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.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we 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!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
Today I want to talk about the big news that hit the wires this morning: Betterment, the “original” robo-advisor, has declared that it’s no longer just in the robo business. It’s becoming a human advisor platform.
Betterment Announces Fee Increase And New (Human) Pricing Tiers [Time – 0:31]
First, some context here: Since 2012, Betterment has operated a three-tier price structure.
They had a core advisory service for 0.25% with at least $10,000 that gave you that robo-advisory services, and if you were over $100,000 level, the 25 bps fee dropped down to 15 basis points. Conversely, if you were under $10,000, there was a 35 basis point price tier as long as you were contributing at least $100 a month. And if you weren’t coontributing, you had to pay a $3 a month flat fee, which could actually be a bit higher as a price.
Given that Betterment had an average account size of a little over $20,000 for most of this time, it was predominantly charging the 25 basis point advisory fee, with some larger accounts over $100,000 that were cheaper.
Within that context, I think it’s really big news this week that Betterment announced it’s switching to a uniform flat 25 basis point fee across the board (no minimum balance or fees, but no more upper tier). For smaller accounts, that’s actually a 10 basis point cut (you go from 35 basis points down to 25). But for the larger accounts, that’s actually a 10 basis point increase.
And that’s not trivial. In relative terms, clients over $100,000 with Betterment that were paying 15bps in the past just got a 66% fee increase, from 15 basis points up to 25 basis points. When they see that next billing statement come through, that fee line is going to be 66% higher than it used to be!
Perhaps even more notable than that fee change, Betterment also announced a couple of new pricing tiers as well. So in addition to this core Betterment digital solution that’s now going to be a uniform 25 basis points across the line, there’s now Betterment Plus. With Betterment Plus, if you have a $100,000 account minimum, then for a 40 basis point fee you got one call per year to a CFP professional – an actual human financial advisor.
If you meet a $250,000 account minimum, then for a 0.5% fee you can access Betterment Premium, which gives you unlimited access to a team of human CFP professionals.
And then on top of that, there’s another tier: Betterment is rolling out a Betterment Advisor Network, which matches consumers who want even more advice (or maybe don’t meet the other Betterment minimums), to 3rd party CFP professionals who are using the Betterment For Advisors platform.
Betterment’s Pivot Marks The Death Of The Pure Robo-Advisor Movement [Time – 3:06]
The basic takeaway is this: Betterment just dramatically raised fees on larger accounts (over $100,000) and then rolled out three even-higher-priced tiers of human services for all of those larger accounts as well. I think what this means is that the pure robo-advisor model is pretty much officially dead.
To address some Periscope viewer questions: These are all total fees. The Betterment Plus fee would effectively be 15 bps on top of the 25, bringing you to the 40 bps total. Premium will be 50 total (25 bps base, plus 25 for the advisor). If you use the Betterment Advisor Network, it will also be the 25 basis point advisor platform fee, plus whatever it is the advisor actually charges. So that last one will effectively be stacked.
To be fair, as I wrote last year, the pure robo-advisor movement was already dying. Betterment’s growth rate has been falling for a while… Wealthfront’s growth rates are crashing even worse… so it’s no great surprise. A couple months after I wrote about that last year, a huge swath of Wealthfront executives left. A couple months after that, the Wealthfront founder took back over the CEO role, and in the meantime, in the past year or two, we’ve seen this wave of robo-advisors capitulating. So FutureAdvisor got sold… JemStep got sold… Upside Advisor got sold… Financial Guard got sold… SigFig pivoted to institutions along with a number of others. Basically, the B2C robo-advisor movement was already on the way out, but I think at the point where you see Betterment throw in the towel… we can officially stamp this as done!
It’s also worth noting that a lot of things that have been called “robo-advisors” serving consumers actually aren’t pure robo solutions in the first place. The convergence we’re seeing is that they’re all becoming a combination of technology and human advisors (what I first called the “cyborg advisor” and Joe Duran at United Capital later dubbed the “bionic advisor”, which got a little more traction as a term).
