Technology will be the key that unlocks the mass-affluent market for financial advisers.
Only through technology will clients with Main Street-level assets be profitable to advisers.
Along those lines, one site advisers might want to keep an eye on is Betterment.com.
The startup online service, meant for novice investors and active traders alike, could foster the growth of whatever liquid assets mass-affluent investors have.
In a nutshell, Betterment provides users with a hybrid investment service that builds a conservative portfolio of stock and bond index exchange-traded funds that is easily managed from a simple interface yet has the liquidity of an online banking account.
The company is a Securities and Exchange Commission-registered investment advisory firm and a broker-dealer.
It also happens to be a startup that is already off to a good start.
Betterment garnered a great deal of buzz last week at the Finovate Fall 2010 Conference in New York and was named best in show. That follows a finish among the top five at Techcrunch Disrupt, a high-pressure “America's Got Talent” type of event for startups in New York that took place in May.
Some advisers will recall that I introduced them to another startup, Mint.com, during Finovate Fall 2007. That website and service has grown to 4 million users and was bought last year by Intuit Inc. for $170 million.
Getting back to Betterment, the site was launched in beta five months ago and with very little in the way of marketing; it already has 1,000 users.
It costs users a quarterly management fee of 0.9% of assets under management, there is no minimum balance, transfers and trades are free, and there are no holding periods. Oh, and by the way, the portfolio is automatically diversified and re-balanced.
Betterment isn't intended for the sophisticated, hands-on, do-it-yourself consumer who is comfortable buying and selling his or her own equity and fixed-income investments, and doing the re-balancing.
It is meant for consumers who have some amount of liquid assets to invest and want to be more active with them but are either intimidated or lack the time or passion to educate themselves to the DIY level. (They also probably lack the assets to interest an adviser).
Jonathan Stein, chief executive and co-founder of Betterment.com, noted that the current user has anywhere from $100 to $100,000 invested through the site's platform, with the average being $15,000.
A committee of economics professors from Columbia University and fund managers helps determine changes to the site's portfolio mix on a quarterly basis, he said.
That mix is grounded in — and managed based on — modern portfolio theory. The stock portfolio is representative of the total U.S. stock market, Mr. Stein said.
“The people we are after are the traditional savers that are looking for an entry into active investing, but one that they can set it and forget it if they want to,” he said.
Betterment suggested that we contact David Aviram, a New York real estate developer whom it considers a typical user.
He said that he has been investing with the site for five months, after a decade of managing his own money on different trading platforms, including those of The Charles Schwab Corp., E*Trade Financial Corp. and TD Ameritrade Holding Corp.
Now 31, he first heard about Betterment through the friend of a friend and decided to try it out by investing $2,000. (Coincidence alert: 31 happens to be the average age of Mint.com users.)
“What I liked most was the ability to reallocate my position simply and quickly, and was impressed with automatic diversification of the account through the spectrum of stocks and bonds they offer,” Mr. Aviram said.
He added that while it was possible for him to achieve this level of diversification in his accounts at the major retail brokerages, the process was more time-consuming, less automated and demanded more research on his part, and often left him with big cash positions that he then had to manage.
“For someone like me who is actively managing my allocations, this is really simple to use; with it, if I am taking money out of stocks, it goes right into a bond portfolio, and I'm able to shift that based on market fluctuations,” Mr. Aviram said.
To illustrate the simplicity, he described his home page at Betterment and how he could change his allocation values with a click on the “Allocation” tab.
“Right now, I have things split 70% in stocks and 30% in bonds, and if I want to change that to 65/35, I just click it, then all the orders are automatically processed,” Mr. Aviram said.
He asked me not to publish the amount of his current account balance, but it dwarfs the initial one and includes most of his liquid assets, he said.
THERE'S AN APP FOR IT
Betterment last week also announced the availability of an iPhone application and an online automatic-savings plan. After users create a Betterment account through the website, they simply download the free iPhone application from iTunes. It lets them check, in real time, the status of deposits and withdrawals, their account balance and composition, and allows them to make changes to their stock and bond allocations.
With the new automatic-savings plan, investors can set up their accounts to make customized, recurring automatic deposits from other accounts.
The next major feature Betterment plans to roll out in the next few months is an individual retirement account.
(Visit the online version of this story for links to the websites and conferences discussed, and tune in to our blog at Investment News.com/technology for continuing developments.)
E-mail Davis D. Janowski at email@example.com.