{"id":15871,"date":"2016-11-17T15:34:56","date_gmt":"2016-11-17T20:34:56","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/robots-are-taking-over-our-savings-but-dont-worry-its-betterment-this-way\/"},"modified":"2016-11-17T19:30:54","modified_gmt":"2016-11-18T00:30:54","slug":"robots-are-taking-over-our-savings-but-dont-worry-it-could-be-betterment-this-way","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/robots-are-taking-over-our-savings-but-dont-worry-it-could-be-betterment-this-way\/","title":{"rendered":"Robots are Taking Over our Savings \u2013 but Don\u2019t Worry, it Could Be Better(ment) this Way."},"content":{"rendered":"

Over the last two decades, the investment industry has seen drastic changes due to digital innovations \u2013 from checking stock prices in the newspaper to seamlessly placing trades on a smartphone, from boisterous trading floors to the silent monitoring of algorithmic trading programs, and from daytime domestic trading to around the clock global market access.\u00a0 Despite this change, the wealth management model has remained relatively intact \u2013 at least until recently.<\/p>\n

The millennial generation is poised to become the global economic powerhouse \u2013 the generation currently boasts 1.3 trillion in financial assets [1] with an additional 30 trillion in assets expected to pass from the baby boomers in the next decades [2].\u00a0 With investing as in many other facets of life, the millennials differ greatly from their parents.\u00a0 Millennials have a love of immediacy, ease, and low cost digital solutions and an inherent distrust of financial institutions and advice due to the Global Financial Crisis.<\/p>\n

In this context, the traditional wealth management business and operating model is at risk.\u00a0 The traditional business model charges 1-2% of AUM* annually for advisory and planning services.\u00a0 The operating model generally involves spending considerable time and manual research to construct an investment portfolio suited to each client\u2019s need and then meeting with that client in person on a quarterly basis to review performance and discuss investment changes.\u00a0 This high touch, slow paced operating environment simply won\u2019t suffice for millennials.<\/p>\n

Enter Betterment, a digital innovator and the biggest winner in the rise of \u201crobo-advisors.\u201d\u00a0 US News defines a robo-advisor as an \u201cautomated wealth management service that provides algorithm-based investment advice without human interaction\u201d [3].\u00a0 Betterment is a web platform that provides personalized investment recommendations based on age, retirement status, and income. They then provide low cost passive portfolios to reflect those recommendations, rebalance appropriately, and provide real time portfolio updates [4].\u00a0 They charge a nominal fee ranging from 0.15%-0.35% based on account size.\u00a0 Importantly, since everything is algorithmic, they can accept any account size (in comparison to typical minimums of $250,000 for traditional advisors).\u00a0 This allows them to get clients at a young age and ideally, keep them throughout their lifecycle.<\/p>\n

Setting up an account with Betterment is blissfully easy and intuitive (Exhibit 1<\/strong>), leading some to call it the \u201cApple of Finance\u201d [5].\u00a0 The company boasts $5bn in AUM as of July 2016 [5].<\/p>\n

Exhibit 1 \u2013 Betterment Platform<\/strong><\/p>\n

\"exhibit-1\"<\/a><\/p>\n

Of course, where there is opportunity, there is competition.\u00a0 The digital advisory business has relatively low barriers to entry and has therefore seen a flood of entrants.\u00a0 Exhibit 2<\/strong> shows Bloomberg\u2019s projections for rapid AUM growth in the industry in the coming years.\u00a0 Since the first robo advisor launched in 2008, there have been 140 companies founded in the space with 80 of those coming in the last two years [6].\u00a0 Betterment has fared well relative to this group, with its most formidable competitor, Wealthfront, managing $3bn in AUM as of mid 2016.<\/p>\n

More alarming is the response from well-capitalized incumbents. UBS has partnered with SigFig to develop new online management tools, other big names like Goldman and Blackrock have been acquiring smaller players, and Charles Schwab and Vanguard have launched robo-advisors of their own (with the added benefit of human access for those who want it) [7].<\/p>\n

