We hear a lot about the so called robo advisors, some of whom are morphing into robo-record keepers, who have raised billions of dollars. The latest winner in the funding sweepstakes is Betterment who recently raised $100 million and seems to have their sights set squarely on providing record keeping along with advisory services to defined contribution (DC) plans. We caught up with Betterment’s 401k general manager, Cynthia Loh, at the NAPA Summit and found out about their unusual approach to managed accounts.
Rather than give employees the ability to create their own portfolios from a menu of investments, participants in Betterment’s plan can only go into a managed account. If they provide no other information than their age, the managed account acts just like a target date fund (TDF). The accounts, using low cost ETFs (exchange traded funds like index funds but usually slightly less expensive) get more customized as participants provide more information. There is no other investment choice.
Though Cynthia admits that the CFOs or executives who want to invest in the hottest fund complain, she explains that their retirement plan is not the right place to take that kind of risk. Sometime the good of the many outweighs the interest of the few.
Loh claims that Betterment has an advantage over current record keepers, especially “online” providers, because they built their system based on new technology not available when competitors started. The company, headquartered in the Flat Iron district of NYC, is also in a better position to attract the most talented software engineers which gives them an advantage over even the largest providers.
Though you might think that Betterment would appeal to just smaller companies who want good technology and low cost funds, Loh insists that they are getting interest from larger employers as well as advisors who they plan to embrace as a distribution model. Many high tech companies discourage customers from calling, which could be a problem for many plan sponsors, but Loh claims that they have an award winning call center ready to answer questions.
In 1998, a slew of internet based record keepers cropped up claiming to disrupt the DC world the same way that Amazon took down bookstores. Betterment is not making those claims hoping to partner with advisors appealing to companies that might want a fresh approach. Certainly, the 100% managed account option is different – combine that with the auto or ideal plan, which Loh says 90% of clients use, and you might have a winner.
