Betterment Adds Human Advisors, Casting Doubt On Pure-Play “Robo” Investment Models

Betterment pioneered the idea that software could do a better job of managing investments than good old-fashioned humans. But now the robo-advisor is turning to tradition—and wealthier customers—with the introduction of higher-tier products that layer in-house financial advisors on top of portfolio technology.

“This offering appeals to the folks who want a little more hand-holding,” says Jon Stein, founder and CEO. He expects to see a relatively small percentage of Betterment’s 210,000 existing customers, who pay 0.25% in fees, choose to upgrade. Instead, the hybrid plans are designed to appeal to a new category of customer, one that might not otherwise have felt comfortable with Betterment’s software-based approach to investment allocation.

If the hybrid strategy succeeds, it could significantly increase Betterment’s average account size, which today hovers around $35,000. Betterment Plus, which includes one consultation per year, will cost 0.4% and require a minimum balance of $100,000; Betterment Premium, which includes an unlimited number of consultations, will cost 0.5% and require a minimum balance of $250,000.

The new tiers are also a tacit acknowledgement that robo-advisors and established players are fast-converging, and increasingly competitive. (The CFP® professionals and licensed experts that Betterment has hired hail from Charles Schwab, Fidelity, and Vanguard.) Soon, everyone will have migrated toward a lower cost structure, enabled by technology. And soon, everyone will have found ways to serve retail investors looking for cheap solutions alongside millionaires grappling with complex tax scenarios.

Though Betterment is considered a leader among its robo-startup peers, it remains a small fish in the big pond of investment management. The company manages $7.3 billion in assets; in contrast, Vanguard added $97 billion in new assets to its ETF business in 2016 alone.

It’s a murky landscape to navigate. One recent analysis by Condor Capital Management, for example, attempted to compare portfolio performance on nearly a dozen different platforms (Charles Schwab won, Vanguard lost, and Betterment landed smack in the middle). But the experiment lasted just one year, hardly an indicator of how portfolios would perform over a decades-long retirement horizon. Moreover, “moderate” risk tolerance, which Condor assumed in each case, can be defined in significantly different ways, making comparisons inherently flawed.

Expand the comparison set even further, beyond robo-advisors, and the simplest solution is often still the best. By way of illustration, look to Betterment’s own website. Buried several clicks in, under “Additional data” followed by “View all benchmarks and portfolios,” there is table comparing Betterment to the S&P 500 Index. Average annual return, cumulative return, return over the last 12 months—the classic index beats the robo intelligence every time.

But that won’t stop Betterment and others from racing to establish strong brands and capture trillions of future retirement dollars. With a lifetime’s worth of savings at stake, customer acquisition costs can soar to the hundreds of dollars.

“If two customers are learning about us and coming to check out Betterment, and one wants human advice, we can make every marketing dollar much more efficient by welcoming both of those people,” Stein says.