Betterment will add self-directed investing in 2025 as part of grander post-robo plan-- something co-founder Jon Stein admits is likely long overdue

Betterment is breaking with its founding business model by allowing investors leeway to make mistakes.

It'll give the leading standalone “robo-advisor" a better shot at competing with Schwab, Fidelity, and Robinhood.

The $56-billion AUM online RIA will add self-directed trading of stocks and funds for retail investors and advisor clients, confirmed Betterment CEO Sarah Levy.

It also just introduced a way for customers to borrow against their managed assets.

"Self-directed investing is a natural step for us and our customers. Our plans this year are more ambitious than ever," she says in an April 23 email.

Part of Levy's ambition is to move Betterment out of the “robo” world of Acorns and Wealthfront, she said in a recent interview with Barry Ritholtz.

“I hate the name ‘robo-advisor,’” she said. "It’s not a robot, and it’s not there to provide advice. It’s a platform that you build on top of. That’s, at least, that’s how I think of it."

Levy added: "What I aspire to for Betterment is that we should become the millennial and Gen Z wealth management brand the way Schwab or Fidelity serves our parents."

Banking services

A Betterment spokesman declined to give further details on the new DIY investing service or Betterment's move into wider supermarket of products and services.

Discretionary [the investor's discretion] trading is "a super exciting new dimension to our offering that will benefit retail customers and advisors, but since it's not yet fully launched across platforms, we won’t have much further detail at this stage,” says the spokesperson, via email.

Betterment's securities-backed lending (SBLOC) service, however, is up and running.

It'll deliver loans of The Bancorp, which provides banking services to nonbank companies, to give premium subscribers (retail investors who pay a subscription) access to bridge cash, and RIAs a way to provide one to clients, according to a new brochure.

No betrayal

The addition of SBLOCs and DIY trading also demonstrates just how far Betterment is moving away from the passive-only, plain-vanilla fiduciary model on which it built its brand.

Yet, Betterment co-founder and former CEO, Jon Stein dismisses the argument that the firm is diluting its original purpose and culture, especially when it comes to supporting DIY investors. 

“With our Betterment Advisory Solutions [RIA custody] business, we trust advisors to know what's best … [and] there are so many reasons customers might have single-name stocks: complicated existing portfolios, keen interests in certain companies … employment, [or] inheritance,” he explains.

"Then there's the data – most of our customers, including retail customers, have held-away assets, and one of the primary reasons for that is self-directed investing. 

“We're not serving customers fully – not meeting them where they are – if we don't accept their self-directed needs,” he says.

Indeed, Peter Stanton, the founder of SBLOC platform Investor Lending Solutions – sold to Goldman Sachs in 2015 – adds that since then, SBLOCs are increasingly a ‘must have’ if you want to be more than a niche player.

“Any wealth management firm must have the capability, [if it wants] to be looked at, in any way, as a more holistic financial advisory firm versus [one that] strictly [manages] investments,” he says, in an email exchange.

Stanton also recently joined homeownership and mortgage planning start-up, GetWyz.

Long-time coming

Yet in taking what Levy now terms a “natural step,” Betterment is departing from one of its unspoken better qualities – to create a no-transaction safe place.

It was a Utopian investing vision ushered in by Stein, then a young Harvard grad.

Betterment stated that it refused to give clients the ability to make individual trades, because active trading “can cause more harm than good,” for “individual investors and fund managers,” it explained in a FAQ as recently as May 7, 2024.

That philosophy may have outgrown its usefulness, even according to Stein.

“Single stocks have been a long time coming [and discretionary trading is] probably something we should have launched long ago,” Stein says, via email.

Investing better

Betterment was certainly a notable holdout. 

“Most competitors, direct and indirect alike, offer both robo and self-directed investing,” says independent analyst David Himmel, via email.

"Robinhood, Wealthfront, Stash, Acorns, SoFi, and M1 Finance all offer self-directed investing."

Betterment will hardly become a Robinhood, with its throng of active traders, says Stein, who remains a Betterment owner and board member. See: Jon Stein ousts himself as Betterment CEO and taps Sarah Levy.

"I've always said we need to meet our customers where they are, and then help them invest better." 

