How Betterment Is Taking on Schwab and Fidelity

Known for its retail trading platform, Betterment has made advisors a core pillar of its business model.


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For years, huge custodians responsible for trillions of dollars in assets have managed to control the vast majority of investor- and advisor-managed assets. But the 2020 merger of Charles Schwab and TD Ameritrade has created a perceived power vacuum that smaller custodians are eager to take advantage of.

According to asset management research firm Cerulli Associates, Charles Schwab and TD Ameritrade, BNY Mellon’s Pershing, and Fidelity collectively accounted for 84 percent of the total independent and hybrid RIA assets under custody in 2021.

However, in recent years, smaller custodians such as Altruist (a venture-backed fintech platform and digital custodian that has raised more than $290 million in capital) have begun to make a name for themselves. Other entrants to the market include Goldman Sachs, which acquired Folio Financial, a self-clearing broker-dealer, in 2020, and FNZ, which acquired a majority stake in State Street’s Wealth Manager Services in 2021.

One custodian that is better known for its robo-advisor platform says that it has also begun to see market share gains. Seven years ago, Betterment — one of the top robo-advisors in the U.S. with more than $36 billion in assets under management — launched Betterment for Advisors, an end-to-end custodian that bills itself as an alternative to larger custodians for RIAs under the $200 million AUM mark. While the company has said that it does not disclose how much AUM is on the custodial platform, it did tell RIA Intel that the figure has more than doubled since 2020. Today the company partners with more than 600 wealth management firms.

“Prior to 2020, the marketplace [may not have been] as ready for a challenger, but now we’re seeing consolidation in the custodial marketplace. We’re seeing declining service for smaller RIAs, and so it feels like there’s really an opportunity for a new player or two to take over some market share. That’s where we’ve been the beneficiary of a lot of growth,” Tom Moore, head of Betterment for Advisors, told RIA Intel.

Moore sat down with RIA Intel to discuss how Betterment for Advisors is serving RIAs and how they believe they are changing the custodial game. Answers have been edited for clarity and length.

Betterment is really known for its robo-advisor platform, so how did Betterment for Advisors come about?

We’ve been around since 2009, but for the first several years, we were explicitly a direct-to-consumer offering. We started Betterment for Advisors in 2015, and in the beginning, we were only serving a few large RIAs that wanted to utilize our client-facing technology. We slapped their logo on our technology and let them use it in their practice. But there were no advisor controls and there was no reporting, so it was limited as far as who they could use it with and how they used it. From 2015 on, we really focused on building the business from a robo-solution for RIAs into a full-blown custodial solution.

Today, we’re really competing headlong against the big custodians: Schwab, TD, Fidelity, and then some of the new challengers like Altruist and Axos. But our niche is the smaller RIA market, under $200 million in assets. Our offering is two-pronged. Simply put, it provides better technology and better service for smaller RIAs. Our automated portfolio management and administrative technology is more scalable for those smaller RIAs, and our intuitive client experience — which is so well known on the retail side — combined with the robust service team we’ve built adds the service element to our value proposition.

What’s different about meeting the needs of smaller RIAs versus those of larger RIAs?

The first thing is that they’re underserved. One of the reasons that we focused on them is that they’re not getting particularly good service from the legacy players. But I think if we go more specifically into how the needs of the smaller RIAs differ, they have a much stronger need for scalable solutions. A lot of times we’re talking about a single person running a $50, $60, or $70 million practice. So a lot of times our advisors are looking at our technology as a way to avoid hiring out operational staff or service staff. We can create the kind of scale that can help them grow their practice from $10 million to $150 million as a single, sole proprietor. We also have no minimum AUM requirements at the firm level and no client minimums. That’s always been a big thing on the direct-to-consumer side, right? We want to be an investing platform for all.

You’ve mentioned that the consolidation of the custodial market has led to declining service at larger custodians. What do you mean?

As custodians get bigger, they prioritize the larger firms more and more, so smaller RIAs are often on the outside looking in. We’ve seen that for a number of years.

As the company continues to grow, how do you stop that trend from becoming a problem with Betterment?

That’s a really good question. It’s something we’ve talked about a lot, because a lot of challengers will kind of make the same pitch, right? “We want to focus on small RIAs. We’re different.” But if you have the same business model, then you’re always going to get pushed into going at market. So one of the reasons that we can focus on the small RIA forever is our scalable technology. The cost to service our RIAs is much lower, because of the platform that we built. We’re a fully vertically integrated custodian and portfolio management tool in which all the trading is done algorithmically. So a lot of the costs that normal custodians incur to service smaller RIAs are either lower or don’t exist. And then the second piece of that — and this is sort of a double-edged sword — is that we charge an upfront platform fee. The revenue model used by a lot of custodians is designed to make money on the assets once they’re in the door, and they’re not charging anything upfront to the advisors. But that’s what puts them in a position that requires them to build scale very quickly in order to create a sustainable economic model. We manage costs by charging an upfront platform fee that scales based on assets, and that ensures that it is viable for us to offer a high level of service to everybody. When you’re just getting started, the fee is 20 basis points, but it scales down with more assets.

The custodial business is hard to break into, with the top four custodians holding 84 percent of the total market share. Why did Betterment want to get into this business?

That’s a loaded question, but I think it’s like “The Question.” Traditionally — and especially in the RIA market — inertia is the biggest challenge. Even if you can convince an advisor that you’re in the right place to get to hold their money, getting them to actually move assets has been a challenge. But the technology to facilitate a move has gotten a lot better, and we’ve done a lot of work on making that process as easy as possible. But I also think there is a shift in the paradigm of that legacy marketplace. I think we’ve seen it play out pretty slowly, but as soon as trading fees went to zero, we saw consolidation. Those firms are rapidly adapting their business models, and I think it’s going to open up opportunity. The last thing I’ll say is that it is hard to get into this industry. I think there’s a period of time before you can build a critical mass of assets, and that’s where we see a lot of challengers fail. But one of the things that we have going for us is that we have built that critical mass across our three lines of business, and this makes Betterment an enduring financial institution. We have our overall retail platform, our 401k platform, and the advisor platform — not dissimilar from a Fidelity or a Schwab or a TD. We’ve gotten to the point where we have enough money under custody to give us a solid foundation that we can continue to build on.

What makes your technology more scalable than the technology that other custodians use?

The term I use is vertical integration. We built our own broker-dealer in-house. We built our own record keeper in-house. And then we built our own portfolio management trading system that allows us to trade with fractional shares, which is how we do it without requiring minimums. And because we built all that in-house, it’s all optimized. It’s all completely vertically integrated, and we don’t outsource any component of that. And that’s what creates the advantage for all three businesses.

How do other lines of the business affect the advisory side?

What makes us unique and what makes our value proposition powerful is that all three businesses utilize the same vertically integrated core trading system. That’s the differentiator. Obviously, we benefit from the scale of the retail business and the retirement fund business, but we also benefit from the innovation and the evolution of that core technology. That’s our advantage. In the 401(k) market, we have scalable technology that can serve a smaller 401(k) plan that’s underserved. In the RIA business, we have a scalable technology that can serve the small RIA that’s underserved. And in the retail space, that’s how we started. We wanted to give the smaller investor access to high-quality investment management. It’s the same value proposition across all three of those businesses, and it’s the same right to win. We’ve been successful enough now that we’re not going anywhere.

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