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Betterment Bettering the Wealth Management Business with Big Data
Betterment uses Big Data to automate financial advice

Betterment is a web-based money management company that previously raised $13 million – $3 million in its Series A back in 2010, and $10 million in Series B in the last quarter of 2012. You can think of the company as a financial advisor, except that it is completely online and highly automated. Betterment is proving that most Maint Street ‘financial advisors’ are merely order takers and completely replaceable.

Founded in 2008, Betterment is a startup with roughly 50 employees and already manages over $500 million in customer assets, with a growth rate of 10% each month. Those growth numbers could conceivably place funds under management in the $1.5 billion ballpark within a year’s time.

Unlike full service brokers or even discount money managers, who can charge up to 1% for their work, Betterment charges only 0.35%, on the high side, for customers with $10,000 in their account, and down to 0.15% for those with more than $100,000 in their account. That’s almost 1/3 the cost of discount brokers and even more than that compared to full service brokers.

Citi Ventures, Globespan Capital and Northeastern Mutual, some of the more prolific names in venture capital, have participated in a new, Series C round, to the tune of $32 million, for Betterment. Citi Ventures’ participation in the funding round has me excited about Betterment’s future, for various reasons I’ll explain.


Revenue Model

If Betterment’s projected 10% growth comes from small investors with $10,000 accounts, or if it comes from accounts greater than $100,000, then the company’s annual revenue, once it hits $1.5 billion under management, would range between $2.2 million and $5.2 million a year. These are comparatively small numbers, particularly for wealth management. Even if Betterment reaches its $100 billion mark (assets under management) it’s only taking in about $200 – $400 million in annual revenues. The revenue center may seem very boring to you, and at first glance it should, but there’s more to this story…

Betterment’s cost center is anything but boring. You see, Betterment’s X factor comes from its Big Data technology (to read my piece on what Big Data is and how it is changing the world, click here). The company’s costs, no matter how many new customers it brings on board, will stay pretty much the same, because everything that is done for the customers is done by algorithm. This is where Betterment absolutely annihilates traditional wealth management firms and why we’ve seen such interest in its seed financings from some of the top VCs in America. Whether the site hosts one investor, or a million, Betterment’s expenses, for the most part, don’t change. So every cent that comes in past break-even falls straight to the bottom line. And I suspect that’s what those VCs are salivating about.

Betterment expects to hit the $100 billion mark in six years. For a wealth management company to get to that level in just six years would be impressive – to say the least. The algorithm (or Big Data technology) Betterment put together is adept at analyzing a person’s profile and suggesting, then executing, an investment strategy (it follows the KYC – know your client – mandatory model of financial advisory).

While buying individual stocks is complex and takes tons of research, most wealth management companies are putting their Main Street clients into generic funds – the same as the competition. Wealth management is not exactly a la carte service unless one is a millionaire. Most wealth management firms who take care of average joe’s 401k or retirement savings provide the basic Happy Meal options. So if you think about it, it’s a simple service to provide that, with some solid math, should be automated.

Most investment grade assets are well categorized with established risk computation methods and the necessary scoring parameters, making most decision making processes easily automated. Investors using Betterment just need to answer basic questions to get the algorithm to crunch the optimal path forward for their profile (depending on whether they are a retiree, young professional, etc.).


Competitive Forces

Competition is a major problem for Betterment given the attractive profit potential and growing innovations in the Big Data space. With barriers to entry almost non-existent, the $100 billion target market share could easily be rationed down by more aggressive entrants coming in. To protect against that, Betterment will have to grow its business fast and hold on to its customers with value-adds, while keeping costs low. At the end of the day, consumers will use Betterment to save money and the time of setting up an appointment with a financial advisor. Unfortunately, with more competitors entering the fold, I fear the MERs (management expense ratios) may have to get even lower. Additionally, Betterment, as a value add for the more sophisticated clients, would be wise to invest in zero down time servers and other up-time measures, as well as possible next generation heuristic algorithms to take advantage of financial markets.

It would be prudent, and seems likely, from a marketing perspective, if Betterment were to merge with a full service broker who has a large clientele; that could feed a steady stream of business to Betterment. Someone like Citi Group would be perfect, which is why I like the fact that Citi Ventures came in on the recent Series C round.

The competition in this arena will be fierce for Betterment as finance attracts the world’s leading innovators. As such, those seemingly small fees Betterment collects could be trimmed further. But to do that, and still make financial and economic sense, Betterment needs to grow its customer-base, extremely quickly. So, I hope a good chunk of the venture capital raised goes to marketing Betterment’s service as aggressively as possible. Now is the time to scoop up market share for Betterment and take advantage of being a first-mover.

If I were a betting man (which I am), I’d say racking up $100 billion in assets under management and charging anywhere between 0.15 to 0.35% is a good way to set up the entire asset for a sale. Right now, the leading potential buyer looks to be Citi.

Stay hungry,

Aaron Hoddinott signature