Betterment has been fairly quiet since it was finalist at TechCrunch Disrupt three years ago. But in that time, the online investment company has amassed $135 million in assets under management, investing on behalf of 30,000 users. As a Registered Investment Advisor, broker-dealer, and FINRA member, the company has been luring high net worth clients away from traditional, fee-based investment advisors. It’s also been winning over new business from smaller investors (ie, regular people) that aren’t worth a professional advisor’s time of day with its low fees. All of this, with a lean headcount of 25.
Today Betterment, backed by $13 million in venture money from Bessemer Venture Partners, Anthemis Group, Menlo Ventures and angel investors, has added two high profile hires to its stable: The company has hired Mike Ma, former head of retail investing and prospect marketing at The Vanguard Group, to be its chief growth officer, as well as Daniel Egan, a behavioral finance specialist at Barclays, to hold the same position at Betterment.
The company differs from the myriad of new personal finance services on the web in a couple ways. We’re in the post-Mint.com era, where users want online financial services to do more than just spit out a nice-looking chart that shows us how we spend our money. We’d like to manage everything online, and in one place — phone calls and in-person visits are clunky and full of friction. Witness the the popularity of all-online banks like Simple and even USAA for proof.
Many of the new(ish) services, like Sigfig, Riskalyze, Learnvest and DailyWorth, can tell us how to invest our money, or what tools we need to use, or even which broker we should trust our savings with. Sigfig tells us which of our existing investments are no good. Riskalize tells you what to invest in based on your risk profile, but doesn’t go so far as to make the investment. Learnvest recently became an RIA so it could make specific recommendations, but it still cannot actually invest the money. These services, while slick and a huge improvement over the existing offerings, have no control over the user experience once they send their users away to TD Ameritrade, or E-Trade or Schwab. Betterment does have that control, and it can move around your money with as little paperwork or hassle as possible. Stein says the site is meant to be an iceberg – very little to see on top with a giant infrastructure doing all the work below.
Financial advisors would say that people don’t trust a site to allocate such large amounts of money, including one’s savings and retirement accounts, with no human interaction. But that’s discounting the way the current generation operates. We will do anything to avoid having to make a phone call and actually talk to a human.
The financial advisor industry today reminds me of the travel agent industry ten to fifteen years ago. Even as services like Orbitz and Expedia began stealing away their clients, they maintained they could never be disrupted, because no one could replace their special expertise. They had been to these places and they knew best. As is very clear today, they were very wrong. Stein says he sees a fair amount of that in the financial services industry, which is not a winner-take-all situation. “Eleven big players have less than five percent of the market,” he says. “There doesn’t have to be a massive disruption to become a massive company.”
With that approach, Betterment makes it pretty simple to roll over IRAs, investing the money entirely based on your goals, maintaining the investments, tax-optimizing them, and showing you clearly how much the service’s investments have earned for you.
Still, trusting a startup with our life’s savings can be an issue. Just look at what happened when Simple went down late last year. It was easy for those of us with brick-and-mortar bank branches to quip that “that’s what happens when your bank is an app.” And yet, we complain about our corporate banks (one of which recently went down itself) in the same way we complain about Time Warner or Comcast. We expect them to treat us badly, and have developed some sort of Stockholm syndrome that keeps us there.
For the wary, Betterment has easily available customer service — every one of its full-time employees, including the CEO, spends time talking to customers — but says that in general they’ve found people would rather avoid the hassle of a phone call. The platform was smooth enough that it inspired me to roll over two IRAs — both of which had been sitting in cash in a Schwab account for years — and finally become active with my retirement investing. It required no phone calls or paperwork (beyond depositing a check).
The company has fielded acquisition offers but is focused on building a large, publicly traded entity, Stein says, a move that is no doubt intended to inspire even more trust.
Image via 401(K) 2013