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“Betterfront”: Proposal for a More Competitive Robo-Advisor

August 13, 2015

If you are looking for some excitement in the financial-service space this summer, then look no further than what is happening in robo-advisor land.

Things are continuing to heat up, with tempers flaring and giants entering, causing the celebrity venture-capital funded upstarts of Wealthfront and Betterment to start feuding. Such fallout could cost them their remaining goodwill as pioneers and industry disruptors.

Here we have Wealthfront on the attack, a PR gambit that smacks of desperation. And when given a chance to take a higher road, Betterment also chooses to roll in the mud.

Quibbling instead of innovating has always been the calling card of CEOs looking to distract people from troubles closer to home. Remember the Sirius-versus-XM Radio battles?

Why is this a tipping point for the survival of early B2C robos? Let’s take a quick walk down Memory Lane to see why. When Wealthfront and Betterment entered the scene in various iterations nearly seven years ago (Wealthfront used to be called KaChing, of all things) they were industry darlings for proposing to disrupt the big, evil financial-service industry with automation, pretty interfaces and low, low costs.

At that time, their main advantage was a sleepy wealth-management industry with a legacy of being slow to adopt consumer technologies. Wealthfront and Betterment caught an industry in denial that investors would actually want to see and interact with their finances on their smartphones, which were only catching on.

Headline after headline in mainstream and tech-sector media praised these new entrants, and their assets began to swell (slowly), along with their CEOs’ egos (rather more quickly) — never a good combination.

Then, the inevitable occurred. Big online financial-service brands woke up and realized that the barriers to entry for robos were extremely low. All you needed was an interface, an algorithm and a friendly broker-dealer — and voilà, you were in the robo-advisor business. Even stodgy, slow-moving broker-dealers, like LPL Financial, are now bringing robos to market after abandoning the idea a few years ago.

It took Schwab and Vanguard just weeks to eclipse Wealthfront and Betterment in total robo assets under management, and the giants have been dominating ever since. Schwab’s “free” robo promises to put even more pressure on the original B2C robos, exposing the vaporware economics they used to attract hundreds of millions in VC investments. Losing money at 15 to 25 basis points seemed like a good idea in the short term; however, when you are now faced with the nasty possibility of losing money at zero basis points over the long term, then all bets are off.

Morningstar equity analysts have already weighed in on this issue, and their scary math suggests that for a B2C robo to break even, it needs to get to $14 billion to $40 billion in AUM — and spend hundreds of millions in annual advertising dollars to attract and retain those assets. Again: That’s to break even.

At only $2.5 billion apiece in half a decade for Wealthfront and Betterment, the head scratching begins — and the countdown on the patience of their VC backers.

So what can these firms do?

In my opinion, they should get married — and fast. By combining platforms, they will get to a more reasonable assets-under-management figure of $5 billion. They’ll be able to achieve dramatic synergies by eliminating half of their combined staffs and be able to sell off one of their platforms. Let’s face it, they both do the same thing — and their platforms are built to scale.

“Betterfront” can use those savings to get its wares in front of financial advisors, a more promising area of robo-technology growth than B2C.

So, as summer wedding season continues, let’s see who moves first — Wealthfront or Betterment. If neither does, then probably the next big events in their lives will be funerals, not nuptials.