But the idea is there’s still value to what humans do, and there’s also value to what technology does. So the optimal solution is combining both. It’s not the human or the robo. It’s the tech-augmented human, because when you actually look, that’s really what’s already been dominating the landscape. Personal Capital often gets dubbed robo-advisor, but it’s not. It’s got human financial consultants working with clients, and although its asset base is smaller, because it charges “human advisor” fees, it actually already had more revenue than all the other robo-advisors combined! Vanguard Personal Advisor Services is often called robo, but it’s not. It’s 400+ CFP professionals serving clients directly across three large locations in the Carolinas, Pennsylvania, and down in Arizona. And even Schwab, which went to market with a robo-advisor, just announced that it’s pivoting from Schwab Intelligent Portfolios to Schwab Intelligent Advisory. The difference? Schwab Intelligent Advisory will offer 24/7 access to human CFP professionals.
In other words, when you really dig into the landscape of robo, what you find is that actually almost all of the B2C robo-advisors were already either gone, sold, dead, pivoted, or not actually robos in the first place, but rather, human advisor solutions that were just using technology and might meet with clients virtually. And now, what you’re seeing is Betterment is doing the same thing, pivoting away from the pure robo-tier, going into the tech-augmented human business using its technology as the core platform, and then layering on higher price tiers on top of it because 25 bps just doesn’t scale the way they were hoping it would.
And it’s a big change when you talk about a new service that for higher end clients boosts their baseline pricing by 66% and the Premium service would be triple the cost of what their high-end clients were paying yesterday. Now, granted, you have to choose to pay up to that full Premium service, so it’s not an automatic fee increase. but I think it says a lot when Betterment takes a core tier for $100,000+ clients and says, “Here’s a human advisor service for triple the pricing,” that they think they can sell.
So for all those advisors who’ve been wondering all along how on earth you’re going to compete with a robo-advisor like Betterment charging 15 basis points on large accounts while you charge so much more… well it turns out, Betterment was trying to figure out how they can get the prices that we charge as human financial advisors! And now that’s what they’re rolling out, up to a 50 basis points service for Betterment Premium that gives you year-round round-the-clock access to CFP professionals to augment the pure technology solution. If that’s not capitulation to the demands and higher price point of human advisors, I don’t know what is!
Betterment Is Pivoting To A Platform Business [Time – 7:51]
I think it’s also worth noting that in terms of Betterment itself as a core business, I don’t actually truly view them as pivoting to the human advisor business. I think actually what we’re going to see in terms of Betterment’s model is that they’re trying to pivot to be a platform business.
The essence of a platform business is that you want to be a central clearinghouse that matches consumers with whatever things or services they want to buy. So eBay is a platform to match buyers and sellers, Amazon is a platform to match consumers and businesses, Google is a platform to match readers and advertisers, and I think Betterment wants to be a platform as well, and that’s why you’re actually seeing them offer a range of services.
I suspect that Betterment just did the math and determined that offering once-per-year advice from CFP professionals costs about 15 bps… year-round advice at scale will cost them 25 bps… so, therefore, Plus will cost 40 bps (15 bps + 25 bps) and Premium will cost 50 bps (25 bps + 25 bps). Any advisor that’s on the Betterment Advisor’s Platform also pays 25 basis points, and then the advisor just charges their fee on top.
Basically, what you’re coming down to is Betterment’s business model is, “We want 25 basis points for our technology.” That’s it. You can be a self-directed consumer that uses it for 25 bps, you can get Plus for 25 bps plus the limited CFP, you can be Premium for 25 bps plus the full CFP, or you can be Advisor Network for 25 bps plus the advisor’s fee. So Betterment just wants to be the 25 basis points platform for whatever it is that people want to buy, get their layer, and then cost-plus up the price to whatever it actually takes to deliver the service on top.
