One We Like: Betterment

January 26, 2016

By Consulting Group

We’ve written before about how, despite a lot of media buzz and misconceptions, there are hardly any robo-advisors in the UK at present. However, that is about to change, with the imminent launch of products such as Wealthify and Scalable Capital. With that in mind, we thought now might be a good time to dedicate this month’s ‘One we like’ slot to our favourite US robo-advisor – Betterment. What can the UK ‘robots’ learn from their American cousins?

The most important aspect about Betterment is that it knows its market. Betterment’s low-cost, simple investment proposition is potentially valuable to a huge range of investors, but for most people with less than $100,000 to invest it is a far more sustainable solution than investing with an advisor – a very similar situation to that which we see in the UK post-RDR. Betterment identified an area of the market which was unaddressed, understood what that market required and built a product which provides its users with exactly what they need.

Choosing an investment portfolio with Betterment could not be simpler. To begin, you enter 3 pieces of information – your age, salary and whether or not you are retired. From that point, you have the opportunity to choose one of three investment goals – retirement, safety net or general investing. Pick a goal, and your suggested portfolio mix (the balance between stocks and bonds) will be allocated to you, based on your age and income. Fill in your personal details, commit funds, and that’s all you need to do to invest.

Customers do have the opportunity to change the asset allocation if they wish, but in contrast to other operators asset allocation is driven by Betterment. In this way they take much of the complexity and uncertainty out of picking your investments. This is why they’ve been particularly successful among those new to investing. It is very difficult to be overwhelmed by choice when investing with Betterment. Consequently they have 125,0001 customers, compared with 37,000 at their flashier, more well-known competitor Wealthfront, though with an average investment of around a ⅓ of Wealthfront’s.

Betterment’s model cannot be copied exactly by non-advisory firms in the UK due to rules over advice, but the key aspects can be – they just need to be separated a little bit from the actual investment choice.

There is not an advice gap in the UK – there is a confidence gap. Many people have assets to invest – more than 10 million contribute to a cash ISA each year – but the majority of those don’t have confidence in themselves to choose whether to invest in bonds or stocks, small-caps or large-caps. It is up to investment firms to provide this confidence, by not being afraid to offer non-regulate, generic financial planning advice helping investors choose their goals. By offering this service, and combining this with a simple goal-based investment proposition like Betterment’s, those new to investing will have the tools they need to make good choices, and enter the investment market for the first time.



Betterment was the first company to launch a ‘robo-investing’ product, where a client’s portfolio is automatically managed based on an algorithm. Although it has been overtaken by Wealthfront in terms of assets under management, it still has more customers than any other robo-investing provider.

Black Swan Partners has written before that, despite much excited talk in the industry media about the impact which companies such as Nutmeg or Money on Toast may have, there is yet to be any UK equivalent to Betterment, Wealthfront and other US providers where portfolio management is entirely automated. This is presumably a deliberate decision by Nutmeg – having a human Chief Investment Officer in charge of its portfolios might mean it has to charge significantly more than the US firms, but gives it more flexibility.

The human element enabled it to sell UK equities when it appeared Scotland might vote for independence last year. However, even if Nutmeg continues to shy away from robo-investment management, it will be interesting to see if it tries to replicate Betterment’s latest innovation – a robo-savings plan. The product, called SmartDeposit, links with the customer’s current account (checking account in Betterment’s US terminology) and each week checks to see whether there is any excess cash above the ‘Checking Account Ceiling’ set by the client – if so, it automatically invests it into his/her Betterment account, up to the ‘Maximum Deposit Amount’, also set by the client.

From Betterment’s point of view it’s clearly beneficial for as much of its clients’ assets to be invested with it as possible, though SmartDeposit should also be very beneficial for its clients. Most people hold too much money in cash, and Betterment quotes a UBS survey which found that people with the longest investment horizons, those aged 21-36, who should generally be investing in high-growth portfolios, hold the highest proportion of their wealth in cash, more than 50%[1]. The difference between millenial and non-millenial investors is shown below.



SmartDeposit should help these customers by taking any decision about how much a client should save each month out of their hands, and automatically investing the appropriate amount for the client at that time, depending on their current spending. Clients of Nutmeg, or for that matter any UK investment platform, could benefit in the same way.

The question is will clients want to use SmartDeposit? Giving a company access to your current account to take as much money as it deems fit seems like a big step, even for one that a client clearly trusts to look after its money. Control over your own money is fundamental to most people, and although SmartDeposit has a number of features built into it so that clients retain control, including the option to skip any SmartDeposit which comes up, this may be too big a barrier. On top of this, regardless of the potential returns they miss out on, many people want the reassurance of a large cash sum available to cover any unexpected expenses. It will be fascinating to see what take up Betterment gets for SmartDeposit, and even more fascinating to see if robo-savings makes it to the UK before robo-investing.