There's a battle going on in the financial advisor sector. Currently, there are two standards of care required of a person who can call themselves an advisor:
Fiduciary Standard
This stems from the Investment Advisers act of 1940, and demands that RIAs are bound by law to act in the best interests of their clients.
Suitability Standard
Broker/Dealers (reps who work for larger institutions and recommend products) are exempted from the Fiduciary standard, providing that:
(i) the broker-dealer’s advisory services must be “solely incidental to” its brokerage business; and (ii) the broker-dealer must receive no “special compensation” for the advice
In other words, you can have two people offering investment advice, but one is bound by law to act in your best interest, while the other is not. Ironically, the person who is compensated by selling you a commissioned product is the one not bound by any fiduciary duty here!
This is the core of the Fee Only vs Commissioned Advisor battle. But sadly, Fee Only advisors are also susceptible to conflicts of interest, and the solution from Betterment seems to be highlighting that all too well.
What is Betterment?
Betterment is an automated investing tool, often called a 'robo advisor'. Advisors balk at the term and constantly try to discredit them with arguments like 'an asset allocation is not a plan' and 'robots don't give real advice' etc... and rightly so. Betterment, like all robo advisors is not a true advisor, and cannot do what an advisor does, yet at least. As a business, the goal is to gather as many assets as possible onto the platform, and charge a management fee for allocating the assets into model portfolios consisting of ETFs.
Betterment charges accounts based on the following:
What is Betterment4RIAs?
Technically known as Betterment Institutional, it is a white labeled product that advisors can buy, slap their logo on and provide to their customers. When first released it allowed only access to the same models as the consumer platform, but allowed you to charge your clients up to 1.35%. The cost to the advisor was a flat 0.25%. The spread was your profit.
The Fiduciary Error
Before Betterment4RIAs as a fiduciary, who wanted to manage investments you would have do something like:
But what about the human value?
The anti robo argument in the industry has always been that the robo doesn't offer real advice. So the natural defense for a human advisor who delivers Betterment4RIAs is that you get the human. Great argument, with only one problem...
The advisor is double dipping, and it's obvious that they are charging solely for the robo aspect, not the human one:
Interestingly as a fiduciary, the advisor could also (and perhaps should also):
In other words, Betterment4RIAs is exposing the fiduciary advisor as a fee grabber, who may actually be breaking their fiduciary duty by not recommending the client get exactly the same product directly from the source. And in doing so, it is blasting through the argument that you can't get good advice from a robo, because the human selling the robo service is doing little to no additional work, and charging anything up to 9X the fee for it.
That just happens to be the entire marketing campaign for the Robos... which some might say makes those advisors a sucker.
Personally, I like the idea of Betterment as a solution for consumers, as it is a better product than paying for an expensive human financial advisor who uses Betterment and charges you way too much for it
Customized Portfolios
Betterment4RIAs initially did not allow advisors to offer a product different from the consumer platform, which I believe has now changed. So there is an argument that the advisor (while charging 5-9x the fee) has created models that are superior to the models that Betterment has created. But I would hope they are willing to defend that, as a fiduciary.
Fiduciary Standard
This stems from the Investment Advisers act of 1940, and demands that RIAs are bound by law to act in the best interests of their clients.
Suitability Standard
Broker/Dealers (reps who work for larger institutions and recommend products) are exempted from the Fiduciary standard, providing that:
(i) the broker-dealer’s advisory services must be “solely incidental to” its brokerage business; and (ii) the broker-dealer must receive no “special compensation” for the advice
In other words, you can have two people offering investment advice, but one is bound by law to act in your best interest, while the other is not. Ironically, the person who is compensated by selling you a commissioned product is the one not bound by any fiduciary duty here!
This is the core of the Fee Only vs Commissioned Advisor battle. But sadly, Fee Only advisors are also susceptible to conflicts of interest, and the solution from Betterment seems to be highlighting that all too well.
What is Betterment?
Betterment is an automated investing tool, often called a 'robo advisor'. Advisors balk at the term and constantly try to discredit them with arguments like 'an asset allocation is not a plan' and 'robots don't give real advice' etc... and rightly so. Betterment, like all robo advisors is not a true advisor, and cannot do what an advisor does, yet at least. As a business, the goal is to gather as many assets as possible onto the platform, and charge a management fee for allocating the assets into model portfolios consisting of ETFs.
Betterment charges accounts based on the following:
- o.35% of $0- $10K
- 0.25% of $10K-100K
- 0.15% of $100K +
What is Betterment4RIAs?
Technically known as Betterment Institutional, it is a white labeled product that advisors can buy, slap their logo on and provide to their customers. When first released it allowed only access to the same models as the consumer platform, but allowed you to charge your clients up to 1.35%. The cost to the advisor was a flat 0.25%. The spread was your profit.
The Fiduciary Error
Before Betterment4RIAs as a fiduciary, who wanted to manage investments you would have do something like:
- Recommend a manual system that you rebalanced (or used tools to do so)
- Recommend an autopilot system (target date or lifestyle funds)
- Recommend that they self managed, or perhaps even, invested with Betterment directly.
But what about the human value?
The anti robo argument in the industry has always been that the robo doesn't offer real advice. So the natural defense for a human advisor who delivers Betterment4RIAs is that you get the human. Great argument, with only one problem...
The advisor is double dipping, and it's obvious that they are charging solely for the robo aspect, not the human one:
- With Betterment Institutional, xx has been able to offload all of the time-consuming back-office tasks and let Betterment’s software manage the portfolio, trading, asset allocation, paperless account opening, rebalancing, paperless rollovers, statements, and technical support.
- Pays once for Financial Advice or Planning( the only edge the human has over the robo)
- Pays once again for the Investment Advice ( fundamentally pure robo advice)
We get a person paying out a fee, perhaps $2000 for a financial plan and $200 per month for ongoing 'advice', and then if they want to invest with the advisor because they trust them they have to pay another fee for the advisor sticking a logo on Betterment, then pay Betterment, and then pay Vanguard.
Interestingly as a fiduciary, the advisor could also (and perhaps should also):
Charge for their human advice, and advise the client that they don't need to pay that extra layer of fees to the advisor, since the advisor has already outsourced: manage the portfolio, trading, asset allocation, paperless account opening, rebalancing, paperless rollovers, statements, and technical support
In other words, Betterment4RIAs is exposing the fiduciary advisor as a fee grabber, who may actually be breaking their fiduciary duty by not recommending the client get exactly the same product directly from the source. And in doing so, it is blasting through the argument that you can't get good advice from a robo, because the human selling the robo service is doing little to no additional work, and charging anything up to 9X the fee for it.
That just happens to be the entire marketing campaign for the Robos... which some might say makes those advisors a sucker.
Personally, I like the idea of Betterment as a solution for consumers, as it is a better product than paying for an expensive human financial advisor who uses Betterment and charges you way too much for it
Customized Portfolios
Betterment4RIAs initially did not allow advisors to offer a product different from the consumer platform, which I believe has now changed. So there is an argument that the advisor (while charging 5-9x the fee) has created models that are superior to the models that Betterment has created. But I would hope they are willing to defend that, as a fiduciary.
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