Betterment to let humans customize robo portfolios

Betterment is giving advisers and some of its retail clients more control over how money is invested.

With Flexible Portfolios, which the robo-adviser launched Wednesday on both its retail-facing product and Betterment for Advisors, users can control the asset class weights within Betterment portfolios.

For the white-label version of Betterment, advisers currently select a pre-built portfolio strategy, either recommended by Betterment or a strategy provided by a third-party asset manager, and the adviser adjusts the client’s risk allocation.

Now advisers can adjust the actual weights of each asset class within Betterment portfolios, though the third-party portfolios are off-limits.

Cara Reisman, director of Betterment for Advisors, said change allows advisers to bring in their own investment philosophies and adjust portfolios according to a client’s unique needs, circumstances or preferences.

For example, if a client is already invested in U.S. equities, an adviser doesn’t have to sell that position to move assets over to Betterment. Now the adviser can underweight the U.S. equity portion of the Betterment portfolio.

Flexible Portfolios also introduces three new asset classes that advisers can now implement with the robo-adviser — high-yield bonds and domestic and international real estate investment trusts.

The new product will encourage more advisers to bring assets to the Betterment platform who previously could not, Ms. Reisman said. She added that this is the first in several updates Betterment has planned over the next year to give advisers more customization options.

For Steve Lockshin, an early venture capital investor in Betterment who also uses the platform in his RIA, AdvicePeriod, the Flexible Portfolios advance is a long-awaited feature and no-brainer. While he supports having human advisers use Betterment to service clients, there were still many cases where the technology’s “one size fits all” portfolios just were not appropriate, he said.

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“This will now open up those opportunities for me,” Mr. Lockshin said.

For advisers who avoided robo technology because it can’t support their unique strategies, “now they can actually create their secret sauce portfolios,” he said.

However, he’s concerned about putting these customizations into the hands of retail investors.

“This is creating opportunity for people to make bad decisions,” Mr. Lockshin said. “From a cost-value perspective, it makes sense. I just worry that it invites self-destructive behaviors.”

Neal Quon, the co-founder of technology consulting firm QuonWarrene, said Flexible Portfolios addresses one of the biggest criticisms of digital advice — that investment strategies are too static and predefined — but said the customization presupposes that investors understand the details of the asset classes and how to weight them.

“If somebody has the ability to readjust too often, are they going to have the discipline to stick to the model? Or are they going to over-tweak it?” Mr. Quon said. “I’m not saying they can’t do it, but for the general, mass-affluent population, you need to ask yourself, ‘why are you going to a robo platform instead of seeking advice?’”

It’s all about providing the appropriate context of what assets and weighting mean for the over architecture of the portfolio strategy, he said. If Betterment can successfully educate and help retail investors understand portfolio strategy, it could be a win-win.

Betterment is aware of the concerns, and said Flexible Portfolios is best suited for experienced investors who want to control their allocations, but also want the value of Betterment’s tax-minimizing features. Flexible Portfolios will only be available to retail investors with at least $100,000 at first, but Betterment plans to roll them out to all users.

Flexible Portfolios also will have guardrails to encourage positive behaviors and will alert investors if changes in asset class weights result in poor diversification or inappropriate risk, according to Betterment.

If Flexible Portfolios can entice advisers to move more client assets to the platform, or attract retail investors who want a greater level of control, Betterment could fight off headwinds facing all robo-adivsers. The valuation of one competitor, Wealthfront, was reportedly cut by a third in its most-recent funding round, and investors like Mr. Lockshin said other startups are likely in the same boat as nearly every incumbent financial institution debuts its own digital advice product.

A Wealthfront spokeswoman disputed the latest valuation but declined to give the current number.

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Matt Cosgriff, a retirement plan adviser at BerganKDV Wealth Management, said the launch of Flexible Portfolios indicates to him that Betterment recognizes its biggest value proposition is its technology platform to aid advisers.

“They’re almost turning into a custodian, re-balancer and performance accounting solution on steroids, designed with an Apple-like mindset centered around ease of use and simplicity, which many of the existing custodians and other tech solutions can’t match given their legacy systems underpinning their technology,” he said. “Given that the technology they have built out has a high fixed cost, it’s not all that surprising to see them making the ‘platform’ available to consumers as well, even though the margins on that B2C business might be less (given the relatively high cost of client acquisition) than the B2B space.”

Each marginal dollar Betterment can bring in can “help chip away at those high fixed costs and lower their average unit price,” Mr. Cosgriff said.