I think that’s notable because what it means in the context of us advisors is that Betterment’s trying to shift from a model where they’re in competition with us, to a model where they’re in competition with our custodians and direct-to-consumer investment platforms. At this point, you’re going to see Betterment offering these Plus and Premium services with human advisors, but I don’t think they’re actually trying to stake a position against advisors. I think they’re trying to stake a position against companies like Schwab, Fidelity, and TD Ameritrade, because all of those are direct-to-consumer brands that make their money as platforms. As I predicted years ago, the robo-advisor is now trying to become a full-stack competitive threat to custodians.
After all, at any of those major players you can get self-directed trading, managed accounts, human advisors (who in many cases are CFPs), and they’ve all got advisor networks if you want even deeper advice. That’s the gist of their model. They don’t care which one you choose, per se. They just want you to choose any one on their platform. Right?
Schwab is the quintessential example. They’ve got self-directed, managed accounts in a robo-solution, Schwab Financial Consultants, Schwab Private Client, and Schwab Advisor Network. And now Betterment will have robo-managed solution, Betterment Plus, Betterment Premium, and Betterment Advisor Network. They’re just lining themselves up in the exact same way!
Ironically, though, custodians actually have a challenging business model right now. They make a couple of basis points of revenue on their asset base. That’s it. At some custodians, when you add up all of those $9.95 trading fees, their revenue relative to AUM is around three to five basis points. That’s actually why you saw the launch of solutions like Schwab Intelligent Portfolios, Fidelity Go, and TD Ameritrade Essential Portfolios. Because from their perspective, if you can get just 25-30 basis points in a robo-managed account, that’s like a 10X multiplier in your revenue per assets compared to traditional custodian or brokerage services. It’s not a low-cost service. It’s an amazingly profitable one!
If Betterment can pull this pivot off successfully, they could start a trend of custodians trying to raise fees, because almost everything else in the custodian model is getting commoditized down to nothing, especially with DOL fiduciary coming through with what I think is going to be a new wave of pressure on 12b-1 fees, sub-TA fees, and getting the ultra-low share class that has all that other stuff stripped out. The custodial model is under assault, and their dream is to be able to get 25 basis points (like what Betterment is going to be charging for their technology/custodian platform).
Will Betterment Be Able To Compete As A Platform Business? [Time – 11:56]
On the flip side, I think the question is still whether Betterment is going to be able to compete in the space, and how they’re going to compete. Betterment Premium launched a service for 50 basis points with a $250,000 minimum to get year-round access to the group of CFP professionals, but Vanguard does the same thing for 30 basis points with a $50,000 minimum, and Schwab Intelligent Advisory does it at 28 basis points with a $25,000 minimum.
In other words, even in a world of “getting access to CFP’s plus digital services”, Betterment is coming in at a price point that is 80-100% higher than Schwab and Vanguard, and they’re coming in at five to 10 times the minimums of Schwab and Vanguard. As a result, this doesn’t look so much like robo-disruption. Now it’s actually the robos that are getting disrupted by the incumbents, a trend that I had talked about in early 2015, noting that eventually major players were going to come in like Schwab and Fidelity and offer robo-services for essentially nothing in exchange for just trying to get the assets. Now Betterment has to actually face a challenge, as they attempt to be the robo charging a higher price point to compete against the incumbents. Beware trying to go up against companies that have a couple trillion dollars of scale as a head start!
Which means, ultimately, Betterment is still going to live or die by the same thing that’s been threatening it from day one: client acquisition costs. Betterment will need to figure out how to market and get clients offering a fairly similar service to Schwab and Fidelity at almost double the price and quintuple the minimums.
