{"id":393,"date":"2015-09-13T16:47:10","date_gmt":"2015-09-13T20:47:10","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/how-betterment-wins-by-reducing-the-cost-structure-of-investment-management\/"},"modified":"2015-09-13T16:47:10","modified_gmt":"2015-09-13T20:47:10","slug":"how-betterment-wins-by-reducing-the-cost-structure-of-investment-management","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/how-betterment-wins-by-reducing-the-cost-structure-of-investment-management\/","title":{"rendered":"How Betterment Wins by Reducing the Cost Structure of Investment Management"},"content":{"rendered":"

Betterment is a FinTech startup that provides investment\u00a0management services to individuals\u00a0of all types.\u00a0 By leveraging software and automation, the team has drastically reduced the cost structure of investing and disrupted a well-protected and inaccessible industry.<\/p>\n

Americans are poorly invested\u00a0because the existing infrastructure for creating and maintaining savings plans is difficult to navigate and expensive to administer. According to techcrunch, \u201c30.9% of the population has no retirement savings or pension plan. For millennials, many of whom were late to the job market thanks to the financial crisis of 2008, those numbers are actually just above 50%.\u201d\"Screen<\/p>\n

Technology has enabled Betterment to automate portfolio allocation based on easy to understand preferences such as investment horizon and risk tolerance.\u00a0 Replacing portfolio managers as the gate keepers with crystal balls, Betterment simply creates diversified portfolio (then adds on a few fancy features like tax loss harvesting) and takes its hands off the wheel.<\/p>\n

Creating Value<\/u><\/strong><\/p>\n

Betterment offers better net returns (+4.30% vs. DIY investor according to the company), more accessible investing, and less human bias.\u00a0 They are able to offer better net returns (vs. avg. DIY investors) for several reasons.\u00a0 First, they are able to charge less because their service is highly automated so marginal cost per dollar invested is very low. Second, they provide automated services that most portfolio managers simply can\u2019t offer, such as automatic rebalancing. Rebalancing has historically been high touch and slow. Slow rebalancing can be costly because it causes suboptimal risk-adjusted returns. And lastly, betterment gives much broader diversification that most portfolio managers.\u00a0 This diversification can only be accomplished using automation.<\/p>\n

Next, Betterment makes investing more accessible.\u00a0 Historically, individuals have been given options for investing amongst a list of funds administered by Fidelity, Vanguard, etc., these funds charge higher rates yet don\u2019t provide clarity on the investment objectives.\u00a0 For someone who doesn\u2019t know much about finance (or even someone who does) this process can be overwhelming.\u00a0 Betterment asks simple questions about the investors objectives and designs a custom allocation based on those preferences.<\/p>\n

Betterment introduces less human bias into the investing process.\u00a0 Portfolio mangers\u2019 objectives are not aligned with those of the investor.\u00a0 They are driven to take risky bets in order to compete for investment dollars.\u00a0 Betterment has created a unified algorithm that doesn\u2019t make bets based on \u201cinstincts\u201d but rather on fundamentals.<\/p>\n

Broader Implications<\/u><\/strong><\/p>\n

Betterment is a winner because it has broken into a $5.5 trillion industry with a small team and a simple mission.\u00a0 Their use of technology directly supports that mission and provides real value to the customer.\u00a0 This investing strategy may have broader implications for the economy (where investment is less correlated with news\/earnings), but for the early adopters who gain cheap access to investment in a much better pool of assets \u2013 Betterment will do great things.<\/p>\n","protected":false},"excerpt":{"rendered":"

Betterment is disrupting investment management by leveraging software and automation to reduce the costs associated with investing and maintaining a balanced portfolio. It heralds a new world that promises to be more efficient, inclusive, and transparent.<\/p>\n","protected":false},"author":25,"featured_media":394,"comment_status":"open","ping_status":"closed","template":"","categories":[162,650,161,163,15,4],"class_list":["post-393","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-automation","category-finance","category-investing","category-portfolio","category-software","category-technology"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/digital-winners-and-losers\/","yoast_head":"\nHow Betterment Wins by Reducing the Cost Structure of Investment Management - Digital Innovation and Transformation<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-digit\/submission\/how-betterment-wins-by-reducing-the-cost-structure-of-investment-management\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How Betterment Wins by Reducing the Cost Structure of Investment Management - Digital Innovation and Transformation\" \/>\n<meta property=\"og:description\" content=\"Betterment is disrupting investment management by leveraging software and automation to reduce the costs associated with investing and maintaining a balanced portfolio. 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