Betterment, the leading independent robo advice platform, is adding a human touch to its offerings, and by doing so, acknowledging it is directly competing against the biggest wealth management firms.

"When we launched in 2010, we said that if we were successful that all of the incumbents would look to replicate our platform," says Betterment CEO Jon Stein. "We've long considered Schwab and Fidelity to be our primary competition and have anticipated over time that we would inevitably become even more competitive with them."

Betterment announced on Tuesday it is launching hybrid advice tiers that will exist alongside its base automated advice offering and its RIA platform: one that allows clients a yearly check-in call with in-house CFPs out of its Manhattan offices; a second that offers unlimited access to Betterment's in-house CFP team, and a third that puts clients into a direct adviser relationship, through its Advisor Network.

The first new tier, Betterment Plus, has a fee of 40 basis points and an account minimum of $100,000. The second tier, Betterment Premium, charges 50 basis points and account minimums of $250,000. Dedicated Advisor is the name of its third offering, and advisers it makes referrals to will set their own pricing.

"In our Advisor Network, we are working with CFPs — most of whom are members of the FPA who we have a relationship with," Stein says. "We do also have XY Planning Network firms in the network as a result of our partnership. We are excited about deepening those relationships."

"We've long considered Schwab and Fidelity to be our primary competition," says Betterment CEO Jon Stein.

Betterment will not get any fee for these referrals, Stein says, nor will firms have to pay to be part of the network. The firm does do some additional vetting before accepting advisers into the network, and there is already a waiting list, according to Betterment.

MODEL TO BEAT
Stein says there is already a team of about a dozen CFPs internally working at the firm's Midtown location. There is also a job posting on the firm's site seeking CFP applicants.

With $7 billion in AUM, Betterment is the leading independent robo advice platform. Unlike others in its digital-first class, it has aggressively pursued assets beyond retail investors, first with its institutional offering, Betterment for Advisors, and offering a 401(k) plan solution to employers too.

The implementation of a hybrid model by Betterment, though, proves that the human-hybrid model of digital advice is the model to beat, says Sean McDermott, senior analyst at Corporate Insight.

"[It's] emblematic of how much the digital advice market has matured over the years," McDermott says. "Betterment recognizes that a purely digital relationship does not satisfy the needs of everyone, particularly investors with more complex financial needs and larger portfolios. This new service should enable the firm to move up-market."

Steve Lockshin, the founder and former chief executive of Convergent Wealth Advisors and an early investor in Betterment, says the pivot signals how advice is being broken down online.

"I believe what you're going to see is something like an efficient frontier of service; where consumers will have more stops along the continuum to 'dial in' the experience they like," he says. "As more firms offer more solutions, it's not difficult to see how part of the business becomes commoditized."

Stein was quick to point out that the digital-only model is not dead, and that Betterment still expected most of its clientele to select its digital offering.

"We'll continue to attract tens of thousands of customers who will choose our digital offering," Stein says. "We could have kept growing our current business and been very successful, but our vision is much larger than that."

WELCOME COMPETITION
Advisers using Betterment's RIA platform said they were not threatened by its latest offering, instead interested in getting on the firm's list of RIA referrals.

"I have no problem with healthy competition," says Tony Pampel, founder of Dallas-based True Life Financial Planning, a member of the XY Planning Network. "The folks who will feel the squeeze are those using TAMPs and layering fees on top of that. Now you can take out those fees for the exact same portfolio. You still can talk to an adviser. You might not get to sit inside a pretty office. But there's nothing wrong with that."

Pampel says the adoption of hybrid advice focused on planning and low costs is good for the industry as a whole.

"At least now those people will get planning. At first they were getting what they were asking for — robo advice for free — and that scared me. That type of tool without guidance — it may have been mathematically correct, but it's got to be more than math. People are more than spreadsheets."

As a virtual-based advisory serving millennial and Gen X clients, Jason Mirabella, founder of Henfruit Investr, says he doesn't deal enough in scale to feel threatened.

"Whether it’s the new Schwab offering, Fidelity or Betterment, they are all going in this direction," Mirabella says, "But when you come down to it, these are still call centers. There still are a lot of people out there who want to work with a financial planner. They like the efficacy of working with a planner who knows about their situation specifically and can build a relationship with them over time."

Mirabella, whose Noblesville, Indiana-based firm also uses Betterment for Advisors and is part of the XY Planning Network, suggested there might be some conflict if the firm wanted to pivot toward being a TAMP for advisers. "I'm curious to see how they structure it," he says.

PRICING HIGH
The hybrid offerings from Betterment will face off against those from Schwab and Vanguard, which charge 28 and 30 basis points, respectively, and combined manage assets of more than $50 billion.

"The fact that Betterment still struggles to acquire clients is likely the primary reason that they’re pricing as high as 50bps in the first place… for a service that Schwab and Vanguard offer for 40% less the cost, with 60% to 80% lower minimums," says Michael Kitces, partner and director of wealth management for Pinnacle Advisory Group in Columbia, Maryland, and co-founder of the XY Planning Network.

"Simply put, this is Betterment recognizing that growth requires going upmarket, and that using advisers isn’t a cost but an opportunity, both because it helps to bring in clients and solve their problems, and because it’s a way to scale the money they’re already spending in their efforts to acquire clients."

Betterment is also moving up the competition chain because of the venture capital funds it has raised and the expectations that come with it for profitability and a public offering, says Lex Sokolin, director of fintech strategy at Autonomous Research.

"By going upstream to the mass affluent market, the firm competes with Vanguard, Schwab and Personal Capital, but also has the opportunity to get to profitability that much faster," Sokolin says.

"Similarly, a higher basis points cost for the service puts human hours back into the equation. This will make revenue numbers appear higher, which has a direct impact on valuation. And once a private valuation for a startup approaches a billion, exit opportunities start looking more scarce and the public markets come calling."

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