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Jon Stein unleashes elite RIA referral unit as crown jewel of grand Betterment plan to sell virtual fiduciary advice

Robo's CEO names Vanguard, Fidelity and Schwab as market-share targets of his advice offensive across the full spectrum of affluence

Tuesday, January 31, 2017 – 10:11 PM by Lisa Shidler
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Jon Stein: We realized we needed to productize this to overcome the notion that robo means: no humans. No matter what the situation, we can help you.

Brooke's Note: Unlike politics, where competitors exist largely at the poles, a war in the financial advice business seems to have broken out over who can be most moderate. Betterment is making an interesting play for that Goldilocks ground of not too much advice, not too little -- and fees and policies that stick to that middle ground as well. If there is bad news for the "robo" it is that it follows Vanguard and all the largest legacy discount brokers into this realm. The better news is that it has a plausible edge with automation, minimized channel conflicts and wearing only a fiduciary hat. For at least a few RIAs, here is a very interesting new partner and referral source. 

Betterment is rolling out a bold blueprint for the national distribution of financial advice -- with independent RIAs inked in as managers of high-net-worth accounts.

The New York-based firm, which manages $7.3 billion of assets for 210,000 clients, today announced two new tiers of in-house, CFP-assisted, telephone-administered advice.In all, Betterment has carved its non-referral services into three slices: Betterment Digital, which gives investors access to the firm's algorithm at a cost of .25% of assets annually. Betterment Plus, allows the investor one call per year with an accredited human advisor per year (cost: .40%); and, at the top of the service pyramid, Betterment Premium, which gives customers unfettered access to CFPs for an annual .50% fee.  See: Rekindling old feud, Michael Kitces blasts Betterment, if civilly, for stealth price hike and other shortcomings

The Plus plan requires a $100,000 minimum balance, and the Premium plan requires a $250,000 minimum balance. For all three plans, Betterment’s fees are only charged on the first $2 million of a customer's balance. Betterment will waive its management fee on any assets over $2 million.

At the same time, Betterment announced that clients wanting a higher level of counsel will be referred to RIAs who charge more in the ballpark of .9%.

These advisors, who live under Betterment's RIA custody arm, Betterment for Advisors, will receive free referrals. Betterment will make its money by managing the assets. See: Betterment informs RIA clients of new $2,400 license fee then cancels it, for now, after advisor blowback.

Betterment CEO and founder Jon Stein makes no bones about the signal he hopes this program sends to the marketplace with this restructuring.

"We're coming right at the industry and we're attacking them head on," he says. "This makes us look a lot more like Schwab, Fidelity and Vanguard." See: How Fidelity's robo for RIAs 'leapfrogged' rivals -- and why the landing might not stick. He might also have mentioned Personal Capital, a fellow start-up of similar vintage that is all virtual advice and which keeps reporting success. Personal Capital gets $75 million investment and an ex-Schwab retail chief in Jeff Carney

'Bold step'

But whether the audacity of the $7-billion robo -- which still operates from a repurposed toy factory in Manhattan -- is warranted in tackling the trio of $3-trillion-asset monsters of Charles Schwab & Co., Fidelity Investments and the Vanguard Group, remains to be seen, says Davis Janowski, senior analyst Forrester Research Inc. See: Vanguard set to launch geek-spirited think tank in heart of Philly as its 'robo' (that really isn't) hits $47 billion of AUM.

"It's a bold step toward where a lot of the advisory industry is probably headed or should be. It does remain to be seen and established just how much demand there actually is for what Betterment is calling their "Plus" and "Premium" offerings," says Janowski, head of digital wealth management ebusiness and channel strategy at Forrester. 

Lex Sokolin: It's ironic that Betterment is now echoing Schwab's strategy since Schwab had copied the startup in its original launch of Intelligent Portfolios.

Stein allows that he is gauging demand for these offering largely based on "anecdotal" evidence. A frequenter of conferences, the CEO says he consistently encounters investors who contend that Betterment might get their account were it to add an extra layer of human intervention. See: The odd and open courtship between the SEC and robo-advisors plays out again -- this time at an SEC-hosted webcast panel in Washington, D.C...

He adds that his insistence that Betterment does, and always did, have a high level of human service largely falls on deaf ears. Today's formal advice rollout, he says, is as much about stigma-busting as innovation. 

“We realized we needed to productize this to overcome the notion that robo means: no humans," Stein says.  "No matter what the situation, we can help you."

Stein also could hardly have missed the blizzard of evidence provided by big rivals that virtual advice -- as opposed to robo advice -- is asset-gathering catnip.See:  McKinsey: Robot-advisors have a cloudy future but 'virtual advice' delivered by 24-hour super-centers with experts and algorithms will win the day. Not only is Vanguard experiencing dizzying growth in Vanguard Personal Advisor Services but Schwab just rolled out its own ambitious virtual advice platform. See: Schwab unveils its virtual future to plaudits but using green CFPs as its real people, mandatory 6% cash, could prove troublesome.

