Special Feature

The Tech Revolution

In this special feature: the future of the advisory business; compliance and technology; leveraging social media; tech's dark side; and much more.

Dan Egan, of U.S. robo-advisor Betterment, discusses the future of investing

By Fiona Collie | Mid-February 2017

Since launching less than 10 years ago in the U.S. and Canada, digital wealth-management platforms, a.k.a robo-advisors, have gone through dramatic change - in both industry perception and service offerings.

And it appears that the changes will just keep coming. To find out about the impact of this still-evolving sector on financial advisors, Investment Executive spoke with Dan Egan, director of behavioural finance and investing with the New York-based robo-advisor Betterment LLC.

Launched in 2010, Betterment manages US$7.4 billion in assets for 210,000 clients. This interview, conducted in January, has been condensed and edited.

Investment Executive: The robo-advisor market in the U.S., and in Canada, is still new but it has attracted a lot of attention. Are you surprised at how quickly this technology has taken off?

Dan Egan: I'm of two minds about it. The view from the inside is, yes, the growth has been blockbuster in terms of assets and customer base.

We're a fintech company and we're probably on the side of being more of a technology company than a traditional bank. When we look at what people usually think of as the pure tech field, things like Facebook or Google, they don't require you to hand over a significant amount of your money. People change much more slowly, usually, when it comes to investing.

So, having the growth that we've had - which has predominantly come from customer referrals and word of mouth - has been pretty astonishing, considering it involves people moving over their life savings.

And I think another element that's been surprisingly good is the breadth of customers that we have. We don't have a narrow, focused niche in terms of age and gender. We have people from 18 years old to 92 years old. We have people who are just starting out, we have people with tens of millions of dollars. All of these people are comfortable with technology and with managing their wealth online [and] I think it's nice to see that those are the things that cross broad swaths of the population.

IE: Where do you see the robo-advisor industry going regarding the direct-to-consumer channel?

DE: I think the strength we have in terms of using technology to do more things efficiently - that straight digital offering - will continue to grow and we're going to continue to add new features and services to it.

[Betterment is] going to expand into offering human advice - using licensed, certified financial planners and investment advisors to give individual advice over the phone on investments at Betterment and away from Betterment. [This offering launched in January 2017].

IE: What changes do you see for the robo-advice channel more generally?

DE: I think there are lots of long-term opportunities to help people get a holistic view of their financial situation. That's everything, from being more proactive in helping them figure out what their budget should be, to managing their cash flow, to helping them manage debt, insurance etc.

In terms of sticking to explaining our core competencies though, there's still a lot to do in investment management [because] even though we're growing very quickly, we represent a very small amount or percentage of the overall assets available in the U.S.

The number of people who are still in high-fee funds or low value-add managers [means] there's still a lot of work to do in getting the word out about what a fiduciary advisor is and why you need to keep [investing] costs low.

I also think the move over the past few decades toward lower costs in commissions, trading etc. is just going to continue to redefine what is a commodity and what is the unusual value add. One of the defining characteristics of firms that are going to survive in that new environment [is being comfortable with] continuously innovating and adapting.

IE: You partner with financial advisors through online division Betterment for Advisors. How does that platform work?

DE: Betterment for Advisors has been around for two and a half years now. We have over 400 RIA [registered investment advisor] firms on the platform and I think there's been a really nice mix of different firms coming onto the platform.

We're quite happy when we see young financial planners, or financial planners who want to go independent from a big firm, being able to get started very quickly and efficiently [and] use the platform for all their customers with financial planning needs but [who also] want a very low cost, tax-efficient solution.

We're also seeing some larger RIA firms who are trying to find out, not only how to serve the younger generation or more tech savvy group, but also how to manage the wealth transfer that's coming over the next few generations, [and dealing with] the younger people who have grown up expecting good things from tech and finance, [who will] inherit the money of their parents. There's a tremendous opportunity there and you want to make sure you're not on the wrong side of that.

IE: How do you see a robo-advice platform, like Betterment, partnering with advisors or adding to that relationship?

DE: Good advisors are going to flourish when they use technology well.

So, because technology is commoditizing things like asset allocation, investment selection, portfolio management, etc., the valuable human element can be dedicated to managing the relationship, the holistic financial plan for the customer, making sure that they are stepping up the value-add ladder - rather than taking a step down.

I do think that, if an advisor tries to compete against technology he will go the way of John Henry. You do not beat the steam engine. You could put a valiant effort in but you're not going to win. It's far better to learn how to become a conductor.

IE: Betterment has been very supportive of the Department of Labor (DOL) Rule, which places a fiduciary obligation on some advisors. In Canada, we're debating the adoption of a "best interest" standard. How do you see this issue shaping the future of platforms such as Betterment? [The DOL rule was placed under review by President Donald Trump after this interview was conducted.]

DE: One of the biggest issues around the term financial advisor is that, far too often, insurance sales people or brokers position themselves as if they are fiduciary advisors. The idea that a consumer has to ask and isn't going to naturally understand that brokers aren't fiduciaries - that's really the issue. It's not a matter of putting brokers out of business, it's a matter of aligning the consumers' expectations with what they're actually getting.

In the long run, from a moral or ethical standpoint, we believe the fiduciary role is very good for consumers at large and so we're very happy if [the rule] goes ahead.

At the same time, if it gets repealed or, as is more likely, it's not enforced by the administration, I actually quite like the idea of saying: now that we've had all this discussion about who is a fiduciary, or not, here's a number of firms who are not fiduciaries. It allows us to come out and say that we are [fiduciaries] and a lot of the other players aren't.

IE: What challenges do you see in the future for the robo-advisor market?

DE: There's always the issue of cyber-security. I think one of the biggest concerns that regulators look at is: how well are we nudging our customers to make sure their accounts are secure?

I think regulation has a big role there, in terms of managing and setting standards for how we move information between advisors; between accountants and different platforms; about the level of permissions; and about the fact that people should own their own data rather than the data provider owning it.

In the longer run, one of the only threats I see is that the best part of what Betterment - and what a robo-advisor does - being diluted and confused by the marketplace.

One of the real business innovations behind Betterment was being a true independent fiduciary and being very clear that we get paid 25 basis points to do all of these things for you and do them well.

My biggest concern is other people, existing incumbents, entering the field and that they're going to use these old tactics to seem better - while actually making the customer worse off.

As long as consumers understand what they're doing and what they're paying for, we'll be doing quite well. The more that legacy players are able to [use]odd pricing schemes, the more that we're going to see the best parts of this disruption lost.

IE: Anything further to add?

DE: I think the key [for younger advisors is to] think about the long-term things and what is very difficult for computers and algorithms to do vs. the inherent human elements.

And then, double down on investing in the things that are going to make you a good relationship manager, being able to understand people, to help them figure out their goals. Because a lot of the stuff that has traditionally been on the investment side is definitely going to be done by computers and a lot of it is going to go very quickly.

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