Wealthy individual investors are beginning to allocate a higher percentage of their assets into their robo-advisor investment accounts and some have put millions into these accounts, according to Jon Stein, CEO of Betterment, one of the leading robo-advisories.
High net-worth individuals have typically started with 5% of their assets invested with Betterment but an allocation of 20% is becoming more common, said Stein, speaking at the CB Insights Future of Fintech Conference yesterday.
One of the criticisms of robo-advisors has been that the very wealthy might have more complex investment needs and higher customer service expectations, and will not adopt these services.
The top client at Betterment in terms of amount invested has $10 million invested with the platform, said Stein. “I’ve never talked to that person,” he added. “I probably should.”
Stein pointed out that Betterment does have human representatives available for clients’ questions and concerns, and that they don’t receive a high number of calls, even at times of market turbulence.
“When it comes to customer service, people are always surprised that we do have humans on call, but it’s surprising how rarely they actually need to call,” he said. “It’s reassuring just to know that there can be someone on the line.”
Betterment wants to position itself as a central hub for their clients’ financial needs, and is planning the launch of loan and insurance products, Stein said. Betterment has already launched a 401K product.
Stein also dismissed claims that the robo-advisor space is too overcrowded or that it’s a winner-takes-all market.
“There’s room [for many players] in the space,” he said. “Like ETFs — how many are out there today? It was originally just Vanguard and some others early on, but new ones are still coming in, Fidelity just got into the game, Schwab too.”
Anand Sanwal, CEO, CB Insights: Everybody all right? I didn’t get a lot of response, there. Everybody, good? All right. All right.
So I’m going to blow through this. We’re a little bit behind schedule. We’ve actually been good all day. So thanks to you guys for coming back from breaks on time. I’m going to try to get through this little vignette pretty quickly. Then, turn it over to Julie, and John, and then the panel. And then, dinner, dinner, and a [inaudible 02:39:53]. So that’s the way we’ll wrap up the night.
So changing face of wealth. So for those of you who don’t know what a robo advisor is: online wealth management service that provides automated algorithmic-based investment advice. So we’ll just set that as the stage. We showed you this earlier.
Still, again, the Y-axis on a log scale. Still relatively small amount of dollars in automated investment services, aka, robo advisors. Big market potential, that is expected. Lots of money coming into this space. And we have John here, from Betterment. But you see all the different folks. And $678 million in total funding. You see the top four players, in terms of total funding. So lots of capital has flown into this robo advisor world.
It’s off to a strong start in 2016. So that’s just Q1. So a pretty healthy deal activity. So it’s been pretty buoyant, this market, which has been good. Target demographic, at least today, in the way that it’s presented is, is wooing millennials — tech savvy younger clients with fewer investable assets. But that will grow with time.
And so, here, we see comments about millennials and their needs over time. High net worth investors have also begun looking at robo advisor. So, here, we see Charles Schwab, which is one of the incumbent companies that’s entered the space. And so we see them with clients with a million plus under management. And then we see Betterment and Wealthfront with a $100K-plus. Obviously, there might be some of that $100K-plus that has a million, so we don’t know that portion. But you can see that the high net worth folks are now starting to gravitate towards robo advisory as well. So it’s a good sign.
Incumbents are responding with acquisitions. Again, I mentioned it earlier. If it doesn’t look like you’re approaching skill in this business, then exit to one of the incumbents might make sense. And so we’ve seen some exits there. Partnerships, obviously, have happened. And then, there is some cases where partnerships changed. They evolved and maybe are no longer partner. So one case is Fidelity and Betterment.
And then, obviously, organic development. This is an area that we actually see incumbents reacting, and taking some action, and doing pretty well. So having pretty significant assets in their version of robo advisor business. And then, we see some other folks who’ve expressed intentions to develop robo advisor product. These are the assets that each of them have raised. And you see the incumbents, again, have done well, in terms of putting some assets underneath this.
