Figure 1: Betterment Mobile Application3<\/sup><\/strong><\/p>\n In addition to disrupting traditional investment funds, robo-advisors like Betterment have had a significant impact on the traditional wealth management industry. Traditional wealth managers like Merrill Lynch have come under scrutiny from their clients in recent years for several reasons: (i) high required minimum account balances, (ii) high fees, (iii) inability to produce differentiated investment returns, and (iv) a lack of technology solutions that facilitate ease of use and information transparency. Robo-advisors have attempted to create solutions to address these issues.<\/p>\n Betterment\u2019s business model creates and captures value by offering a simple, transparent digital interface that produces optimal investment returns at a lower cost and is accessible to everyone. Betterment\u2019s platform offers clients access to its platform for a tiered annual fee between 0.15%-0.35% depending on investment amount with no minimum investment. This compares to traditional wealth managers who have a minimum account balance requirement of $250k or more and charge 1%-2% annual fees. On a $250k account, this translates to a Betterment client saving $2,125 in annual fees prior to considering any impact from return performance and compounding over time4<\/sup>.<\/p>\n To deliver on this promise, Betterment\u2019s operating model: (i) provides investment diversification based on Nobel Prize winning research, (ii) invests in low cost investment funds reducing the fees clients pay at the fund level, and (iii) employs a tax harvesting strategy to maximize the tax efficiency of each client\u2019s investing strategy5<\/sup>.<\/p>\n What does this all mean? In short, there will be continued disruption in the wealth management industry. In a recent survey administered by Investopedia, 78% of financial advisors in the U.S. indicated that they believe technology will greatly impact their practice in the next five years6<\/sup>. A.T. Kearney estimates that robo-advisors will grow from $300 billion (<1% of assets) in 2016 to $2.2 trillion (~6% of assets in 2020)7<\/sup>.<\/p>\n Figure 2: Estimated U.S. Robo-Advisors Assets Under Management ($ in Trillions)7<\/sup><\/strong><\/p>\n Some traditional wealth managers such as Charles Schwab, Vanguard, BlackRock and Fidelity8<\/sup> have attacked the proliferation of robo-advisors head on by acquiring robo-advisory firms while other such as Bank of America Merrill Lynch9<\/sup> and Morgan Stanley10<\/sup> have announced plans to build in-house robo-advisor capabilities. In a worst-case scenario, robo-advisors could take significant business away from traditional wealth managers. At the very least, robo-advisors should put pricing pressure on traditional wealth managers \u2013 estimated by A.T. Kearny to decrease industry revenues by at least $8-$12 billion over the next five years7<\/sup>.<\/p>\n However, the impact of Betterment and its peers should not be all bad for the industry. Booz & Co published a presentation in 2013 that opined on how the industry can use digitization to its advantage: (i) creating new technologies that enable enhanced interaction between advisors and potential clients and (ii) enabling advisors to reach a broader base of potential clients. In my opinion, this last point is the most important11<\/sup>.<\/p>\n In the short-term, Betterment and other robo-advisors should continue to attract new clients to their platform as well as partner with large corporations (such as Uber12<\/sup>) to be their low-cost retirement provider. However, to build a sustainable long-term business, I believe that robo-advisors should partner with large wealth management platforms as part of a customer segmentation strategy. Nearly all large traditional wealth managers are moving towards their own robo-advisor solution that will increase competition with Betterment. Inevitably some of these will fall short in their offering, however, partnering with traditional providers to manage their robo-advisory platform should be a win-win for all parties. There will always be a need for customized financial advice for wealthy individuals and that will require professional, human advisors for the foreseeable future but a customer segmentation strategy that expands the opportunity for professional wealth management strategies to a broader audience of consumers is a compelling value proposition and one that can be facilitated by Betterment.<\/p>\n Word Count:<\/u><\/strong> 778 words<\/p>\n Sources<\/strong><\/span><\/p>\n 1 Betterment. 2016. Betterment Announces the Latest Breakthrough in Tax-Smart Investing: Tax-Coordinated Portfolio\u2122. [ONLINE] Available at: http:\/\/www.prnewswire.com\/news-releases\/betterment-announces-the-latest-breakthrough-in-tax-smart-investing-tax-coordinated-portfolio-300334678.html<\/a>. [Accessed 18 November 2016].<\/p>\n 2 CNBC.com staff. 2016. Betterment 2015 Disruptor 50. [ONLINE] Available at: http:\/\/www.cnbc.com\/2015\/05\/12\/betterment-disruptor-50.html<\/a>. [Accessed 18 November 2016].<\/p>\n 3 Listen Money Matters. 2016. Acorns vs Betterment vs Wealthfront: Epic Robo-Advisor Battle\u00a0\u00a0\u00a0 . [ONLINE] Available at: https:\/\/www.listenmoneymatters.com\/acorns-vs-betterment-vs-wealthfront\/<\/a>. [Accessed 18 November 2016].<\/p>\n 4 Betterment. 2016. Our Pricing – Betterment. [ONLINE] Available at: https:\/\/www.betterment.com\/pricing\/<\/a>. [Accessed 18 November 2016].<\/p>\n 5 Betterment. 2016. Our Portfolio – Betterment. [ONLINE] Available at: https:\/\/www.betterment.com\/portfolio\/<\/a>. [Accessed 18 November 2016].<\/p>\n 6 Investopedia. 2016. Nearly 80% of Financial Advisors Expect Robo Technology to Upend Wealth Management Industry. [ONLINE] Available at: http:\/\/www.prnewswire.com\/news-releases\/nearly-80-of-financial-advisors-expect-robo-technology-to-upend-wealth-management-industry-300326916.html<\/a>. [Accessed 18 November 2016].<\/p>\n 7 Teresa Epperson, Bob Hedges, Uday Singh, Monica Gabel. 2015. Hype vs. Reality: The Coming Waves of \u201cRobo\u201d Adoption . [ONLINE] Available at: https:\/\/www.atkearney.com\/documents\/10192\/7132014\/Hype+vs.+Reality_The+Coming+Waves+of+Robo+Adoption.pdf<\/a>. [Accessed 18 November 2016].<\/p>\n 8 For Investors: 7 Things You Should Know About a Robo-Advisor | The National Association of Active Investment Managers – NAAIM. 2016. For Investors: 7 Things You Should Know About a Robo-Advisor | The National Association of Active Investment Managers – NAAIM. [ONLINE] Available at: http:\/\/www.naaim.org\/for-investors-7-things-you-should-know-about-a-robo-advisor\/<\/a>. [Accessed 18 November 2016].<\/p>\n 9 Lisa Beilfuss. 2016. Merrill Lynch Unveils Plans to Launch Robo Adviser – WSJ . [ONLINE] Available at: http:\/\/www.wsj.com\/articles\/merrill-lynch-unveils-plans-to-launch-robo-adviser-1475610410<\/a>. [Accessed 18 November 2016].<\/p>\n 10 Business Insider. 2016. Morgan Stanley’s digital strategy relies heavily on robo-advising – Business Insider. [ONLINE] Available at: http:\/\/www.businessinsider.com\/morgan-stanleys-digital-strategy-relies-heavily-on-robo-advising-2016-7<\/a>. [Accessed 18 November 2016].<\/p>\n 11 Kunal Vaed. 2013. How Digitization is Transforming Wealth Management. [ONLINE] Available at: http:\/\/cdn.americanbanker.com\/media\/pdfs\/Mobile13-Vaed.pdf<\/a>. [Accessed 18 November 2016].<\/p>\n![\"mobile\"](\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/Mobile.jpg\")
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