It’s a Monday morning in June, and Betterment cofounder and CEO Jon Stein is seated with his executive team in a conference room at the robo-advisor’s loft-style New York headquarters. The company has just unveiled a revamped version of its website, and an additional $70 million in Series E financing is in the works. But the agenda today is focused on an even more important topic: Betterment’s ability to set itself apart from a growing array of competitors.
Stein sits in the middle of the room, taking notes longhand with his laptop closed. Still boyish at age 38, he leans back in his chair while his vice president of strategy presents a chart showing Betterment in relation to brokerage firms, wirehouses, and fellow robos. The company’s research suggests that customers first choose the robo-advisor category, and then a specific firm. The question, then, is how to convince them to pick Betterment.
Stein leads a brief discussion, then pushes toward a vote: If Betterment wants to win, what selling point does it need focus on over the next quarter? At the mention of “personalization,” every executive team member raises a hand.
Robo-advisors got their start as low-cost, off-the-shelf counterparts to traditional wealth management. But they are quickly learning what human financial advisers have long known—that customers prefer services that feel tailored to their needs, and are willing to pay for them. It should come as no surprise that Betterment’s recent product updates have been oriented around the theme of personalization, from its decision to introduce a “hybrid” price tier–which includes access to human advisors–to the launch of its socially responsible investing portfolio option earlier this month.
Later, over a salad quickly assembled from the catering spread in the Betterment cafeteria, Stein reiterates the point. “At the end of the day, the job that we’re doing for customers is we’re making the most of your money, maximizing your money for you,” he says. “If we do that better than any other options out there, people are going to come to us.”
So far, they have. Last week, Betterment became the first independent robo-advisor to reach $10 billion in assets under management. That puts the company within firing distance of robo-style offerings developed by incumbents, like Schwab’s Intelligent Portfolios product, which has $19.4* billion in assets. And it strengthens Betterment’s lead over startup competitors including Wealthfront, Wealthsimple, and Personal Capital. At its current growth rate, Betterment is adding $1 billion in assets every 50-60 days.
The milestone matters because Betterment’s business model depends on fees charged as a percentage of the assets it manages. The company has positioned itself as the lower-fee alternative to traditional wealth management solutions, and so assets are critical to revenue growth.
“You have to have scale to make the economics work when you have hundreds of millions of venture capital coming in,” says Scott Smith, a director at research firm Cerulli Associates. “At 25 basis points, it’s an uphill battle.”
Some analysts estimate that robo-advisors spend anywhere from $500 to $1,000 to acquire each customer. The companies then charge base fees in the realm of 25 basis points (0.25%). For a robo-advisor like Betterment, where the average account size is approaching $36,000, the typical customer today contributes roughly $90 in revenue per year. To make the math work, companies assume that accounts will grow in size over time, and that customers will stick around for years.
“The bet is that you can be a distribution company and spend on customer acquisition because the ‘L’ in LTV [lifetime value] is believable,” says Charles Birnbaum, a partner at Bessemer Venture Partners, which led Betterment’s Series A and has contributed to every round since. “It’s a huge challenge.”
Finding additional sources of revenue would make the road to profitability an easier slog. Betterment’s premium tier, which requires a minimum account balance of $100,000, provides “unlimited access to our CFP® professionals” for 40 basis points. In addition, the company has a 401(k) offering called Betterment for Business. But Stein sees the company as well positioned to tackle an even larger opportunity: becoming customers’ central financial relationship.
“The sticky relationship is your assets,” he says. “There’s a lot of configuration and setup that goes into that, a lot of ongoing guidance and advice. And then, [there are] all the peripheral things come through that advisor. They’ll refer you out to an estate planner, or a mortgage banker, or whatever you need, but that advisor is the hub. And that’s where I think we’re best positioned to the be financial institution for the next 100 years. Because we’re starting with advice and frankly I think banks are in this problem spot where they’re not really giving advice. And advice is ascendant.”
Other startups are following a similar playbook. SoFi, for instance, now offers mortgages, life insurance, and wealth management alongside the student loan refinancing product that was its focus at launch. Robinhood, a stock-picking app with over 2 million users, has signaled its interest in capitalizing on the strong brand it has established with first-time investors, and ultimately replacing the bank in those customers’ lives.
Betterment believes that its focus on advice will give it an edge. “We’re in the best position to offer you advice. We can see across accounts, and customers trust the brand,” says Eli Broverman, Stein’s cofounder. Other services, he says, are more transactional. “That’s not the natural place to start the relationship. People come to you because you offer the lowest rate.”
