In recent times the US digital advice market has seen a number of the key players adding banking products to their propositions. Betterment are just one example of a digital advice tool offering access to checking and savings accounts and at InVest West 2019 Jon Stein, the CEO and Founder, discussed why he has taken the company in this direction and the common trends he is seeing in a very competitive market.
In the first week post the launch of Betterment Everyday, they saw a billion dollars largely from new customers flow into their savings account which Stein attributes to the press they received. When quizzed as to why this was, he was quite clear that people do not trust the traditional banks and are looking for alternatives.
The Betterment proposition has been designed to help consumers better manage their money both on a day to day basis but also over the longer term. Whilst banks profit from poor consumer behavior such as keeping their money in checking accounts that pay minimal interest, Betterment look to help promote healthy financial behavior. They have built detailed algorithms that can understand how much money a person may need to pay their day to day bills and sweep any excess money into investments which offer a better chance of return.
In a previous session Andy Rachleff, Co-founder and CEO of Wealthfront, described his business as a bank with a financial services arm, whilst Stein was a little more reluctant to describe Betterment in this way. He did go on to explain that there are several reasons behind the recent upturn in banking services from digital advice firms. Firstly, the technology required has vastly improved but perhaps more interesting is the fact that many of these firms are preparing for poor market conditions. If a digital advice firm also offers checking and savings accounts any clients that are spooked by poor market performance and want to disinvest (regardless of being informed that this may not be in their best interests) will have the ability to keep the money with Betterment.
Betterment are actively building out a full suite of financial products in order to cater for all the needs of their customers. Currently alongside the digital advice business that provides investment and tax advice, they also provide Betterment for Business that offers a group 401k service for employers.
The investment products incur a Bps charge and when asked about whether Betterment may follow others such as Schwab into a fixed fee subscription model, Stein explained that they are currently taking a watching brief. Interesting Cynthia Loh from Schwab mentioned in an earlier session that this model had been very well received by their customers. In any event Betterment are currently happy with a model which rewards them when their clients are doing well as this incentivizes them to always do right by the client.
The Betterment proposition has made vast strides in recent times and the Betterment for Advisors proposition is now the leading challenger brand to Schwab following their acquisition of TD Ameritrade. These are clearly exciting times for the company, and it will be interesting to see how the proposition develops as more products are offered.