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Executives at both Betterment and Wealthfront say there’s room for established companies and pioneers. Adam Nash, chief executive officer of $3 billion Wealthfront, which launched in 2011, says his company focuses on younger investors with different ideas about technology and investing while incumbents are battling for boomers’ assets. “Those older investors aren’t looking for the same things,” he says. “We want to be the Amazon, the Netflix in this category.” Nash says 90 percent of Wealthfront customers are younger than 50, and 60 percent are under 35.

Marketing and UI/UX would be my guess. Just as Robinhood was aimed at a younger cohort (smartphone only, slick interface, social media hype through a waitlist, etc.) some of these Robo services will be tailored to the differing needs of a younger crowd...even if ultimately, the fees on these new services are a few tenths of a percent higher than the Vanguard/Charles Schwab funds. They'll also probably play up the anti-big bank, overthrow the established financial order, "we are new fintech" factor to build hype around their funds and services.

$3B valuation? $3B in revenue? $3B in assets under management?

Its $3B assets under management.

Also the firms with better algorithms and cheaper management fees will make their customers more money. If the upstarts can do that, then they will win.

Algorithms for what exactly? I am curious.

I) You're correct: in every industry, the deck is skewed heavily in favor of incumbents.

II) Nonetheless, incumbents sometimes lose new markets, or allow new entrants to achieve success. Ironically, Vanguard and Schwab are great examples of companies that more recently found openings in the personal finance space and prospered as a result. It's not a stretch to say that Vanguard was the Betterment of its day, or that Schwab was the Wealthfront of its day.

III) Some other thoughts as to why anyone would choose to invest with a pure-play robo-advisor:

- "The Schwab Intelligent Portfolios service is free—it earns revenue in part by investing clients’ money in Schwab-managed ETFs." That would turn me off, as it feels like a built-in conflict of interest. I'd be worried that there is incentive for this conflict to grow, and not in my favor.

- "Customers need at least $50,000 invested at Vanguard to participate, but only those with at least $500,000 to invest get a dedicated adviser." Most Americans have less than $50k saved for retirement, IIRC. Vanguard is saying they don't want most people in this offering. Betterment and Wealthfront do not have account minimums, so they are positioned to start with people in their 20s and stick with them over the decades.

I'm sure there are a bunch of other reasons around technology, etc., but these are the most obvious reasons presented in the article.

> Betterment and Wealthfront do not have account minimums

Wealthfront has a minimum of $500, which is admittedly less than $50k, but it is still a minimum.

Wealthfront also will not provide certain services until you have an account balance of $100k.

The $50,000 figure is for a human advisor. Vanguard's whole value proposition is that you don't need unique advice, and they can offer you better returns by having fewer humans in the loop.

I choose to invest with Betterment instead of Vanguard or Schwab, much of it comes down to the ease with which I can interact with their services in comparison. Betterment has a nice iPhone app, and even in the app, everything I could possibly want to do is no more than 1 or maybe 2 touches away.

For comparison, I rolled over quite a bit of money from a Vanguard fund into Betterment in part because the interaction with my money was more difficult in Vanguard, and I pretty much had to use the website. I also have a work plan with Fidelity invested in a target retirement fund with very low fees, but again the app and how I interact with my money is terrible in comparison.

I understand Betterment is doing less, which is probably why everything is so easy to find, but for someone like me who wants to have their money 100% in equity assets and diversified with an easy dashboard, Betterment is far and away the simplest. A nice bonus is that I can crank my allocation up to 100% stocks 0% bonds which it seems none of the target date retirement funds will allow (I have stable assets invested elsewhere and don't need the exposure in my Betterment accounts).

If you want 100% stocks, you just buy an equity fund.

Of course target-date funds don't have that, that's the point.

Of course it's your money to do with what you like, but how exactly are you interacting with your money and how often?

Also if you want 100% stocks and 0% bonds you can buy VTSAX or VTI (that's US equities, if you want international ex-US there's VTIAX / VXUS).

I have monthly deposits, and mostly just check balances once a week or so. As for buying funds, yes I could do that, but I'd like a nice mix of large and small cap, domestic and foreign, and the tax loss harvesting is quite handy! This would be far more work than I want to undertake elsewhere.

you'd also have transaction costs to buy monthly and rebalance when needed which would probably cost about the same as the betterment fee.

Betterment's tax harvesting software got me about $3500 in realized losses which I was able to claim for my FY2015 taxes. That ended up getting me about $1500 in deductions on my tax return, while holding nominally the same securities (albeit from a different financial service supplier). Well worth the ~$250 in fees I paid them this year.

I'll probably switch over to a strictly Vanguard portfolio when that harvesting isn't saving me money any longer, but until then, I think I'll stick with Betterment.

