Betterment’s next-gen challenge to ‘grandparent’ RIA custodians

Though perhaps still best known as a robo-advisor, Betterment is staking its place among firms going up against industry stalwarts like Charles Schwab and Fidelity Investments in the lucrative business of supporting RIAs.

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Its latest step in that direction came on Feb. 10 with a Securities and Exchange Commission filing announcing plans to test out a new advisor referral program. Like similar offerings at the much-larger Schwab and Fidelity, RIAs already receiving various services from Betterment can agree to pay a fee in return for referrals of clients seeking advice from a professional. (In Betterment’s case, according to its filing, the fee will be set at 0.25% of any assets an advisor picks up through these referrals.)

Betterment’s plans — which are being rolled out in a pilot phase to a small number of its longstanding RIA partners — follow on similar referral programs recently announced by Pershing and Goldman Sachs’ Ayco unit, which provides financial planning to corporate executives and employees. Like Betterment, all these firms have been adding to their services for supporting registered investment advisors, who are widely considered to constitute the fastest-growing segment in wealth management.

Overseeing those efforts at Betterment is Alison Considine, the head of strategy and business development at Betterment Advisor Solutions. Beyond the fledgling referral program, Betterment has long specialized in helping its advisor partners build specialized portfolios for their clients.

READ MORE: Goldman, Wells Fargo scout RIA movement for new business opportunities

Considine said Betterment Advisor Solutions was started in 2014 in response to advisors who wanted to make use of the firm’s expertise in building portfolios for their own clients. Since then, the firm has offered custodial services for the safekeeping of client assets and systems designed to help RIAs with billing and client management.

All of that has been accompanied by an extension of Betterment’s offerings into ever-more sophisticated portfolio management. Just this month, it announced it’s working with Goldman Sachs, State Street, Vanguard and other big asset managers to open a “model marketplace,” giving its partner advisors access to even more investment opportunities at no additional cost. 

“We’ve really been on a journey of going from a robo, turnkey solution to a full-fledged custodial and portfolio management platform that offers advisors all the flexibility that they need to manage their client accounts,” Considine said.

Considine, who joined Betterment in 2019 after spending nearly four years in private wealth management at Morgan Stanley, recently sat down with Financial Planning to discuss the firm’s growing RIA business and its place alongside heavyweights like Charles Schwab and Fidelity. 

This article has been lightly edited for clarity and brevity.

Financial Planning: Where does Betterment Advisor Solutions fit into the firm’s general business plans?

Alison Considine: Essentially, Betterment has been around since 2010. We got our start as a direct-to-consumer wealth management platform — one of the original robo-advisors. 

So we’ve been around for a little over 15 years now, and we have three lines of business: There’s our retail business, as well as our B2B lines of business. Then we also have a 401(k) solution, where we’re the record keeper and 401(k) provider, working directly with small businesses, as well as working with advisors who manage 401(k) plans. 

And then we have our advisor solutions business, which is our custody vertical for third-party RIAs to use Betterment software. 

So in terms of the journey that we’ve been on, we started out as retail-facing and now we’ve diversified into these three lines of business, and we feel like those three pillars are key to our growth and key to our story. 

In a lot of ways, we’re set up very similarly to Schwab and Fidelity and other legacy players out there, with those complementary lines of business that reinforce each other.

FP: How many firms now use your advisor solutions services?

AC: We work with about 600 firms today, mostly independent RIAs, although we do have relationships with a handful of broker-dealers or other financial intermediaries.

We see two major use cases. We work with a lot of small RIAs startups or breakaway advisors who can launch and scale their business using Betterment as an all-in-one solution, where we provide not just the custody, but a lot of the other essential tech that they need in one vertically integrated platform. 

We have no minimums to get started, so it has been a popular approach with those small RIAs over the years who have built their business with us, using us as a growth partner, where they can scale efficiently and not have to hire people, because we’re handling so much of the day-to-day. 

The other major use case is with large, established RIAs who tend to come to us looking for a client segmentation solution. So they will oftentimes look to adopt Betterment alongside other custodians — whether it’s Schwab or Fidelity or whoever they’re using — for a segment of their clients who are looking to be more automated, more turnkey and provide a really modern experience. So it’s fairly common for those large firms to use us for a subset of their clients, whether it’s next-generation clients or households below a certain asset level. 

That can create a pipeline of really great next-generation clients, because that household that’s maybe only $200,000 or $250,000 today and early stage and in the accumulation phase, can grow into a great long-term client for the firm.

FP: Do you see your lack of asset minimums as your primary differentiator from your competitors?

AC: Yes, some firms have asset minimums, or some firms just gate certain features or access to a certain level of service based on assets. So it may be formal or informal.

But, yes, we don’t have any minimums to get started, and we’re focused on providing all of our great technology and great service and support to every advisor on the platform. And that is a really key differentiator when advisors don’t always get great support on other platforms, depending on their size. 

So in terms of how we think about ourselves compared with a Schwab or a Fidelity, if those are the parent or grandparent brands, we want to be the next-generation, millennial version of that. We’re offering a mobile-first app, a really easy-to-use interface, and then that same sort of diversification when it comes to our product suite.

FP: Will there be an asset minimum for your advisor referral program? Or have those details not been decided yet?

AC: Not yet. The pilot is starting with a small group of our really trusted, long-term advisor partners who all use us and know the platform very well. We’ll be working out some of those details as we expand beyond the pilot.

FP: What sorts of investments will the new ‘model marketplaces’ help advisors access on behalf of clients?

AC: The current lineup of portfolios in our model marketplace is all ETF-based. 

It spans different asset classes, certainly stocks and bonds. And then we also have several strategies that feature liquid alternatives and commodities and gold and other asset classes like that. 

So there is a range of different options available. It’s in an ETF wrapper today, but we’re certainly open to considering other options in the future.

And I should say that outside the model marketplace, we have a custom portfolio offering where advisors can build their own model portfolios and run those portfolios using our software. With that, they can choose ETFs, mutual funds, individual stocks. We have a universe of 10,000-plus securities to choose from when building models.

Our investing team is always looking at what models are available and where we want to go next. And the other most important thing for us is advisor demand and feedback about what they want to see. We really built our whole product roadmap, including model strategies, in conjunction with advisors, based on what they tell us would be most beneficial for their practice and for their clients.

FP: Betterment is probably still best known as a “robo-advisor.” Is that a fair characterization, and where do you think your biggest business prospects lie in the future?

AC: We actually don’t break out our assets by line of business. 

Betterment as a whole has over a million customers and roughly $66 billion in AUM.

As we had talked about, the retail business was the first business, and then the B2B businesses launched after that. We have continued to ramp up investment over the past few years. And with that product development comes a ton of growth opportunities. 

So we see the advisor solutions business and the 401(k) business both being key pillars for us long term. 

Compared with the other incumbent custodians out there, I think we’re doing similar things in terms of having a broad product offering that meets a lot of different people’s needs. But we’re doing it in a really modern, easy-to-use way, with a lot of great technology to help advisors make the most of things and improve things for their clients.