Betterment Jon Stein
Betterment CEO Jon Stein

Betterment Getting Traction in 401(k)s

It seems Betterment’s foray into 401(k)s plans is proving to be a successful new revenue stream for the automated investment service.

The New York-based robo advisor announced Thursday that it has added 200 plan sponsors to Betterment for Business, the automated 401(k) service, since launching in January.

Cynthia Loh, the general manager of Betterment for Business, said the service has attracted companies across the board—from technology and health care to law offices and shipping firms—and that the adoption rate surpassed the robo’s own goals. Loh added that it has also been converting a lot of plans from larger, established companies; the firm’s largest conversion so far was a $15 million plan.

“In the first seven months of being live as a 401(k) provider, there was an expectation that we would only see new plans,” Loh said. At first, only about 15 percent of plans were conversions, but now it’s closer to 40 percent. “The longer we are in the market, we’re seeing more and more inquiries for conversions, and getting more from medium-sized businesses.”

The 401(k) business has also provided Betterment with new opportunities to cross-sell. With some plans including as many as 600 employees, Betterment for Business has increased awareness of the retail product, and Loh said individuals have opted to roll over their 401(k) into a Betterment-managed IRA. Likewise, working with various companies has provided opportunities to introduce more financial professionals to Betterment Institutional.

“The cross-selling opportunity really expands our reach into the overall number of individuals that we’re able to get in front of,” Loh said. “The idea that we have customers already that are part of all three of our business lines starts to get really interesting.”

Betterment for Business’s success comes when there is more skepticism than ever about the direct-to-consumer robo advisor business model. Industry blogger Michael Kitces estimates the robos generate as little as $50 gross revenue per client, meaning new revenue is needed for the technology startups to realize a return for their venture capital investors.

While Wealthfront has remained steady in being a purely B2C robo, Betterment has added two more businesses: Betterment Institutional (a white-label version of the robo for financial advisors) and Betterment for Business. Wealthfront has reportedly struggled to retain top talent (update: a spokesperson for Wealthfront disputed this claim, calling it "completely false" and that the company is "upgrading talent if anything), while Betterment recently surpassed $5 billion in assets under management. Betterment recently hired a new chief financial officer, Amy Shapero, with experience from Goldman Sachs and Credit Suisse despite a PR dust-up over a decision to suspend trading following the Brexit decision. 

And while Betterment doesn’t break out how each business contributes to its overall AUM or revenue, Shapero recently indicated that Betterment for Business would be an area of focus for Betterment as it moves towards making an initial public offering.

The company is currently valued at $700 million, and some analysts feel Betterment’s diversification leaves it well positioned for the future. Kitces said, “Betterment may soon be the last man standing,” and in a recent research report, Tiburon Strategic Advisors Managing Partner Chip Roame said he would bet on Betterment surviving a coming decline of robo advisors.

Roame also said his research indicates that the defined contribution space is the most ripe for digital automation, and companies focusing on it should continue to do well. That appears to be holding true, and Loh said 401(k) will be a “really crucial” part of the company’s future plans.

“The 401(k) space has been long overdue for an overhaul,” Loh said. “There is broad agreement throughout the industry that the current solutions are not meeting the needs of most participants.

“Having more than 200 plans in just six months is a great indicator of the clear demand for what we’re building.” 

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