Market-share grab

But when it comes to big growth in adding high-net-worth assets, RIAs remain the fastest-growing channel and Betterment's plan to put its name behind the the advice provided by certain RIAs is a major move.

Lex Sokolin, ‎global director fintech strategy at Autonomous Research, says that certainly Betterment's decision to form a cozier relationship with RIAs is a clever and thoughtful strategy.

"Even if Betterment makes no money on the RIA channel, it gets incremental AUM and marketing exposure. This is a victory for the startup because it takes market share away from the incumbent," Sokolin writes in an email. 

Davis Janowski: It does remain to be seen and established just how much demand there actually is for what Betterment is calling their "Plus" and "Premium" offerings.

Michael Kitces, founder of XY Planning Network, says his firm was part of the pilot program for the new referral system but was reticent about registering a critique.  

"In terms of Betterment’s RIA referral plan, indeed XY Planning Network had members involved with their pilot program, and has more advisors who are looking to participate as the program scales up."  See: Fidelity launches gigantic referral database to give advisors a shortcut to wealthy prospects.

For now, the referral network is in its fledgling stages with only 10 firms screened and approved. Betterment for Advisors has 350 advisors in its network and a waiting list its referral program.

There is no fee to enroll in the Betterment's referral program and, notably, no penalties are imposed if the advisor takes the clients to another firm.

Betterment currently charges a flat .25% for investors who use the Betterment for Advisors program for their custody needs and that fee remains the same regardless of whether the investor is part of the referral program.

“We don’t charge a referral fee and it’s priced exactly the same way for all of our advisors who work with investors. We don’t want to biased. And, if the advisor decides to move on, there is no penalty for moving," Stein says. 

Burned by M&A

Charles Schwab & Co. has a well-known program, Schwab Advisor Network, where advisors pay an asset-based fee for referrals and get penalized if they move the assets away from Schwab. See: Schwab is set to connect RIAs outside its referral network to HNW investors through its 'Got-milk'-style campaign

Tim Welsh, president of Nexus Strategy in Larkspur, Calif., and a former Schwab director, says Schwab is wise to structure its referral network the way it does and that Betterment may need to learn the hard way.

In the early years Schwab's referral network also had no fees or penalties but got burned. "The advisor would flip it or sell the firm and it was a pure transition of assets out," he says. "That was a big issue -- RIA M&A."

In addition to being the manager of the RIA assets, Betterment will have another point of leverage that Schwab never had with its RIA. It will be the collector of the entire fee that RIAs charge. Betterment will then pay the RIAs. Legacy custodians let the RIA collect its own fees.

What will be particularly interesting is to see how this new offer changes Betterment's relationship with RIAs, says Will Trout, an analyst with Celent.  

"I believe that Betterment has struggled to gain the confidence of RIAs given their back end and operating model and the post Brexit trading -halt kerfuffle. If adoption has been uneven, as I suspect then Messrs. [Tom] Kimberly [head of RIA custody] and Stein will be all the more keen to get RIAs onboard, given incursions into this space by Schwab (and soon, Fidelity) and fintech firms like Trizic." 

One way that Betterment plans to get cosier to RIAs is with a national conference. No date has been set and it may not happen in 2017.

Fully fiduciary platform

Stein explains that any investors who express an interest in seeking a full-time dedicated advisor will be referred to multiple RIAs. Any one of the RIAs vetted in the Betterment for Advisors platform could receive the referral. 

Will Trout: I suspect then Messrs. [Tom] Kimberly [head of RIA custody] and Stein will be all the more keen to get RIAs onboard, given incursions into this space by Schwab (and soon, Fidelity) and fintech firms like Trizic.

While he didn't offer specifics, Stein did say the advisors are carefully vetted and are all CFPs and fee-only advisors. No hybrids need apply.

Typically, RIAs set up their own pricing and there is just one "all-in" price quoted to the investor which includes Betterment's fee and the advisor's fee. Betterment collects the fees from the investor and distributes it to the advisor. For instance, if an investor is charged 90 basis points, then Betterment takes 25 basis points and gives the advisor the remaining 65-basis-point payment.  

Stein says this program will be most attractive to Betterment's prospects and not existing retail clients, who pay .25% regardless of their asset level. 

“Our expectation is that most investors won’t convert. But this gives them an option," Stein says. "What makes our program unique is we’ve vetted all of these advisors and they're all fiduciaries and they're all fee-only and they are all aligned with Betterment. They're a very good fit for customers coming to Betterment." See: Betterment jumps headlong into the 401(k) business spurred by a conviction that even Vanguard Group is unfriendly to investors in this arena.

He adds: "Firms like Betterment can indeed compete against incumbents head-on especially where they are strong. The strength is in technology, efficiency and scale. Even though cost of client acquisition may not be as low as an incumbent's, the cost of servicing the client is likely lower. Where Betterment and other pure-play wealth managers may fumble is that they have only one source of revenue, their advice. Schwab, on the other hand, controls custody, technology, asset management, cash sweep and distribution."  See: Fidelity launches new robo as Schwab's hits $8.2 billion in assets.

Premium demand? 

