Since they first emerged nearly five years ago, the widespread belief has been that robo-advisors will ultimately cause fee compression amongst human financial advisors, as the process of implementing a diversified asset-allocated portfolio becomes increasingly commoditized. However, it turns out that in the pricing game of chicken between robos and human advisors, it’s actually the robo-advisors that are turning first.
This week I will discuss this week’s blockbuster announcement from Betterment that they will no longer be “just” a robo-business, are instead are pivoting to offer human financial advisors, and are raising their fees in the process!
Specifically, while Betterment will still maintain a 25bps advisory fee for its core digital business, the company announced that for accounts over $100,000, fees are being increased from 15bps to 25bps (a whopping 66% price increase for large accounts paying the “old” rates!), and large accounts will also have the opportunity to use Betterment Plus (offering an annual meeting with a CFP professional) for 40bps, or Betterment Premium (offering year-round access to a team of CFP professionals) for 50bps, or can be referred to the new Betterment Advisor Network (at whatever rate the outside advisor charges, plus the 25bps Betterment for Advisors platform fee).
The announcement that Betterment is pivoting to increase their fees and add new human advisory services is the most direct acknowledgement yet of the sheer unsustainability of the original robo-advisor model. Instead, Betterment has shifted to mimic its more successful competitors, including Personal Capital, Vanguard Personal Advisor Services, and the recently announced Schwab Intelligent Advisory – none of which are actually robos at all, but rather tech-augmented human advisor platforms.
Ultimately, though, Betterment’s shift to offer a layer of human advice still isn’t necessarily about staking a competitive position against (other) human advisors. Instead, it’s a shift to become a platform business that compete with the likes of Schwab, Fidelity, and TD Ameritrade. After all, if the scaled human advice is merely offered “at cost”, then Betterment effectively earns 25bps of fees regardless of where clients go – whether it’s Betterment Digital, Plus, Premium, or the Advisor Network. It’s no longer about getting the clients, per se, but simply being the platform where the clients go for whatever solution they choose.
Yet, there is still a question of whether Betterment will actually be able to compete in this space at all. After all, the irony is that now the “robo-advisor” is actually the higher priced offering, as the new Betterment Premium service is almost double the cost of the competing Schwab and Vanguard alternatives, with 5X to 10X the minimums! Which means Betterment faces a challenging uphill marketing challenge, for which the quintessential robo-advisor differentiator – low cost – is no longer in their favor!
The bottom line, though, is simply to recognize what a profound shift Betterment has made, and one that I think marks the ultimate demise of the pure B2C robo-advisor. For better or worse, Betterment is now trying to reinvent a modern version of the old-school investment platform – akin to Schwab, Fidelity, and TD Ameritrade – serving both consumers and advisors, but doing so with what it hopes will be recognized as superior technology. Which means the “robo” technology is still here to stay… though ironically for Betterment, the challenge remains what it has always been – whether they can market themselves and attract assets fast enough to hit critical mass, or succumb to the challenge of the financial services industry’s brutally high client acquisition costs!