One We Like: Betterment - Black Swan

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One We Like: Betterment

January 26, 2016

By Consulting Group

We’ve written before about how, despite a lot of media buzz and misconceptions, there are hardly any robo-advisors in the UK at present. However, that is about to change, with the imminent launch of products such as Wealthify and Scalable Capital. With that in mind, we thought now might be a good time to dedicate this month’s ‘One we like’ slot to our favourite US robo-advisor – Betterment. What can the UK ‘robots’ learn from their American cousins?

The most important aspect about Betterment is that it knows its market. Betterment’s low-cost, simple investment proposition is potentially valuable to a huge range of investors, but for most people with less than $100,000 to invest it is a far more sustainable solution than investing with an advisor – a very similar situation to that which we see in the UK post-RDR. Betterment identified an area of the market which was unaddressed, understood what that market required and built a product which provides its users with exactly what they need.

Choosing an investment portfolio with Betterment could not be simpler. To begin, you enter 3 pieces of information – your age, salary and whether or not you are retired. From that point, you have the opportunity to choose one of three investment goals – retirement, safety net or general investing. Pick a goal, and your suggested portfolio mix (the balance between stocks and bonds) will be allocated to you, based on your age and income. Fill in your personal details, commit funds, and that’s all you need to do to invest.

Customers do have the opportunity to change the asset allocation if they wish, but in contrast to other operators asset allocation is driven by Betterment. In this way they take much of the complexity and uncertainty out of picking your investments. This is why they’ve been particularly successful among those new to investing. It is very difficult to be overwhelmed by choice when investing with Betterment. Consequently they have 125,0001 customers, compared with 37,000 at their flashier, more well-known competitor Wealthfront, though with an average investment of around a ⅓ of Wealthfront’s.

Betterment’s model cannot be copied exactly by non-advisory firms in the UK due to rules over advice, but the key aspects can be – they just need to be separated a little bit from the actual investment choice.

There is not an advice gap in the UK – there is a confidence gap. Many people have assets to invest – more than 10 million contribute to a cash ISA each year – but the majority of those don’t have confidence in themselves to choose whether to invest in bonds or stocks, small-caps or large-caps. It is up to investment firms to provide this confidence, by not being afraid to offer non-regulate, generic financial planning advice helping investors choose their goals. By offering this service, and combining this with a simple goal-based investment proposition like Betterment’s, those new to investing will have the tools they need to make good choices, and enter the investment market for the first time.

1https://www.paladinregistry.com/robo-advisor/wealthfront

 

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