Robo advisor Betterment works with Fidelity in RIA push

If you can't beat the robots, join them.

That's what Betterment—the ultra-low cost, computer-driven personal portfolio service—hopes financial professionals will do with its new institutionally focused "robo-advisor" offering. Launched Wednesday, Betterment Institutional lets registered investment advisors, or RIAs, use a product that is seen by some as a threat to their relatively expensive and outdated money-management services.

Betterment's core retail product has gained attention recently as awareness of low-cost, passive money management—also called "digital" advising for its automatic allocations to exchange traded funds based on investor goals—has gained popularity with entrants such as Wealthfront and Vanguard Personal Advisor Services. Launched in 2010, Betterment now has 49,000 individual customers with $875 million invested as of Tuesday.

According to Betterment and its partners, the service will help advisors by eliminating or combining many traditionally cumbersome tasks, including a paper-based sign-up process; using multiple software programs for asset allocation and tax efficiency; going between separate brokerage and custodian vendors; and using multiple tools for tax and return reporting. The end result, they say, will be saved time and money.

Jon Stein, founder and CEO of Betterment
Source: Betterment
Jon Stein, founder and CEO of Betterment

The product has several major votes of confidence. One is a previously unannounced collaboration with Fidelity Institutional Wealth Services, a platform for nearly 3,000 RIA firms. Fidelity will now provide information and education on Betterment to those advisors, although they will not be required to use it.

"(We) share an interest in helping advisors realize that digital advice should not be perceived as a threat, but rather an opportunity to evolve," David Canter, an executive vice president in Fidelity's Institutional Wealth Services unit, said in an email. "Betterment Institutional is an exceptional solution for many of our RIA clients that need a scalable, automated platform," he added.

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"Advisors have been coming to us and saying, 'This is great. I love what you guys are doing. I'm using it myself for my personal accounts. How can I use this for my clients?'" Betterment founder and CEO Jon Stein said in a recent interview. The company made the The 2014 CNBC Disruptor 50 List earlier this year.

The product was also shaped in partnership with the two heads of major wealth advisory firms. One is Steve Lockshin, founder of Convergent Wealth Advisors, AdvicePeriod and Fortigent. The second is Marty Bicknell, CEO of Mariner Holdings, which includes Mariner Wealth Advisors and Montage Investments. Lockshin and Bicknell are investors in Betterment and plan to use the product with some of their firms' clients (AdvicePeriod and Mariner for now). About 25 RIA firms have also been using the beta version of Betterment Institutional.

The cost for professionally advised users will be similar to Betterment's current retail fees, plus whatever the RIA charges for additional services. Betterment now costs 0.15 to 0.35 percent of average annual assets, depending on the amount of money invested.

Betterment Institutional will feature a 0.25 percent "platform" fee regardless of assets. Stein said that with the RIA charges, the total cost for their clients would likely range from 0.50 to 1 percent. That will usually be below the 1 percent or more that advisors typically charge to clients who meet a minimum account size, say $10,000 or even $1 million.

The idea is that advisors will provide services that Betterment can't, such as estate planning, in-depth financial guidance, trust and other family-related asset management. Betterment will be used to handle the bulk of actual client investments, including the rebalancing and tax-efficiency work that's typically done using disparate types of software or even by hand.

Through Betterment, RIAs get a custom website featuring their branding. Clients will use the site to sign up and monitor their investments; RIAs can also review the portfolios on the back end through their own dashboard or even work with clients in real-time over shared-screen technology.

Fidelity's Canter said that RIAs can use the Betterment service to better attract new business segments, especially those with investment amounts that previously fell below their thresholds. Fidelity research from May found that 56 percent of RIA and broker-dealer firm leaders plan to "embrace digital advice by incorporating it into their existing businesses or partnering with a digital advisor."

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Lockshin is quick to tout Betterment's potential. Besides possibly adding a slew of smaller new clients, Lockshin said that it will help manage the portfolios of existing clients more effectively.

"It commoditizes the parts of our business that should be commoditized and lets us focus on the value-add piece of the relationship," he said.

Lockshin estimates that RIAs will save 20 percent to 30 percent of their time because the Betterment software is so much more effective. They will also save money by buying less software.

Lockshin said he will have no investment minimums for clients on his platforms. They will begin by charging clients the 0.25 percent platform cost, and advisors in the network can then add further fees for extra service.

Advisors will be able to add investments on top of Betterment's simple stock and bond ETF mix, but such allocations will be done outside of the platform.

CEO Stein doesn't see RIA use of Betterment's technology as a threat to their passive model.

"If advisors are doing that, they're doing that already. Our product is only going to nudge them in a better direction," Stein said. "That's the only affect it's going to have."

Lockshin agreed that the RIA advisory model was compatible with Betterment's. Some clients, he said, need more personal guidance to stick with a long-term passive plan, especially when the market sours and there's incentive to sell.

"It doesn't need to be a death match. We're actually arguing it's not us versus them, it's us plus them," Lockshin said. "I'm excited about it and my peers in the industry are all pretty excited about it. I think the next year's going to be a lot of fun."

Stein hopes that the new institutional product will help Betterment become a household name.

"We want to be the next Charles Schwab. We want to be a big, trillion-dollar asset manager," he said. "We see this as one of the natural ways to continue to grow our franchise."

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