Broverman met Stein during the poker “boom era,” when “every young guy in his 20s was playing poker.” Broverman, a Brown chemistry major who had gone straight to law school, started hosting a regular game at his studio apartment in Greenwich Village. Stein was invited by a mutual friend. “I was very driven and hyper-competitive at the poker table. I wanted to win,” Broverman says. “Jon would be the least interested in the game, but he loves to gather people.”
Stein, a Dallas native, says he has always been a social organizer. In college, at Harvard, he ran the grill for his residential house. “I enjoyed hiring my friends and bringing them together and building a culture and a business,” he says. He threw parties, including a regular New Year’s bash that involved selling tickets, at cost. At one point, he started a book club.
Now he is trying to gather people to his biggest project yet, with 280,000 customers and counting. To stay close to their needs, Stein makes an occasional visit to the Betterment customer service team, which occupies a high-ceilinged space overlooking 24th Street; in the corner, a hackathon trophy towers over nearby desks. One morning, using a borrowed laptop, he dives into customer emails while waiting for the phone to ring. Why has my account been suspended? Is it possible to transfer funds from a foreign bank? How long have you been in business?
“With a broad question, you have to guess what they’re thinking. They probably want to understand our track record,” Stein says as he plows his way through the familiar queries, closing each one with his standard sign-off: “Thanks for being a Betterment customer,” followed by his first name.
When Betterment overhauled its website in May, the company removed jargon and updated language throughout, with the goal of reducing customer confusion. Copy on tax benefits, for example, changed from “Lower taxes mean better returns” to “Your after-tax return is what matters.” But to some extent, customer questions represent an opportunity as much as a problem to solve.
“When we talk to customers their balances increase. They get more trust out of it,” Stein says.
Trust was especially important in Betterment’s early days, when Stein and his founding team would take turns answering the phone day and night. Now the company has the beginnings of a track record, and some brand recognition. Customers joining today can trust that Betterment won’t disappear overnight—but they need to also trust that the company can serve their individual needs.
Wealthfront, Betterment’s California-based rival, has taken a product-driven approach to personalization. The interface it built to manage 529 college savings plans, for example, allows users to upload a picture of their child or grandchild, and pick a dream school to save toward. Like Betterment, Wealthfront has also introduced a feature to enable socially responsible investing.
But unlike Betterment, Wealthfront gives customers control over investing in (or divesting from) particular categories, like fossil fuels. “Rather than tell our clients what we think is socially responsible, we want them to be able to personalize their own” portfolio,” Wealthfront spokesperson Kate Wauck told the Wall Street Journal. Betterment, in contrast, is for the time being offering access to two ETFs that select companies based on their overall ESG (environmental, social, and governance) scores.
It’s personalization—within boundaries. Stein is resolutely skeptical of anything that approaches stock-picking. Last year his panel discussion at TechCrunch Disrupt with Robinhood cofounder Vladimir Tenev got awkward, fast.
“It’s an irresponsible way to invest,” he says of the Robinhood model. “I think the arbitrage that they have exploited is that there’s a generation of investors who hasn’t been burned yet by that style of investing. When I talk about personalization, I mean things that actually help you make more money off of your money.”
Alois Pirker, a research director at Aite Group, sees products like socially responsible investing as a first test for robos’ ability to provide advice in the right way at the right time—and at the right price.
“Sometimes consumers are more self-service, and sometimes more hand-holding is required—they go in and out of that,” he says. But incumbents are ill-equipped to manage those fluid dynamics. “Firms like strict segments, they want to assign you to a segment and not ask you how you want to be served. The question is how do you bundle services, and can you identify needs early enough.”
He adds: “In wealth, the advisors will always be there. The way the advisor gets integrated is the secret sauce.”
If that prediction proves correct, the biggest threat facing Betterment and its peers may come from incumbent banks and wealth managers. JPMorgan Chase, for example, is building robo technology of its own. Other firms are partnering with white-label players like SigFig and FutureAdvisor, which was acquired by BlackRock in 2015.
Stein, meanwhile, is confident that success lies in doing right by Betterment’s customers. The firm prods customers to focus on variables that they can control—how much they save, for example—and not the variables that they can’t.
And in a way, he is following that same guidance in how he runs the company he founded nearly 10 years ago. He can’t directly alter the competitive landscape, but he can keep improving Betterment. “You can’t control it. So, don’t spend a lot of time thinking about it.” Some advice, as it turns out, applies to everyone.
*This number has been updated to reflect the AUM for Schwab Intelligent Portfolios as of June 2017.