Jonathan B. Stein
Jonathan B. Stein

Even at a smaller scale, robo-advisories can become profitable businesses

Jonathan B. Stein of Betterment, the world's largest independent robo-advisor talks about robo-advisors and more

Although robo-advisory firms have recently launched in India, the way ahead is a steep climb for them. They offer convenience, can work in a low-cost distribution scenario and have the potential to aid penetration of financial instruments. But they also require internet connectivity and financially educated and internet savvy customers to sustain. That will happen over time. For now, many of them are bleeding. But robo-advisors are growing at a faster pace in the US. According to a KPMG report, robo- advisors are expected to manage $2.2 trillion worth of assets by 2020. Leading the pack today is Betterment, the world’s largest independent robo-advisor. It surpassed $5 billion in assets under management (AUM). At the sidelines of the CFA Society India’s 7th India Investment Conference, Betterment’s founder and chief executive officer, Jonathan B. Stein spoke to Mint Money and told us that robo-advisors can also be profitable. Edited excerpts:

What do you think is the way ahead for robo-advisors, especially in an emerging economy like India? Do you see them picking up?

It’s a different market and I am not an expert on Indian markets by a long shot. Having said that, in the US and globally, advice is going to have a good run over the next decades because the financial world and our lives are getting to be increasingly complex as we’re living longer, costs of retirement are going up, health care costs are going up, education costs are going up and so on. And we have to make all these complex trade-offs with more and more complex instruments. So, we want advice to make all these things for which we want finance, more accessible in our life. Also, the middle classes around the world are growing and so the need for advice is increasing. 

So, everywhere it (advice) is going to have a good run. In the US, in particular, I feel more and more advisers are going to embrace technology. Advisers will no longer be able to say that “don’t pay any attention to technology advisers (robo-advisors)", or that “only full humans are good." Any good adviser leverages technology: we partner with hundreds of advisory firms who leverage Betterment technology. We have our in-house advisers who talk to clients, and yet many clients choose to come to us and don’t have a need for that kind of human interaction, they just want advice.

So, at Betterment, you also now have human advisers who have come on-board and are leveraging against its platform. But the traditional definition of a robo-advisor is one that comes with little or no human intervention. Most of the work is done by algorithms and programs, barring some minuscule back-end human support. Now, if you are getting human advisers on board Betterment, whose recommendations will finally go through to the client?

Our advice is always personalized to the person who’s receiving it. That personalization can happen through the client coming to us and telling us about their goals, their financial situation and their tax situation. Now, many people are confident of coming online and entering all these details by themselves. They are confident about understanding the results that come back their way. 

But just as many people would prefer to give that kind of information in the context of a conversation. And they have their results interpreted and presented back to them by a human. Many of us relate to stories about our lives and having someone understand that and then relay our solutions to make their lives simpler; something only a human can do. And, many people like that kind of human involvement. So advisers leverage all that automation  and technology and efficiency that comes with Betterment and all of our clients get. But they are providing a layer of human interface on top of that. 

So whose advice prevails, in terms of actual recommendations? The adviser’s or Betterment’s?

The advisers are there to listen to our customers, to take back input and translate it into a financial plan. That’s the same kind of process that our clients go through themselves when they directly approach our site. But the communication is assisted by an adviser. An additional thing the adviser can do is factor in the situations that are unique to each customer. For instance, a client can have a sick relative who she thinks would need care, someone doesn’t have kids but plans to have one or few in the future. These are things that can only be nuanced if there is a human element involved, as opposed to just a form-filling based interaction.

Did the need to have a human element on board come in after some kind of realization that perhaps robo-advisory as a stand-alone model may not take off as you might have expected? And that a human presence in delivering advice is essential?

It has always been a part of our business model. In my early days at Betterment, I was on the phone with clients, helping them answer questions and make a plan. And then when we started hiring our first batch of planners, we started putting them on the phone to have these conversations. Most of the times, these conversations were used to help us figure out what we wanted to build, what kind of questions we were asking our customers, what were the things we needed to automate first. Tax efficiency was a big one. Behavioural advice was another. There are always new questions coming up and we use it as a way to better understand our customers and better understand what they want from us. And we have always done that (having a human element in our model).

So, you can do both. Some people want a pure digital solution and we continue to have the best in the market. Some people want a human advice solution and they want somebody to talk to about their plan. Now our platform has become so sophisticated, that we want to make it accessible not just to people who want purely digital solutions, but to all those people who want remote advice too.

Can robo-advisors be profitable? Quite a few robo-advisors have set shop in India but they are burning cash and not making money yet.

Our funding is smart and we have great investors. They are obviously investing because they see the promise of this model and it is a model that scales well. It is a way of providing services where there’s a lot of demand for those services, there’s a willingness to pay for advice and the market before us hadn’t really addressed the latent demand that was there. I look at this opportunity and I take the long-term view. I think there will be a handful of companies in this cycle that grow to become major public companies managing trillions of dollars and they’ll have advice at their core. We are the leader in that movement but a lot of the incumbents and other startups are chasing us. I don’t think it’s a winner-take-all market. There will be several successful companies to pursue this model. But profitability is definitely possible. Even at a smaller scale, robo-advisories can be profitable, but the more you grow it, it obviously becomes a better business.

Does Betterment have any plans to go global?

Yes, we will eventually expand overseas, in the long term. Because all around the world people are more similar than they are different. We all hope to retire. There will be a period in our lives where we will be earning less. We all want to send our children to college, we want to pay for our health care. We want to do all these things. And we rely on finance to help us do all of that. 

Behaviourally we are similar. We have the same fears about the market: what happens if markets drop, and so on. Our learnings from the US will be applicable elsewhere as we scale up. Today we manage money for 200,000 people but when we hit the count of a million, we will be ready to expand globally. 

Once you get a client on the platform, do you notice any changes in their behavioural aspects, like do they start selling or trading more once they know they can do this all by themselves?

We don’t know much about their behaviour before they became our clients. But we know how we changed their behaviour since they became our clients. Take an example of our tax impact preview. This is a feature that shows you what is the tax impact of a transaction before you make that transaction. 

Say, you are about to sell everything or you are about to change your allocation. This feature tells you how much tax you will end up paying. 

When we show people that information, 75% of the people decide not to go with that transaction. That’s an incredible resolve because it means that 75% of the people didn’t really need to do it; they were just thinking about it. And if we dissuaded them, we probably not only saved them the tax, we saved them from market timing. One of the biggest hazards to your financial health is trying to time the market. So yes, we notice a huge improvement in investment behaviour. 

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