I think that tax loss harvesting illustrates my point. I don't know if Vanguard's service currently supports tax loss harvesting but its a feature that takes about 1 man week of work to implement.

Tax loss harvesting isn't a feature that you can differentiate yourself with.

I've implemented it several times over for the hedge funds I've worked at. Its a well understood tool that's been in use by funds for as far back as I remember.

Why doesn't Vanguard do tax-loss harvesting yet?

Excellent question, does anyone know? I'd like to know the answer as well.

I'd imagine it would be illegal for Vanguard to implement in the way that Betterment does. Betterment buys exchange traded securities to allow their customers to participate in the underlying mutual fund. They can basically jump from a Vanguard ETF to a Schwab or iShares ETF of a similar market. I'm reasonably certain it would be illegal for Vanguard to purchase a competing fund's ETF as it would be directly affecting the business of a competitor.

In fact, I'm not even sure how Vanguard could do this in any manner that would be customer facing.

> I'm reasonably certain it would be illegal for Vanguard to purchase a competing fund's ETF as it would be directly affecting the business of a competitor.

I can buy whatever companies ETF I want with my Vanguard account. Why would it be illegal?

I'm referring to their mutual fund, not purchases you make on their trading platform.

> 1 man week of work to implement.

A more realistic estimate is probably 6 people for 2 years. Plus increased support costs. Large financial companies are often ridiculously slow to roll things out, but as a customer you want risk aversion not bugs.

> but its a feature that takes about 1 man week of work to implement.

A good example of how estimates in software are usually off by large factors. Determining the best exit point to harvest a loss at, for example, would probably take more than a week. And that is just one small piece of the model.

As I mentioned in a few child comments, I don't think Vanguard can implement tax loss harvesting in a way that's customer facing at all. They certainly can't implement it in the way that Betterment does - that would involve purchasing competing mutual funds' ETFs, which I'm sure the SEC would view as anticompetitive.

I suppose you could do something like that within a sector - trading an Amazon for an Apple in tech, or a Shell for an ExxonMobil in oil - but that's betting on a lot of independent factors besides the performance of the commodity or sector as a whole.

> $3500 in realized losses

> $1500 in deductions

Do you mean $1500 in credit? why wouldn't all $3500 be deductions?

> Well worth the ~$250 in fees I paid them this year.

Will this work every year, even in bull markets?

> Do you mean $1500 in credit? why wouldn't all $3500 be deductions?

Frankly, I'm not sure. I did it through Turbotax a week ago and didn't look closely at it.

> Will this work every year, even in bull year?

As long as you have a security that you can sell at a loss with a comparable security to replace it - yes.

> If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

https://www.irs.gov/uac/Ten-Important-Facts-About-Capital-Ga...

Buying "nominally the same securities" is exactly the reason why tax-loss harvesting is borderline illegal. It goes directly against the IRS warning on "substantially identical" securities.

http://www.investopedia.com/exam-guide/series-7/investment-r...

Betterment's burden to bear, not mine.

That's not how law works.

I never really understood tax harvesting. People act like it's free money, but it just seems like tax deferral to me. Sure, you get nearly the same securities - but you get them at a lower cost basis, so you'll have to pay more capital gains tax later, assuming you sell them at a gain.

I suppose you could think of it as an interest-free loan (by getting your deduction now rather than lower taxes later), so maybe it does make sense. Personally, I'd much rather pay my taxes now, while I'm earning an income, and maximize the amount of my retirement savings that I'll actually get to spend without having a mysterious tax bill hanging over my head. I prefer Roth IRA to traditional for the same reason.

> $3500 in realized losses... $1500 deduction

Someone please correct me if I'm wrong, but it seems silly to harvest more losses than the capital loss deduction limit ($1500)! That's $2000 worth of higher cost basis that were basically "thrown away" rather than saving you ($2000 * ~15%) on your eventual gains taxes, no?

> more losses than the capital loss deduction limit ($1500)

Currently you can deduct up to $3000 of short term capital losses per year against other types of income (e.g. regular employment income), and any remaining balance can be carried forward indefinitely.

I got the $1500 number from the OP, not sure where it came from. I didn't realize losses could be carried forward like that though, good to know!

I am guessing OP was able to decrease his/her taxes owed by $1500 (e.g. by deducting marginal income by $3000 at a combined state and federal marginal tax rate of ~50%).

*Edit: or, as cbhl points out below, OP is married filing separately, in which case the deduction limit is $1500/year (multiplied by marginal tax rate to yield actual tax savings).

While I agree with you on all of those points, I think that there's still something to be said about usability and quicker innovation for managing/reviewing your finances. I personally use Vanguard and love them, but their site was really really difficult for me to use when I joined, and it's still not great after a big refresh. For those who are serious about getting the lowest possible fees and the maximum return, usability might not be a big deal. A lot of people are really drawn by shiny things, though, and shiny is not something that larger financial institutions have ever been good at.