But Betterment may face an uphill battle competing with Schwab due to the scale and myriad advice channels, Sokolin says.

Launched nearly two years ago, Schwab’s Intelligent Portfolios had $12.3 billion in assets as of Dec. 31, 2016 with 120,000 accounts. That’s up from 100,000 accounts with $10.1 billion as of Sept. 30, 2016. See: Schwab's robo spikes suddenly to nearer $5 billion as 500 RIAs sign on.

By contrast, Betterment's startup competitor, Redwood City, Calif.-based Wealthfront Inc., founded in 2008, currently has 100,202 accounts and manages $5 billion in assets according to the firm’s most recent ADV filing on Jan. 26. See: Andy Rachleff takes back CEO spot at Wealthfront at critical juncture.

Stein says that while Betterment is seeking to mirror parts of the business model of Schwab and Fidelity's robos, that it will endeavor to differ where it matters most -- fiduciary care. 

"The difference is that we assure a high level of advice," Stein said. "Fiduciary advice. We're still an advisor and the old way of investing is controlled by brokers and mutual fund superstores. They're trying to sell you product -- their own product -- and we're only giving you the product that you deserve. If you want pure digital, we've got the best in the market. If you want someone to check on you periodically, we can do that too. If you've got more complicated needs, we can handle that too. We're got the right advice no matter your needs." See: Why robo-advisors meet the lofty fiduciary standard when so few humans can, according to an opinion written by Betterment's outside counsel.

Related Moves

Wealthfront's unlikely tapping of Sheila Bair and Tom Curry signals likely push to gain a bank charter, analysts say

The Redwood City robo-advisor's addition of two renowned former chief banking regulators brings legitimacy and guidance that could lead to a margin-fattening bank charter and help solve the robo-advisor's problem of high client acquisition costs.

December 31, 2020 – 4:37 AM

Jon Stein ousts himself as Betterment CEO and taps Sarah Levy, who joins an exclusive club of top women executives, with a mission -- an IPO

The co-founder of the New York robo-advisor headhunted the ex-Viacom brass through Harvard professors on the down low to ostensibly scale operations.

December 8, 2020 – 5:27 PM

Chuck Schwab reveals Part B, doubling-down on Walt Bettinger by making him co-chair, a day after Part A -- wagering $15 billion from the Schwab corporate treasury on the CEO's future leadership

The 84 year-old founder's elevation of his 61-year-old protege may foretell bigger fireworks from Rick Wurster who recently took over many of Bettinger's CEO duties, one executive recruiter says.

July 30, 2022 – 12:41 AM

Five RIA Doubletakes: An RIA-only law firm breaks away • Kitces launches picker of 'best of breed' RIA software bundles • Vanguard targets 2070 just as media targets TDFs • SEC fishing for RegBI Scofflaws, including RIAs • CFP appoints first African-American chair

RIA Lawyers will reject RIA custodians• Kitces Nascar montage is now interactive and helpful • Vanguard's super long TDF draws critics• SEC supply lines are stretched with new battle front • Kamila Elliot is ex-DFA, diverse and calling CFP shots

January 12, 2022 – 3:13 AM

See more related moves

Mentioned in this article:

Portfolio Management System
Top Executive: Andy Rachleff

Consulting Firm
Top Executive: Michael Kitces

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein

Stephen Winks

Stephen Winks

February 1, 2017 — 3:02 PM
Let's hope Stein has fully fleshed out fiduciary duty as to claim fiduciary status and fall dhort will give ROBOs a black eye. There are a number of specific duties Stein has not accounted for which can be readily managed if one wanted to. This is where an expert authenticated prudent process is helpful--an easy fix. Agree with Pat Mulvey's (FAA) comments above. More diligence is required to achieve prudent expert standing. SCW


February 1, 2017 — 7:22 PM
This makes no sense. Shouldn't the 'fiduciary advisor' decide whether the ETF flipper is in the best interest of the client? Wonder if it is not? Seems like these guys are making the decision on what's best for the client not the advisor. You're a fiduciary advisor, here's a referral, now you gotta use our stuff whether it is in the best interest of the client or not. LOL
Tim Baker

Tim Baker

February 1, 2017 — 7:56 PM
“Betterment collects the fees from the investor and distributes it to the advisor” essentially making them a Turnkey Asset Management Program by default. In these arrangements the advisor technically acts as a “solicitor” receiving a portion of the total fee with the RIA (Betterment) maintaining the fiduciary capacity. Therefore, the question is: should clients referred to an affiliated RIA advisor have to sign a Best Interest Contract Exemption under the new fiduciary rule?


February 1, 2017 — 8:06 PM
That's a good question...one of many. Betterment and/or the advisor need to be able to back up and defend their claim. Seems pretty casual in my view
Stephen Winks

Stephen Winks

February 1, 2017 — 8:25 PM
Stein's conception of fiduciary s in the vein of a product, not prudent process, which leaves a lot of holes to fill. Either you are or are not a fiduciary, being close does not count. SCW


February 1, 2017 — 9:07 PM
I agree Steve

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