Betterment: IFAs Should Take Heed Of Robo Advisers

U.S. ETF platform CEO Jonathan Stein tells advisers that they should learn lessons from robo advice  

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Strong trends are pushing investors towards automated advice and online investment plans, but financial advisers do not need to automatically perceive this as a threat, U.S.-based, ETF-focused robo adviser Betterment’s CEO Jonathan Stein said at the Inside ETFs Europe conference.

Speaking at the largest ETF conference in Amsterdam last week, Stein told the audience that trends such as falling transaction costs, the reduced cost of diversification and evolving pension schemes have helped to create a mass market for robo advice.

“ETFs have greatly reduced cost of diversification,” said Stein. “It used to be really expensive to go out and buy a broadly diversified global portfolio. Now you can do that for a few basis points.

“The third trend is we’ve moved away from defined benefit and toward defined contribution pension plans,” he added. “With no advice, you have to save for your own retirement. Many people had to figure this out on their own, but there are more options and tax incentives every year.”

Betterment creates ETF-only portfolios for direct investors and advisers online and now manages around $2.3 billion in assets. Its average customer is a 36-year-old professional with around $100,000 annual income, the kind of customer who expects "instant gratification", said Stein. The robo adviser is working towards its goal of allowing customers to sign up and create their personal plan within five minutes.

“I wonder if there is such a thing as a fully automated investment plan?” asked Stein. “People tend to say no. I ask the same person if driving can be fully automated, and they say it probably will be. Who knows which is more difficult.”

However, Stein told the audience of IFAs that they should not necessarily perceive Betterment and its competitors as a threat.

“We also offer our service to advisers,” he said. “Some people say this kind of advice we are giving will disrupt in the IFA, or RIA market, and they should be concerned. I think we’ve seen a lot of growth in the IFA market and people will continue to want to use advisers to give them advice about their money.”

Stein admitted the adviser part of their business is “tiny” but is growing quickly.

“When they [investors come to] see an adviser, the first question is: “How much should I be saving?” Most investment sites do a terrible job of answering those questions,” said Stein. “The portfolio isn’t the most important thing, yet there’s so much attention paid to it.”

Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.