Betterment, the online investment platform with $3.9 billion in assets under management, intends to use its latest funding round of $100 million to expand its current offerings and provide clients and advisers' clients with their full financial picture, said CEO Jon Stein.
The robo-adviser announced on Tuesday it had obtained another $100 million, with investments made by Swedish investment company Kinnevik, as well as Bessemer Venture Partners, Menlo Ventures, Anthemis Group and Francisco Partners. The company now has a valuation of $700 million, a 55% increase from $450 million last year, the company said.
Mr. Stein said the money will go to extend services for its original retail platform for advisers called Betterment Institutional, and Betterment for Business, its 401(k) service for employers — and become "our customer's central financial relationship," he said.
"That means building on the advice," he added. Betterment recently came out with
account aggregation. Last year it also released
RetireGuide, to assist clients with their retirement accounts. "We want our customers to send their paychecks and we'll help them make payments and everything in between."
Over the past 15 months, Betterment has grown from managing $1.1 billion to nearly $4 billion in assets for more than 150,000 customers, the company said.
Industry watchers usually call out robos and their sources of funding, saying eventually the money will dry up. Mr. Stein said, on the contrary, Betterment already had more than 50% of its last round of $60 million still in the bank and is using this next round to overcome giant competitors, such as Vanguard's hybrid robo, Vanguard Personal Advisor Services, and Charles Schwab & Co.'s offering, Schwab Intelligent Portfolios.
"It's not like we had to go out and raise more money," Mr. Stein said. "We're building out the best products to beat the incumbents, and to do that it takes capital."
Backers will still want to see a return on investment, even in a liquidity event, said Matt Fronczke, senior executive consultant and head of consulting at DST kasina. He added that cheap fees do not mix well with high client acquisition costs, and it also doesn't help that growth is not as rapid as it was in the past year and a half.
"The continued acquisition of new clients and expansion of business is critical for these platforms to grow their asset base," Mr. Fronczke said. "The investment of $100 million is a sign of confidence Betterment is well positioned to continue that growth across business verticals."
Building out services and growth in various offerings, like a direct-to-consumer platform, an institutional platform and one within the 401(k) market will take not just investments, but patience.
"It is a tough business," Mr. Fronczke said.
Industry watchers say the robos that succeed alongside the giants will have to be innovative. Will Trout, a senior analyst with Celent's wealth management unit, said for the most part, the larger institutions' platforms, like Vanguard and Schwab, are "plain vanilla baskets of exchange-traded funds."
"While I don't think [Betterment is] anywhere near the point of profitability, it is clear they are going to be one of the survivors of any consolidation that will come from fee pressure and from the large institutions," he said. "Betterment is making a bet that they are going to be able to diversify their product. "
It will have to come down to more than ETFs and stocks, but "real advice" around retirement, education and financial planning, he said.
Other robos have already felt the pressure associated with this growing market. Asset manager Blackrock
acquired robo-adviser FutureAdvisor, last August, and Envestnet
acquired Upside, now called Advisor Now, in February 2015. Earlier this year Invesco
acquired business-to-business robo platform Jemstep.
Many of the robos get their funding from venture capital. Wealthfront, for example, which recently hit $3 billion in AUM, has raised $129.5 million in funding since 2008, the latest, in October 2014, led by Spark Capital. Back then, it was valued at $700 million. Other backers include
Dragoneer Investment Group, Greylock Partners, Index Ventures, DAG Ventures and Marc Andreessen.
SigFig, a robo-adviser with about $94 million in AUM, has raised $30 million in funding since its inception in 2011, including from Nyca Partners,
Bain Capital Ventures and Union Square Ventures. Mike Sha, SigFig's CEO, said Betterment's latest round is validation that consumers find digital wealth platforms compelling, and that he expects other companies to join the market.
Hedgeable has received $1.85 million in funding from private equity. However, Mike Kane, chief executive of the robo, said the company has majority employee ownership. He noted that robos like Betterment and Wealthfront have commoditized the digital advice platform, but other entrants can be successful if they find a focus, like a women-focused platform or one for socially responsible investing. Hedgeable's is alternative investing.
"You have one or two big players," Mr. Kane said, "but you have dozens of other smaller firms that make money in more niche markets … it will take a while to play out."
It's true that other firms are realizing they need to pick up the pace themselves to stay competitive, although that includes creating adviser-facing platforms —
a list of firms, including LPL Financial, Wells Fargo and Merrill Lynch, have said they are implementing a robo this year for their advisers. Cerulli Associates expects to see robo-advice platforms reach
$489 billion in AUM by 2020.
For the current robos to weather any competition, from new entrants or existing behemoths, they'll need to refocus their companies' efforts to be long-lasting, not only to attract clients but funding as well.
"There will always be room for a non-incumbent firm, whether it is Betterment or Wealthfront. But it speaks to the fact that the robo model is maturing," Mr. Trout said. "It's not just about an interface, it is about real solutions … the guys funding them recognize that this is an affirmation of their more sophisticated value propositions."
