Robo-Advisor Betterment’s ‘Challenger Mindset’ Drives Growth

Betterment disrupted the financial services industry during the financial crisis in 2008 by pioneering a robo-advisory service that enabled individuals to manage their own investments. Now, Betterment’s president says new growth will come from disrupting itself.

Betterment launched shortly after the financial crisis of 2008 as the first robo-advisory that enabled individuals to manage their own investments without the help of a financial advisor.

The company has continually expanded its services to support long-term growth and now has more than 700,000 clients with $32 billion in assets under management.

A challenger mindset and a focus on “disrupting ourselves” have been key to growth, said Betterment president Michael Reust on a recent episode of the Banking Transformed with Jim Marous podcast.

The company was the first robo-advisory on the market, launching with algorithms that rebalanced assets within target day funds to help people manage buy-and-hold investments through a simple platform.

But a surge of copycats meant Betterment needed to pivot quickly and “disrupt ourselves before we became disrupted,” said Reust. “We’ve tried to differentiate ourselves on a few different things.”

Channeling an Omnichannel Strategy

A key to differentiation is not fintech’s typical customer-centric approach, but instead “client-outcome centricity,” said Reust,

This means aligning products, services and actions to customers’ goals as well as their needs — such as outbound messaging during periods of market turmoil to help consumers re-calibrate risk or calculate the tax implications of purchases with the Tax Impact Preview feature.

“We see massive reductions in customers taking harmful-to-themselves actions as a result of putting that kind of data in front of them,” said Reust. “It’s hard to execute in real-time, but it’s the sort of thing that is really potent.”

Second-Stage Disruption:

Betterment needed to pivot fast. So it set about finding ways to differentiate itself from other robo-advisors.

Betterment’s ability to execute on this strategy rests on a sophisticated data streaming system that builds automated experiences. Then the robo-advisor, with the help of its CRM and product marketing experts, segments audiences and looks for opportunities to help them improve their finances.

Attracting More Customers with Broader Distribution

Entering the advisor and employer markets opened up opportunities by attracting new clients and allowing for broader distribution, Reust said.

And rather than fight it out head-to-head with big players in the consumer market, Betterment uses an “engineer mindset” to leverage its platform and innovate through a multitude of distribution channels.

Customer-Acquisition Tactic:

One reason Betterment offers a savings and checking account is because more consumers shop for banking products than investing products.

That’s the strategy behind consumer products such as Betterment Everyday, a savings and checking account platform started in 2019. As the primary place for deposits and payments, Reust said it’s a “launching point” for other services that drive long-term value, reinforce the referral flywheel, and increase consumer interactions with the company.

“Part of the reason we did this is because a lot of consumers are shopping for banking products, not shopping for investing products,” Reust said. “That’s the entry point that can become the front door and a relationship-deepening product for existing clients.”

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Simplifying Things for Employers and Employees

Exploring new distribution channels inevitably led Betterment to the employer space. It started with Betterment for Business in 2016, a 401(k) platform for small and midsize businesses that automated benefits administration.

This app asks employees about their current situation and their priorities. With that information, the app automatically allocates loan payment, 401(k), and emergency savings dollars in the manner best aligned with the individual’s plan — meanwhile significantly simplifying benefits administration.

Benefits Administration and Beyond:

Exploring new distribution channels inevitably led Betterment to the employer space.

Betterment rebranded the app in 2022 as Betterment at Work to transition it from a 401(k) business into an “employee wellness” business, with apps such as the Student Loan Pay Down Automation and Matching tool, allowing employees to analyze and automate payments to save the most money. “It’s a beautiful system that works well for the consumer, and they are far more financially independent or at least resilient than they would be otherwise,” said Reust.

Betterment is now preparing to add two new components, a 529 savings plan to help employees save for their children’s college tuition and another to help them build their emergency savings. “We’ve seen really good resonance with that strategy so far, and we’re going to continue to lean into that,” said Reust.

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Engage the Right Bank Customers with the Right Messages

The future of differentiation and disruption includes new consumer products, Reust said, noting Betterment’s acquisition of cryptocurrency portfolio manager Makara in February 2022. “We have very thoughtful people who are experts in this, looking at the portfolios, modeling them, thinking about the ongoing management there,” he said.

Efforts like these boost Betterment’s bottom line through increased customer loyalty,  while engaging consumers in their own financial decisions and improving their finances, according to Reust.

“People who are engaged tend to do more good things,” said Reust. “They set more goals, set up more auto deposits. They’re saving more frequently. And so we try to engage with the right consumers, the right messages, to make them feel the system is working for them.”

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