I don't think that this really counters any of your points, only justifies why I think some people might want to use services like Wealthfront and Betterment.

Just signed up for betterment after looking into Vanguard, other options.

Putting your money into Vanguard requires more investing knowledge (picking which ETF, how to spread investment) and is not nearly as easy, nice to use as betterment. Betterment is a tech company and they seem to be good at building tech around ETFs in order to make it a better experience. iOS enough to fork over a couple of hundred dollars a year in fees. I don't Hinkie Vanguard will ever provide an experience as nice as betterment.

Also, their tax-loss harvesting feature could actually save you money in the long run if you don't have a retirement account.

Their fees will probably cost you more money than the money saved from tax loss harvesting. Betterment is just investing in Vanguard funds (not all of it, but definitely a few). You could spend a few days and research investing using Vanguard, but if you'd rather not do that and are willing to absorb their fees, than Betterment is a brilliant choice.

If you want to understand the basics of passive investing, The Bogleheads Guide To Investing is a brilliant book.

Putting your money into Vanguard requires more investing knowledge (picking which ETF, how to spread investment) and is not nearly as easy, nice to use as betterment

You could also just pick a couple of already-well-diversified index funds. In the end, the additional knowledge that Betterment offers you is only a benefit if they have higher returns than a simple portfolio of index funds after fees.

Why would Wealthfront or Betterment need massive amounts of VC funding? I'd imagine that their overhead is pretty low. The biggest item is probably marketing expense which they can adjust depending on the environment.

Totally unsolicited, but I have an account with Wise Banyan and I'm really pleased so far.

Betterment

* AUM $3B as of 11/2015

* Average account size is ~$30,000 from what I can gather

* That means 100,000 users

* At Betterment pricing, they make $6/mo per user

* That's $7.2m/year

Betterment has 149 employees on LinkedIn. I would assume the true number is closer to 180. Assuming an average fully loaded (salary, taxes, benefits and perks, etc) cost of $100,000 per employee, that is $18m in headcount costs alone.

I also wouldn't be surprised if the CAC is over $100, which means at least $10m to acquire those 100,000 customers.

Lastly, $7.2m in revenue is likely over stated for 2 reasons: 1) There are tons of free accounts that drag the average down and don't pay anything, 2) Which means some of the larger accounts that have substantially more fall into lower price tiers and result in lower revenue (per dollar invested)

Why the hell does Betterment need 180 people?

Product Management, Product Design, Product Marketing, Engineers, Ops & Legal, Finance, Marketing (Growth) & Analytics, Sales, Business Development, Privacy & Security, Talent/Recruiting, etc...

They're dealing with people's money and they're growing. Doesn't seem too absurd. They're not just building a rinky dinky dumb interface between a user and a Vanguard fund. Also, they have an institutional product outside of the scope of the consumer product.

> Product Management, Product Design, Product Marketing, Engineers, Ops & Legal, Finance, Marketing (Growth) & Analytics, Sales, Business Development, Privacy & Security, Talent/Recruiting, etc...

I get all that. I don't get how that kind of head count works for a company that only has about 100,000 customers and $3 billion in assets, considering the value proposition for this company is supposed to be intelligent passive investing.

> They're dealing with people's money and they're growing. Doesn't seem too absurd. They're not just building a rinky dinky dumb interface between a user and a Vanguard fund.

Prop shops and hedge funds run leaner than they are, and those places are employing lots of people for actively developing trading strategies and maintaining large, sophisticated backend systems. Betterment is supposed to reduce the risk and cost of investing by using algorithms to build index funds and cutting all that active management crap, thus I would expect them to be running leaner than those other places.

As for growth, they have been in business for almost eight years. I don't think the growth rate justifies the current head count. I worry that they are pulling a Twitter and hiring a bunch of people they don't actually need yet as part of a talent war.

On their institutional product, LinkedIn gives me the impression that it is run as a quasi-separate entity. I don't know if the 180 people referred to here have much to do with that part of the business.

Scaling. The whole point of these businesses is that they have minimal per-user costs. 100K customers and $3B in assets costs maybe 50% less in humans than 10M customers and $30B in assets.

That's still outrageously high for what they do. OK, mark down Betterment in the deadpool for me.

Marketing. Building a consumer brand and getting people to sign up takes a ton of marketing dollars.

For a large enough account (>=100k), Wealthfront can buy the individual stocks instead of holding them in an ETF. Right now they only do this for US stocks. Presumably, they'll eventually do this for other asset classes and you'll have the benefit of their tax-loss harvesting and rebalancing and pay only the robo-advisor's management fee.