This is, earlier, kind of talked about the scale required to be successful in this business. So when we think about why companies are exiting early, it doesn’t look like there’s a path to scale, that is one of the reasons that companies are getting out.
Open question challenging incumbent: So how do you…for those of you who remember Joe Lonsdale comment earlier. He didn’t view this as a…I think the phrase was a “technologically interesting problem,” right? And so how do robo advisors differentiate their offerings and not become all the same? So how do they do that? How do they challenge incumbents? Differentiation — I just talked about. And then, ultimately, how they go after the super wealthy? If that is an aspiration, to go up the food chain.
So let me stop there. I’m going to introduce the folks for the Fireside Chat. Julie Verhage is the moderator. She’s a markets reporter at Bloomberg. So where she, outside of traditional public companies focuses on FinTech and other private firms. Prior to joining Bloomberg she was a producer and reporter at Fox Business Network. And then, John Stein. John, is the CEO and Founder of Betterment. What excites him most about his work is making everyday activities and products more efficient, accessible and easy to us. So give them a round. And welcome Julie and John.
Julie Verhage, Markets Reporter, Bloomberg: All right. So last keynote of the day. I say we have a little bit of fun with this one, too.
Jon Stein, CEO, Betterment: Let’s do it.
Julie: All right. So Betterment is one of the larger robo advisors now. What do you see changing in the wealth management space in the future?
Jon: Yeah. So we’re the largest and fastest growing robo advisor in the world as we measure it. We have more customers than all the other robos, combined, by a factor of two. We see this entire financial services sector being changed by the introduction of more advice.
If we take a long view over what’s happened over the last several decades. People have taken more of their financial life into their own hands because they had to. We have to save for retirement. We have manage our money. And we believe that technology, in general, is helping us to automate that works so that we don’t have to do it anymore. Which is, ultimately, what I think most people want.
Jon: Right. So what’s to stop some of the big incumbents like JPMorgan, Citi…although I don’t see JPMorgan mentioned on the board downstairs with companies innovating much. But Jamie Dimon says they could offer robo advisor for free, if they wanted.
Jon: Yeah. He says, “We’re just going to do it.” And he’s right. They will. They’re going to have to. We’ve talked with those guys. We’ve talked with all of these people. Every bank has been in the office. Or, we’ve been to their offices, or this, or that. They’re all doing it, and that’s inevitable.
We said, when the launched…what? Six years ago. We just had our six year anniversary of our launch. We said, “Ultimately, if we’re successful, there’s going to be a lot of competition in this space.” And it is increasingly crowded. There’s more and more companies doing it. But every time one of these large incumbents launches a product, we grow faster. I think because they’re educating the market about the services that people should be getting. And so people do a search, and look around. And that helps us grow faster. And we see that continuing. A little bit like when people started getting into, say, shopping online. It didn’t hurt Amazon that Target also has an online store. They’re still just better at it.
We’re a digitally native, really, technology forward organization, and were building the future of financial services.
Julie: Okay. So how do you make sure that anyone that wants to get into the robo advisor space, in terms of the customer that wants to…where should I put my money? How do you tell them that Betterment is the place that they need to put their money?
Jon: I think there’s nothing better you could do with your money, today, than put it in a Betterment account. We’re going to manage it better than anybody else will. We’re going to tax manage it better. We’re going to behaviorally manage it better. Net of all your costs, we’re going to do a better than anything else you do.
Julie: Okay. Shifting gears a little bit, a lot of people talk about high acquisition costs for the robo advisors. How do you lower that cost because it can’t be low for someone? I don’t go talk to my friends, “I have a really good robo advisor. You should look into them.”
Jon: Right. If the acquisition costs were as high as some of these reports say, we wouldn’t have any any money left.
Julie: So you’re saying the reports are too high?
Jon: Yeah. They’re, in order of magnitude, too high. And I guess that’s just because that’s what it costs incumbents to acquire customers. It just doesn’t cost us that much.
Julie: Why do you think that is?
