Betterment cemented its leadership position among independent robo advice platforms, announcing today it secured $100 million in its latest round of venture capital funding.
"We've always been the frontrunner," says Betterment CEO Jon Stein. "We were the innovator, the one saying this is how the future of financial services is going to look."
The Series E round of funding is based on a $700 million valuation of Betterment, Stein says. The digital advice provider now counts $3.9 billion in AUM and 150,000 retail clients, and operates three business lines: retail, Betterment for Business for 401(k) plans and Betterment Institutional.
One of the prime beneficiaries will be Betterment for Business, the company’s 401(k) division. “We’ve had tremendous traction in that business. We started in January when we announced 50 firms and now we’ve got nearly 100 firms on board,” Stein says. “We just want to be able to continue to invest in and improve that business over the coming years.
Swedish investment giant Kinnevik is providing $65 million of Betterment's new funding, with the remainder coming from its previous VC investors, including Bessemer Venture Partners and Menlo Ventures.
Quote"The fiduciary rule isn't likely the No. 1 thing plan sponsors are thinking about because it doesn't affect them as much as it does the providers."
Stein says the firm still has much of its $60 million from its last round of funding in February banked away, but sought additional funding to further feature and product development, like its March addition of financial account aggregation tools, rather than to pay for marketing efforts.
He acknowledged the large amount was necessary to remain competitive against incumbent digital offerings such as Vanguard's Personal Advisor Services, which quickly tallied up $31 billion in AUM in 2015.
"We've always known that to challenge the entrenched incumbent services would require a lot of capital," Stein says. "We knew starting this business it was going to be a capital-intensive business. It's one of the barriers to entry in the financial services space. We hurdled all the technology barriers, we hurdled the trust barrier. This amount gets us what we need to very much build out our vision."
The $100 million in funding was not reflective of a high cash burn rate, Stein says, adding a claim that Betterment’s client acquisition cost was not at the rates experienced by competing digital platforms. (Riskalyze CEO Aaron Klein estimated it was $825 for a customer averaging $63 in annual revenue.)
Quote“We are incredibly efficient in how we acquire customers."
“We are incredibly efficient in how we acquire customers,” Stein says, declining to provide details about the firm’s CAC.
The announcement comes as industry expectations run high that robo advisors are positioned to scoop up low-account-balance IRA assets collectively worth billions from full-service wealth management firms as a result of the pending Department of Labor fiduciary rule.
Having launched its 401(k) offering in January, Betterment is well-positioned to provide services to smaller broker-dealers and regional banks unable to meet the standard, says Alois Pirker, research director for Aite Group's Wealth Management practice.
"I think robos in general could make a big entrée into the retirement space," Pirker says. "Betterment has been making plans along those lines already. This seems to be a bet on market segmentation after the rule. We thought the gravy train of VC money had dried up, but that doesn't seem to be the case with Betterment."
Stein says that a fiduciary rule's expected boon to robo firms wasn't a major factor in Kinnevik's decision to invest, but other investment firms are pursuing that theme.
"There are number of firms out there trying to play that angle, and we've spoken to them," Stein says. "They believe the DOL rule will cause disruption and opportunities on the other side of the coin for firms like ours. Our view is that's interesting, but we didn't start this company because the DOL was going to make a rule."
Quote"I generally believe VC funding for the robos will now dry up. Betterment may be the exception."
Stein says the fiduciary rule may not be the No. 1 thing plan sponsors are thinking about “because that doesn't affect them as much as it does the providers. But generally they think it's a good thing. What I would want them to know is that the direction that [the] rule seems to be pushing is toward more managed services – platforms that will help you make good recommendations for participants, give advice to participants, more holistic management for participants – all of the kind of stuff that we're already doing.”
Industry observers were also surprised by the amount Betterment was able to raise. Fintech funding is booming, with a recent report from KPMG International and CB Insights noting VC investment reaching a record $13.8 billion last year. However that largesse was not expected to flow to digital advice platforms -- a survey of CEOs by industry research firm Tiburon Strategic Partners found that the majority thought VC funding to online advice would stagnate or grow only modestly this year.
"I am extremely impressed by Betterment and see them as the leading robo," says Chip Roame, Tiburon's managing partner. "I still believe Vanguard, Schwab, and others will raise significantly more AUM, but I think Betterment may be the most successful B2C robo advisor, excluding the major firms and the DC-focused robos like Financial Engines."
The new round of capital almost doubles Betterment's total funding haul to date. Its main competitors among independents, Wealthfront and Personal Capital, have each raised over $100 million in total. In December, Personal Capital hired New York-based private equity firm Evercore to help them with their Series E fund-raising efforts.
Quote"This could be an interesting inflection point for the robo industry."
"I generally believe VC funding for the robos will now dry up," Roame adds. "Betterment may be the exception. The firm has moved more aggressively in many areas – consumer advertising, a financial advisors channel, and a DC offering … I think the DoL might be the savior of some of the robos!"
Morningstar equity analyst Michael Wong, who recently noted the DoL ruling could provide a second wind for robo platforms, suggests the announcement would have a knock-on effect in both fundraising efforts and deals by incumbents to either acquisition or partner with digital advice providers.
“This could be an interesting inflection point for the robo industry,” Wong says.
Stein says Betterment’s latest round of funding could help other digital firms positioned to partner with broker-dealers.
“We are interested in partnering with some of those firms, because we do think there is an opportunity there,” he says. “But it’s not about these small accounts that these [broker-dealers] can’t serve. It’s about how financial advice is fundamentally shifting to a much more advised model for everyone.”
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