{"id":19672,"date":"2016-11-18T17:05:26","date_gmt":"2016-11-18T22:05:26","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/a-betterment-way-to-invest\/"},"modified":"2016-11-18T17:05:26","modified_gmt":"2016-11-18T22:05:26","slug":"a-betterment-way-to-invest","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/a-betterment-way-to-invest\/","title":{"rendered":"A Better(ment) Way to Invest?"},"content":{"rendered":"

For years, financial institutions have used the same formula for attracting new customers. Be at the right place at the right time, and you\u2019ll likely have a customer for life. The \u201cright time\u201d meant having the right set of products to serve a person at major life inflection points. When someone is looking to buy a house, be there with a mortgage at competitive rates. The \u201cright place\u201d meant having branches in as many places as economically feasible, as people value face-to-face interactions when conducting important financial transactions.<\/p>\n

This formula is being disrupted, putting the traditional financial service industry at an inflection point of its own. First, the financial crisis of 2008 created an enormous rise in the distrust of traditional banks. In fact, even 7 years removed from the crisis, only the media is less trusted than the banking industry1<\/sup>. Second, due to the proliferation of digital technology, the \u201cright place\u201d now means a mobile app available on demand. Given these circumstances, people are willing to give Financial Technology (FinTech) startups a chance \u2013 and they have grown rapidly. For example, Venmo, a peer to peer payment app, handled $7.5 billion in transactions in 20152<\/sup>.<\/p>\n

Betterment is another such FinTech startup, and has taken a chunk out of the wealth management industry, currently managing over $6 Billion in assets for customers3<\/sup>. On the surface, $6 Billion does not represent an existential crisis for traditional wealth managers. What has traditional wealth managers scared is that Betterment has dramatically undercut management fees by using computer algorithms to manage money.<\/p>\n

Betterment\u2019s Value Proposition<\/strong><\/p>\n

Betterment\u2019s business model has two components, each being conceptually similar to historically available options. First, investors set their risk tolerance, and Betterment will create a portfolio to provide optimal returns given the level of risk desired. Second, as the market shifts, Betterment adjusts the portfolio to retain desired risk levels. Alone, these offerings are not entirely dissimilar from passively investing with a low-cost provider such as Vanguard, or using a traditional advisor to make portfolio changes.<\/p>\n

The innovative component is the blending of these two models. Using a set of complex algorithms, Betterment automatically reallocates a portfolio so that investment objectives are maintained. The usage of algorithms \u2013 or robo-advising \u2013 has a variety of benefits over traditional wealth management:<\/p>\n