Jon: Because we have reduced friction, and made the whole process of investing easy and delightful. We have the best advice. So we removed some of the inertia and fear that grips most people. And that that makes it just easier to sign-up. And so more people do. And when we increased conversion rates, we reduce our acquisition costs.
Julie: And what are some of the best forms of marketing that you guys have used?
Jon: Gosh we’ve done a lot of things. We’ve done cab tops, here, in the city. And, TV. And, of course, all of the digital channels. But the number one channel for us still, to this day, is referrals. Every year, consistently, 30% to 40% of our customers come through word of mouth, or our referral program. And most of our customers, the majority of our customers, even if they saw us on a cab top or on TV, at some point in their customer journey, they talked to an existing Betterment customer. And that’s why we’re growing. It’s because those customers are satisfied, and they’re talking to people about it. And they’re saying, “This is the best thing I’ve seen. You’ve got to sign up.”
Julie: Okay. So I’m a minority in not talking about where I’m putting my money. All right. So you guys recently launched Betterment for business, the 401 K program. That space is traditionally really messy. has a very long sales cycle. Why get into that?
Jon: I love that. And you’re right, it’s totally a messy space. I mean how many people, here, have a 401 K? A show of hand if you have a 401 K. Keep your hand up if you love your 401 K. How many love their…you do. You have a Betterment 401 K.
Nobody loves their 401 K. It’s a terrible…it’s an industry that has just seen no innovation in the last 30 years, since these things were introduced. It’s just kind of crazy when you look at this stuff. There’s only not many less than a dozen record keepers out there. And the number keeps shrinking and shrinking, because nobody is entering the business, and nobody wants to do the business. Because it’s just a gross, awful, high-cost low-margin business.
I love that, right? When I first approached the investment management space in 2008-2009. When I was talking to people about, “Hey, maybe I want to start this company, Betterment.” They said, “Don’t do that. That’s a terrible industry. It’s super complicated. Stay away.” I think those kinds of things, when everyone is saying, “Look the other direction and go away,” those present really exciting opportunities.
And we heard the same things about 401 Ks. Like, “I don’t know. I’m not sure about that.” But if you look back at the tapes, when we launched in 2010. We were asked on stage at TechCrunch Disrupt, here. Somebody said, “I think this would be really good as a 401 K product.” And we said, “It’s on the road map.”
The only thing we got wrong is, I think we said, “Yeah, maybe next year we’ll do that.” And it took us six years to get there. But it was a little more competent than we thought. But we’ve been working on it for a long time.
Julie: Okay. So the sales cycles. How do you convince a company to move from something like Fidelity, where if something goes wrong you could say, “All of these committees have Fidelity. We were just investing where everyone else was. We thought it was good for our employees.” How do you tell them to do a startup, instead?
Jon: Right. No one ever got fired for buying IBM, right? So the same thing is true in financial services. It’s very slow moving. It’s very slow to change. Products take forever to be adopted. The curve on here, that you saw for ETFs that was growing faster than mutual funds. Well, just remember that was index mutual funds. And the original mutual funds took 50 or 60 years to get off the ground, before anybody was using them.
So innovation is happening faster and faster, and that’s exciting. And I think our demonstration on the retail side is showing that. So far in 401 K, we have more business than we can handle, literally. It’s just more people want to signup, than we can on board all at once. And I think we’re not going to have any problem selling it, based on the early numbers we’re seeing. It’s just a much better product. It’s a better experience. Nobody to date, ever, has offered advice by default for every participant in 401 K plan, that’s free. We’re doing that. It’s something everyone should have. Everyone should have this. And no other service offers it. So that just makes it easy to sell.
Julie: So you said the 401 K business was messy, and that’s the reason you wanted to get into it.
Jon: One of the reasons, yeah.
Julie: Okay. So what are some of the other areas in financial services that you see, that are really messy that Betterment could get into?