Exhibit 2 \u2013 AUM Projections for Robo-Advisors <\/strong><\/p>\n

\"exhibit-2\"<\/a><\/p>\n

Another threat to Betterment is its own economics.\u00a0 A recent Morningstar report estimates that robo-advisors spend $300-$1,000 to acquire a new customer.\u00a0 While this is low in comparison to the estimated $4,000 spent by traditional advisors, it takes far longer for the digital advisors to breakeven given the small account sizes [1][8].\u00a0 Some incumbents (e.g. Vanguard), also benefit from the fees earned on managing the passive portfolios themselves.\u00a0 The same report estimated that a robo-advisor would need around $40bn in assets to become profitable \u2013 a small component of the addressable market, but a tall order to accomplish when some competitors already have the assets and the capital to succeed.<\/p>\n

If Betterment wants to remain a critical player, it must continue to do what it does best: innovate.\u00a0 Currently, most of its capital is deployed to marketing to grow the asset base, but if they want to have a sustainable competitive edge they need to drastically enhance their platform. They should be more innovative in their marketing campaigns to try and save costs while still creating buzz (think inbound marketing, partnerships, viral videos vs. taxi cabs and magazine ads as currently).\u00a0 The cost savings here should be deployed to make their platform more sophisticated.\u00a0 People\u2019s financial situations are complex and their current program only suits investors with simple needs (and likely smaller account balances).\u00a0 They should push towards cognitive computing with the goal of being able to provide more complex advice to serve clients more effectively [8].\u00a0 Without such enhancements, Betterment and the broader robo-advisor industry is at risk of permanently losing to endowed players.<\/p>\n

Words: 800<\/p>\n

*Assets Under Management<\/p>\n

[1] Michael Wong. \u201cHungry Robo-Advisors Are Eyeing Wealth Management Assets.\u201d Morningstar, March 2015.<\/p>\n

[2] Andrew Osterland. \u201cAdvisors brace for the $30 trillion ‘great wealth transfer.’\u201d CNBC<\/em>,\u00a0 June 16, 2015. http:\/\/www.cnbc.com\/2016\/06\/15\/the-great-wealth-transfer-has-started.html<\/a>, accessed November 2016.<\/p>\n

[3] Zina Kumok. \u201c3 Reasons Millennials Should Consider a Robo-Advisor.\u201d US News,<\/em> April 7, 2016. http:\/\/money.usnews.com\/money\/personal-finance\/articles\/2016-04-07\/3-reasons-millennials-should-consider-a-robo-advisor<\/a> , accessed November 2016.<\/p>\n

[4] Betterment. \u201cWhy Betterment.\u201d https:\/\/www.betterment.com\/why-betterment\/<\/a>, accessed November 2016.<\/p>\n

[5] Wikepedia. \u201cBetterment.\u201d https:\/\/en.wikipedia.org\/wiki\/Betterment<\/a>, accessed Novemember 2016.<\/p>\n

[6] Barbara Novick, Bo Lu, Tom Fortin, Shahriar Haifizi, Martin Parkes, Rachel Barry. \u201cDIGITAL INVESTMENT ADVICE: Robo-Advisors Come of Age.\u201d Blackrock, September 2016.<\/p>\n

[7] Jon Marino. \u201cBig banks are fighting robo-advisors head on.\u201d CNBC, <\/em>June 26, 2016. http:\/\/www.cnbc.com\/2016\/06\/25\/big-banks-are-fighting-robo-advisors-head-on.html<\/a>, accessed November 2016.<\/p>\n

[8] Alessandra Malito. \u201cStartup robo-advisers grapple with client acquisition costs.\u201d Investment News<\/em>, May 9, 2016. http:\/\/www.investmentnews.com\/article\/20160509\/FREE\/160509928\/startup-robo-advisers-grapple-with-client-acquisition-costs<\/a>, accessed November 2016.<\/p>\n

[9] Charles Ludden, Kendra Thompson, Imon Mohsin. \u201cThe Rise of Robo-Advice.\u201d Accenture 2015.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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