By Arielle O'Shea
If there was any doubt about the future of robo-advisors, the latest announcement from online advisor Betterment may quash it: The company says it has raised $100 million from investors in its latest round of funding, giving it a valuation of $700 million.
That's the biggest round of funding for any robo-advisor so far, promising to help Betterment solidify its position as the largest independent offering. The company manages 150,000 customer accounts and $3.9 billion in assets, up from $1.1 billion just 15 months ago.
Consumers benefit from robo-advisors
Robo-advisors are in large part a product of the financial crisis; both Betterment and its closest competitor, Wealthfront, launched in 2008. As a whole, the industry has experienced rapid success. Assets managed by automated investment management companies currently total more than $50 billion, with growth of more than 200% in 2015, according to independent research firm Aite Group.
Long-established online brokers have taken notice, launching services of their own. These include Schwab Intelligent Portfolios and Vanguard Personal Advisor Services, with other offerings coming from the likes of Fidelity and Bank of America.
All of this growth and increased competition is good for consumers. Robo-advisors can lower your management fees, build you a diversified portfolio and get you into the stock market with a small initial investment. They offer even small-dollar investors access to a range of asset classes by building portfolios out of exchange-traded funds, a low-cost form of index fund.
Most of the platforms follow a familiar format, first guiding investors through a goal-setting questionnaire on their websites to determine the level of risk that will be taken. Portfolios are then built via computer algorithms and automatically rebalanced as needed. Because of that computer-driven process, management fees are lower than those charged by human financial advisors, often as much as 75% lower.
A one-stop shop for financial services
Betterment, at least, is angling to do even more, CEO Jon Stein says. "We've become the best answer to the question, 'What should I do with my money?' Now we want to become the best answer to the question, 'What should I do with my paycheck?' "
To do that, he says, the company will aim to manage more and more of its clients' financial lives, using this latest round of funding to build out its financial advisory offerings. Betterment currently provides retirement advice through a feature called RetireGuide, which allows users to sync outside accounts such as their 401(k)s. It recently launched a similar service to sync bank and investment accounts, loans, credit cards and mortgages.
"We'll continue to expand RetireGuide into a whole life financial plan," Stein says, "and leverage aggregation, which currently gives a full view of a user's assets and liabilities. We'll continue to build that out into advice across all of those different financial services, so you really don't need any other financial relationship."
That means robo-advisors may soon offer banking and loan products, says Kyle Ramsay, NerdWallet's investing manager.
"As Betterment and its peers better understand their clients' holistic financial portraits, they will evolve their offerings to not only help those clients invest their money, but also to help them save, borrow and grow their money in a low-cost, automated and optimized way."
Easy access for consumers
Betterment isn't the first online advisor to consider comprehensive financial management, rather than just investment management, but it may become the most accessible to do so.
Personal Capital offers clients with $1 million or more dedicated financial advisors, private banking services, estate planning advice and even help navigating the homebuying process. The company charges a tiered fee structure of up to 0.79% (0.89% for clients who invest less than $1 million) and has a minimum investment requirement of $25,000.
Betterment has positioned itself to target a different audience, one that doesn't yet have that kind of money but wants to work toward building it. The company's average account size is just over $25,000, according to Stein. Personal Capital says its accounts average $300,000.
Betterment also has no minimum deposit requirement, though it charges a monthly fee of $3 to accounts under $10,000 that don't commit to a minimum $100-a-month auto-deposit. It says that fee is rooted in behavioral finance, as reducing fees with additional deposits motivates users to save more. Accounts under $10,000 with auto-deposit are charged 0.35%; that fee drops to 0.25% for balances between $10,000 and $99,999, and to 0.15% for balances of $100,000 or more.
"Providing low-cost, high-quality financial planning to the average consumer could have a massive impact on the finances of millions of people," Ramsay says. "Through automation and digitalization, online advisors such as Betterment are building accessible, compelling investment and financial management services that can help all investors improve their financial standing."