Jon: There are a lot of us hovering around I think the same idea. And I think what we all want…at least what I want is this future where I don’t have to think about my money. I got into finance, kind of by accident. I love economics. I loved psychology. I love the macro view. And I loved thinking about human behavior, and behavioral economics, things like this.
And I was consulting to banks. But in my own personal life, I had seven different brokerage accounts. And I found that none of them did exactly what I wanted to do, which is just, “Do this thing for me.” And I kept trying different strategies to see if I could find something I could set and forget and not have to worry about.
Ultimately, I don’t want to have to manage my paycheck and think about how much should be in my checking account versus my savings account? Why doesn’t my bank do that for me, right? I don’t want to have to think about how much to put in my IRA or my 401 K. Why doesn’t my financial institutions do that for me?
We are like the self-driving car of financial services, right? We’re going to get you there. You tell us where you want to, we’re going to get you there safer, faster, better than you can do it yourself. And I think that’s what people ultimately are going to embrace. We shouldn’t be managing our own money.
It’s a little like the dark ages, when maybe you had a broken leg and you had to splint it yourself, or maybe somebody in your family, or your village could do it for you. There were no doctors. That’s a little bit like what our financial services industry is like today, for most people. There’s not enough advice to go around. You have to have a lot of money to afford the little bit of advice that there is. We’re making great advice accessible to everyone. And that’s what, ultimately, the future of financial services is going to revolve around.
Julie: Okay. So a lot of the things that you want to do require data coming in from the customers. And you guys have been very much involved of, the incumbents don’t want that data to be able to go to you guys. How do you stop that? And what are you doing to advocate against it?
Jon: I have to give credit to the incumbents for having, I think, so far a fairly balanced approach on this data privacy issue. On the one hand, let me first state our position. We believe it’s your data. Your financial data belongs to you, just like your health records belong to you. And you should be able to use that data in a secure way, as you see fit, and take it where you want.
The other side of that, which is that maybe you don’t have access your data. Would be, the bank just keeps all your transaction history, or keeps your records. Or the brokerage keeps your cost basis private. If they do that kind of thing, then it makes it very hard to compare services, and it makes it nearly impossible to switch providers. And that would be a bad state of the world. It would be like locking you into seeing one doctor for your entire life, no matter what kind of service you got. We would never let that happen. And we shouldn’t do that in financial services.
Now, the banks have a tricky role to play. Because they don’t really want to share that data because, they want to keep their customers, and they don’t want them to compare prices, and they don’t want them to leave. And they have security concerns. So I understand their point of view. But I think they’re being pretty fair about it.
Some of them are exposing APIs. I think Wells Fargo just talked about doing this. As long as those APIs are robust, and provide really your full financial data to the companies that you want to give access to it, I think that’s a pretty good approach.
Julie: Okay. How do you position Betterment for any scenario? If that all of a sudden stops coming in, is that going to increase costs for you guys, in terms of having them, the customers fill out more forms?
Jon: Yeah. Look, we want to reduce friction in every way. Just like everybody wants to have buy-with-one-click, or not to have to worry about that stuff. Every click makes life worst. So we’re looking to optimize every experience. And the more we can do for you, the better off we think our customers are. It’s when people take this stuff into their own hands, or feel they have to take it into their own hands that they get paralyzed, they get scared, they make bad decisions due to emotional reasons, this and that.
Julie: One of the things that was mentioned on an on-slide was the partnership you guys did with Fidelity. Do you regret partnering with them, back in…what was it? 2014, I think.
Jon: Yeah. I should point out first that that was a partnership with our institutional business. So Betterment Institutional serves investment advisors. We have over 300 advisory firms on that platform, now. And it’s a way for those advisors to better serve their clients. Imagine you could scale your advisory practice from 50 clients to 500 clients just by adopting better technology. That’s what Betterment Institutional does.
And we partnered with Fidelity to learn from each other. It was a one year agreement. We reached the end of that agreement a year later. And I feel like we learned…we learned a lot about practice management. They learned about robo advisors. I think we both kind of got what we wanted out of that partnership, and we remain really close with them.