That said, “I doubt we'll be the first choice for an active trader; only something like 2% of our customers are trading daily [through] another venue.”

Warding off danger

News of Betterment's DIY launch comes just 29 days after Robinhood, on Mar. 27, became a new, and potentially major, competitor in the "robo" market. See: Robinhood is launching plain-vanilla robo-advisor.

Firms are wary of growing “app-fatigue,” which may make investors inclined to keep self-directed and advisor-invested assets at the same brokerage. 

“This is all about customer retention … [it] helps Betterment retain parity and, in turn, customer relationships,” Himmel says.

Stein agrees: “I expect us to better serve the majority of our customers with long-term mindsets who have opportunistic single-stocks or specific funds they're managing."

Robinhood has a far larger customer base of 25.5 million, versus the 900,000 who invest through Betterment.

Little to lose

“It's really an asset play rather than a pivot or change in direction,” says Will Trout, director of securities and investments at Boston consultancy Datos Insights, in an email.

"Betterment has realized that a lot of their customers, whether accessing directly or via their advisors, are also self-directed investors. Rather than forgo a chance at acquiring those assets, Betterment wants to give clients the opportunity to invest," he explains.

"It might be play money at first, but it is likely to grow, particularly if customers like what Betterment rolls out," he adds.

Little to lose in trying, says David Goldstone, manager of investment research at Condor Capital, which produces the Robo Report.

"Betterment has been successful at attracting self-directed investors into managed accounts. [It] might as well try and attract [their] unmanaged assets onto their platform," he says in an email exchange.

Levy is also aware that the earlier you attract a customer, the more potentially lucrative the relationship is.

“An increasing number of our customers see us as a long-term partner in their wealth-building journeys, [and] we remain committed to constantly expanding both investing choice and our product footprint to meet their needs as they grow,” she says in the email.

Incremental revenue growth

SBLOCs will have appeal for Betterment RIA custody clients, Himmel predicts.

“I don't think they'll drive huge volume, but that's not the point. 

"It'll help Betterment retain advisors, and [gaining] incremental revenue from a product they can offer through partnership never hurts,” he adds.

“They’re table stakes at wirehouses, where advisors have the years of training and institutional support to be comfortable identifying the right opportunities to pitch them, and the firms that employ them have anywhere from 15% to 20% of their households borrowing,” he says.

“Independent advisors generally don't have the cultural orientation. Betterment's advisor base, which skews small- and growth-oriented, is [perhaps] among the minority who actively want collateralized lending options, and ... Betterment is likely offering this in direct response.”

Toying with offerings

Betterment, which owns a broker-dealer, has long embraced a multi-spoke business model.

It launched two new business lines, a 401(k) unit and an RIA custodian in 2015 and 2014, respectively, and acquired a third, a crypto business, in 2022, before shutting it down in late 2024. See: Knocking down a 'wall,' Betterment will make RIA custody its 'biggest business'.

It also U-turned on its ETF-only policy, allowing advisors to grandfather onto its custodian ETFs, mutual funds, and single stocks. See: Betterment changes its RIA custody brand to 'Advisor Solutions' -- a sign that digital innocence and niche marketing are now passé -- but its RIA clients are applauding.

In recent years, it has added "model" robo portfolios, too, including “tilts” to ESG, factor-investing, value-investing, and fixed-income. 

The company first began offering hybrid human-digital advice in 2017. See: Betterment rolls out free baseline human advice to all customers with a smartphone and no RIA and cuts price on premium advice offer.

* Forbes first broke news of Betterment's DIY move, albeit in the second-to-last paragraph of an Apr. 21 article.

* It is unclear whether Betterment also intends to roll out individual trading to its retirement clients, be they 401(k) plan sponsors or participants, or IRA investors.

* Betterment declined to answer if its new trading service will benefit from payment-for-order-flow; if it will include individual stocks when tallying AUM-based bills; or if it intends to limit the scope of individual trades to discourage highly active day-trading.

* It also declined to answer if its pivot is a forerunner to the launch of a full-fledged discount brokerage, including products like proprietary money markets; how it will choose what stocks and funds to list; and how, or if it will keep the DIY service separate from robo accounts.