Since they first surfaced nearly five years back, the widespread belief has been that robo-advisors will cause fee compression amongst human financial advisors ultimately, as the procedure of applying a diversified asset-allocated stock portfolio becomes commoditized significantly. However, as it happens that in the pricing game of chicken between robos and human advisors, it’s actually the robo-advisors that are turning first. The announcement that Betterment is pivoting to increase their fees and add new human being advisory services is the most direct acknowledgement yet of the pure unsustainability of the initial robo-advisor model.
Instead, Betterment has shifted to imitate its more successful rivals, including Personal Capital, Vanguard Personal Advisor Services, and the recently announced Schwab Intelligent Advisory – nothing which are actually robos whatsoever, but tech-augmented human being consultant systems rather. Ultimately, though, Betterment’s shift to provide a layer of human advice still isn’t necessarily about staking a competitive position against (other) human advisors.
Instead, it’s a shift to become a platform business that compete with famous brands Schwab, Fidelity, and TD Ameritrade. In the end, if the scaled human being advice is only offered “at cost”, then Betterment effectively makes 25bps of fees regardless of where clients go – whether it’s Betterment Digital, Plus, Premium, or the Advisor Network.
It’s no more about getting the clients, per se, but simply being the platform where in fact the clients go for whatever solution they choose. Yet, there is still a question of whether Betterment will be able to compete in this space whatsoever actually. After all, the irony is that now the “robo-advisor” is in fact the higher priced offering, as the new Betterment Premium service is almost double the price of the competing Schwab and Vanguard alternatives, with 5X to 10X the minimums!
Which means Betterment encounters a challenging uphill marketing challenge, that the quintessential robo-advisor differentiator – low cost – is no more in their favour! The bottom series, though, is merely to recognize just what a profound change Betterment has made, and one that I believe marks the best demise of the genuine B2C robo-advisor.
100 million investment for 10% of a company, with a 90% chance of a capital event. 100 million investment for 10% of the company). I know that I’ve simplified the complicated world of capital raising deal-making in this example, which enabling more sophisticated protection mechanisms and multiple capital rounds will make it more challenging to estimate the safety value.
As an outsider with an intention in valuation, I find capital raising offers to be jaw-droppingly complicated rather than always intuitive, and I am uncertain whether this is by design, or by accident. When it comes to investor safety, the stories that I read for the most part are framed as warnings to owners about “vulture capital” investors who’ll use these protection clauses to remove founders of their ownership rights. I think the story is a far more organic one significantly, where both owners and investors see benefits in these arrangements, and where both can expose themselves to problems, if they reach over.
It is easy to see why private company traders like protections against downside risk, especially when investing in young start-ups, where valuation is difficult to do. However, there are three consideration that investors need to bear in mind, when deciding how much protection to seek. At a fair price, protection provides no value: In investing, you can, generally, buy security agains the downside (by means of insurance or put options), if you are willing to pay the right price. At a good price, the security delivers peace of mind but no extra value.