Julie: Okay. Are there any other firms that you would think about partnering with?
Jon: Like I said, we’ve talked with just about everyone out there. And I think that there’s a lot of interesting. I think, look, all of these firms understand that this is a big deal. And I’m excited that so many firms are getting into the robo advisor space, right?
If it were like ETFs, how many firms got into ETFs? Well, Fidelity only just got into ETFs, right? It took them a long time to get into that. Schwab, relatively, only recently got into it. It was really Vanguard, BlackRock, a few other firms early on. Because it seemed like a marginal tent…well, mutual funds will still dominate most assets for a long time.
The fact that everyone is getting into this robo advisor space means it’s a big deal and they all see it coming. And they understand that, ultimately, the person who is your advisor becomes your central financial relationship. We want to be the your central financial relationship. So we don’t want to be the back-end for another firm.
We want to empower our employers, our advisors, and our retail customers with our technology. And not have that branded in another way. So the firms that we’re looking to partner with have services that are complementary to us. We would partner with folks, say, are offering insurance, or loans, or other things that we might want to offer to our customers, banking products and son on.
Julie: Okay. So are those areas of scale for Betterment, in the future?
Julie: Okay. Any timeframes of when something like that might happen?
Jon: We’re working on a lot of these things. And I don’t have a timeline for you. All I’ll say is that, that vision of becoming your central relationship means that we have to do more than just manage your investments. We need to manage, ultimately, all of your money. And we started with a picture of all of it. So we now aggregate.
And in my Betterment account…I mean I used to use mint.com to track everything. Now I use Betterment to track everything. I’ve got my credit card in there, my bank accounts, my investment accounts…and everything is in one place and increasingly we’re building advice around all of that. You can kind of see how we continue to do that and take over more and more of your financial life, ultimately so that you don’t have to worry about it any more.
Julie Verhage: Is that part of the plan to IPO in the future? Get that scale and get to profitability?
Jon: A lot of companies IPO before they’re profitable and it just has to do with scale. And that is ultimately the path that we want to take, so there’s lots of things that we’re doing to get to scale. I think our core business could get us there. I think the more we build, the more we accelerate that path.
Julie: I guess the last question that I’ll ask before we open it up is, “You have a lot of customers. You want to make sure they stay loyal. We haven’t really had a bear market since you guys have been around. How do you make sure that they don’t go and want an actual human to deal with when that happens?”
Jon: We get this question a lot about what happens when shit hits the fan and everyone wants to talk to someone. I saw some data — maybe it was in the prep materials for this talk — about Vanguard’s personal advisor services in January, when the market was down 15% to 20%, saw a 9% increase in call volumes. I just thought, “That is so small.” And we saw something similar; I think even less than that. We saw a very small increase in call volumes.
If the market is down 15% or 20%, that’s not the same as down 40% or 50%, but you would expect some correlation there. People just, you know, it was okay. I think there is maybe an idea. There’s two different ways you could approach the idea of what an advisor does in a downturn. First let me say, good advisors are not there to tell you how to change your portfolio when the market drops. Good advisors are there to help you with setting your goals, life planning, tax management, the same kind of stuff that our advisors do, or that our technology does for you.
A bad advisor might call you up when the market is down and say, “Hey, I want to reposition things for you.” And I think that’s how advisors generate a lot of commissions and so they think that phone call is important, because it’s important to them, not important to the client. And clients don’t really call. They don’t seem to be bothered by downturns. And in fact, we think, based on our data, that we grew share and grew faster in a downturn because people were leaving other services. And we expect that in a larger downturn as well.
Julie: Okay. We’ll open it up to questions back there. We’ve some time.
Man: Yeah, we have some questions from the audience. How can various digital wealth managers differentiate their services to avoid commoditization?