In the near-term, I suspect Betterment will actually get a revenue bump because they already have some clients above these thresholds, some of whom might be quite interested in paying for advice. That’s an instant upsell for them, in the same way that when Schwab launched Intelligent Portfolios, it immediately got a nice revenue bump when it converted existing brokerage clients… who, again, were only generating a couple basis points of revenue per AUM… while robo-clients buying Schwab ETF’s and paying the robo-wrapper would generate close to a 10X revenue multiplier. But in the long run, Betterment still has to figure out how to market this service with higher minimums and a higher price point against larger competitors with larger marketing budgets. That’s not necessarily impossible. Betterment, to their credit, made their previous pivot earlier than almost any of the other robos in recognizing they had to build a direct-to-consumer brand to possibly be successful. I think that is why they’ve already pulled ahead as the largest robo-advisor in the space.
Of course, Personal Capital is still managing to compete with its digital advice service, at three times the price point of Schwab and Vanguard, given that their fee schedule starts at 89 basis points. Although the unique thing about Personal Capital being this hybrid tech-augmented human advisor is that they have a really unique client acquisition system: a personal financial management app that consumers download for free and use… and basically self-identify themselves as prospects that Personal Capital can call upon!
Now, Betterment doesn’t necessarily have that kind of marketing channel, but Personal Capital hasn’t even been fully staffed with CFP’s. Betterment is at least is making a commitment to staff with CFP’s (although you still have to pay more to get some of the services like you do on the high end of Schwab and Vanguard as well), and beyond that, you’ve got to go to the Betterment Advisor Network.
The opportunity for Betterment is if they can figure out this marketing challenge. This is a really nice opportunity for both their retail service (their Plus and Premium tiers) and Betterment for Advisors. In particular, I’ll highlight the Betterment for Advisors angle, because (as I think most of you are feeling as well), it’s getting harder as a financial advisor to differentiate and do marketing right now. Since Schwab, Fidelity, and TD Ameritrade have long since validated that advisors will go where the opportunities are to get client referrals (and all of those platforms have successful, thriving advisor network programs), I think that presents an opportunity. If Betterment can make it rain with new clients, even if they just route all of it to the Betterment Advisor Network, that’s still a win for Betterment, a win for advisors, and I’ll argue a win for consumers because they’re being served by a CFP professional and some good technology!
Though, it remains to be seen whether Betterment can successfully execute that marketing strategy, and whether external advisors will even get picked when they get put right next to Betterment Premium at 50 bps and Betterment Plus at 40 bps. Will the consumers still choose the direct one-to-one advisor at a higher price point? I’m more than a little curious to see that, since our own XY Planning Network is a major user of Betterment for Advisors, and has some potential to get some clients. I’m certainly hoping that channel works out on behalf of our advisors!
But the bottom line is just to recognize that I think this is a really profound shift from Betterment, and one that really marks the ultimate demise of the pure B2C robo-advisor. Wealthfront is basically the only pure player left standing at this point, and frankly, the one that’s still got the most mediocre growth rates, which doesn’t bode well for them.
I think what we’re seeing as the whole is that what’s old is new again… Betterment is now trying to reinvent itself as a modern investment platform akin to Schwab, Fidelity, and TD Ameritrade already do, serving consumers and advisors, but trying to provide what they hope will be perceived as superior technology. Because as I’ve said all along, even if the B2C robo movement dies, the robo-technology is a real phenomenon that is here to stay.
I mean, who doesn’t want better automation of trading or rebalancing, tax-loss harvesting, and digital onboarding? That’s always been a demand, and I think to Betterment’s credit, nobody in our industry realized how bad our technology was until Betterment and the follow-on robo-advisors showed up and revealed to everyone just how bad our technology was. But still, now Betterment’s going to have to do what every platform brand ultimately has to do, go out and market it and see if they can get enough distribution to hit critical mass. We’ll see.
In any event, I hope that’s some helpful food for thought on the big news today that Betterment is offering human advisor services. This is office hours with Michael Kitces, 1:00 p.m. East Coast time on Tuesdays. Thanks for hanging out with us, everyone! Have a great day!
So what do you think? Were you surprised by Betterment’s fee increase and shift to giving human advice? Do you think Betterment can pull off the transition to being a platform business? What do you think they’ll need to do to be successful? Please share your thoughts in the comments below!