JUL 9, 2015

What Wealthfront’s Attack on Betterment Is Really About

The real competition for Wealthfront is with ‘the other 99.9% of industry assets that aren’t managed by ANY robo-advisor,’ says Michael Kitces

A war of words between two of the biggest independent robo-advisors taking place in the blogosphere may be a main event for the combatants but is more likely a sideshow for the financial advisory business as a whole.

The war involves Wealthfront, which recently slashed its minimum investment from $5,000 to $500, and Betterment, which never had a minimum. Wealthfront’s CEO, Adam Nash, attacked Betterment for charging a $3 monthly fee on accounts that don’t automatically invest at least $100 a month or have a minimum $10,000 balance. “It’s really disappointing that Betterment has decided to build their business preying on those who can least afford it,” Nash wrote.

Betterment CEO Jon Stein responded, point by point, knocking down Nash’s criticisms, and noting that the average net worth of customers paying the $3 monthly fee is $110,000, making the fee equivalent to 0.03% of assets rather than the double-digit examples that Nash citied. (Nash cited 36% for an account of $100 and 14.4% for one worth $250.)

What’s really happening here is more intense competition between robo-advisors themselves and between robos and the big legacy financial firms that have entered the business.

The robo-advisor space is “getting crowded,” and the market share race between Wealthfront and Betterment is “neck in neck,” says Sophie Schmitt, senior analyst at Aite Group, a research and consulting company that focuses on wealth management.

Wealthfront has $2.51 billion in assets and 35,499 accounts, according to its latest Form ADV filing with the Securities and Exchange Commission dated June 24. Betterment has $2.3 billion in assets among 112,345 accounts as of April 21, 2015. Betterment clearly has smaller accounts than Wealthfront does.

But more important than this competition between these two big pure-play robo-advisors is the competition between relatively young, Web-based players and firms like Schwab and Vanguard who have “tremendous marketing muscle,” says Schmitt.  

And the hottest area, says Schmitt, is neither. It’s the growth of digital-enabling technologies for traditional advisors, who are partnering with companies like Envestnet, Pershing and Marstone. “Firms and advisors are looking to upgrade, to automate their accounts … and are looking at having a robo-advisor of their own,” says Schmitt.

That’s where the real competition is for Wealthfront, says Michael Kitces, director of research for the Pinnacle Advisory Group and a regular commentator about the financial advisory industry. It's not with Betterment but with “the other 99.9% of industry assets that aren’t managed by ANY robo-advisor.” Kitces says it’s ironic that Wealthfront would challenge Betterment on pricing for small accounts when Wealthfront had the higher minimums previously and still charges more on large accounts. On accounts larger than $100,000 in assets, Betterment charges 0.15% while Wealthfront charges 0.25%.