Jon: Great question. We think a lot about how the space could become crowded. People are doing their shopping. People are understanding the differences between these services when they sign up. And yet I think we’re probably still in the relatively early adopter phase. We’re with people who really care and are taking the time to read the details and understand what’s the best service out there.
Over time, like it or not, people will rely more on brand and referrals, as I talked about, in making these decisions about where to put their money. And therefore we’re going to have to grow a major national brand in order to ultimately be the most impactful financial services company of a generation that we want to be. That’s going to take some investment. It’s going to take some time. And we’re excited about it.
Julie: How do you make sure someone like a Charles Schwab or a Vanguard doesn’t beat you at that? Since they have so many assets under management already.
Jon: They have a brand. And let’s not forget, 40 years ago, Schwab was nothing. Vanguard was nothing. These are now the firms that we’re talking about as the incumbents. Once a generation or so, things change, and this is that moment.
Julie: Okay. Next question?
Man: Beyond the obvious, young and mass market investors, can digital wealth managers appeal to very high net worth clients?
Jon: Can we appeal to high net worth clients? Yes. Do we today? Yes, but not enough. Our largest customer has — I don’t know — maybe $10 million with us or so. We don’t have many customers of that scale and this isn’t like someone that I know. I’ve never met. I’ve actually never even talked to this person. I should have. But we have a few customers at that scale. I think increasingly our wealthy customers are parking more and more money with us as the platform becomes more and more sophisticated.
One of the things that we’ve seen in our data over the last two years, as we strive to become our customer’s central financial relationship and we segment our customers by say net worth, our lowest net worth customers, call it less than $100,000, already manage most of their money with us; 65% of their assets are at Betterment. For our highest net worth customers, say greater than $500,000, it’s still a tiny fraction of their assets. It’s maybe 20% of their assets are with us. But that’s up from about 5% two years ago.
Where we’ve been growing in share of wallet, and where we’ve been growing in balances is all in these high net worth customers. So as the platform becomes more and more sophisticated, they are feeling more comfortable, and they had been customers all along. We have the same proportion of those customers. They are just getting comfortable moving over more assets from whatever they were doing with it to Betterment. I hope that answers the question. I’m not sure exactly.
Julie: Do you feel like those customers are more proactive in reaching out? In paying attention to where they are invested?
Jon: Are they more proactive in talking to us?
Jon: And wanting to ask questions?
Julie: It’s a smaller portion of their wealth, but it’s still a lot of money.
Jon: One thing that most people don’t know about us — and we probably should do a better job surfacing — is that since day one you’ve always been able to call us. First of all, anyone can call our customer support seven days a week and we get really high marks for it. We were rated Consumer Reports Number One in the brokerage category in customer service in 2015. We were the only company that received that honor that has been in business for less than 30 years.
So we have a huge focus on customer service. We always have. It’s always been central to our mission. And people think, “Oh, robo. I can’t talk to someone.” Also, you can talk to an actual advisor. We have CFPs; we have CFAs; we have PhDs who will talk to you on the phone about your investment plan. And people again think, “Oh, it’s a robo. I can’t get this kind of service there.” It’s just most people don’t and most people don’t really need that. Until your needs get super complex, our technology does a pretty good job of managing your money for you.
Julie: Is there ever a day where you’re going to have to hire a bigger team of those CFPs to be able to deal with these types of calls?
Jon: I hope so! I think we’ll get there. And we’re trying to introduce more of that for people who want it, just surfacing it more and making it more available. But so far, honestly, it’s hard to get people who actually want that call. I think very much of the conversations that we do have with our customers, a large percentage, are wanting to understand that someone is there on the other end of the phone, kick the tires a little bit, see how smart we are. It’s more like a sales call. They are calling in to understand if this is a place that they’re comfortable managing their money.
Julie: So if you did more of a proactive call, they probably were worried about something else instead of where they’re invested?
Jon: Yeah. We don’t proactively call our customers. We do not just cold call them or this kind of thing and I don’t see that coming. I think we will leave it as an option for them. If they want us to call or if they want to call us.
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