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Robo-Adviser Startups Are Now Going After Wealthy Clientele

Robo-Adviser Startups Are Now Going After Wealthy Clientele

(Bloomberg) -- Robo-advisers were built on the promise of offering wealth management expertise to the masses. Now those startups are turning their attention to a different -- and much wealthier -- customer.

Betterment LLC, the largest startup in the automated financial advisory market, said Wednesday that it’s adding a tool for some clients to adjust investment allocations in more granular ways. The service is limited to those with at least $100,000 under management by Betterment.

The product follows similar moves by two other robo-adviser startups in recent months. Ellevest, a women-focused investment platform founded by Wall Street veteran Sallie Krawcheck, introduced a private wealth management service late last year for clients willing to put in more than $1 million. Last month, Wealthfront Inc. added a tool to minimize investment risk for customers with $100,000 or more.

Services geared toward wealthy clients typically carry larger fees, which is appealing to a young company in search of profits. But there are doubts about whether high-net-worth individuals would be willing to move their assets to robots at an untested firm. This type of customer will “always demand face-to-face advice,” according to a report from analysts at Citigroup Inc. in 2016.

Robo-advisers started out by going after people with limited disposable income and little experience with investing. These companies are able to offer wealth management tools at low fees because they rely mostly on automated software, instead of people, to deliver advice. Customers fill out a risk profile by answering questions about their age and goals to receive a customized portfolio made up of exchange-traded funds and other passive investments.

Competition has upped the urgency for these startups to add new products. Charles Schwab Corp., Morgan Stanley and Vanguard Group Inc. have all introduced robo-advisers in recent years and have billions of assets under management already. Betterment and Wealthfront have said they each have more than $10 billion in assets.

“The industry has come a long way over the past several years, but success has also attracted new competition, including large and established players across the financial services industry,” said Devin Ryan, an analyst at JMP Securities LLC. “Increasing competition within the digital wealth management space appears to be accelerating the pace of innovation.”

Ellevest’s product for millionaires comes at a higher cost than its base service, in exchange for access to additional investment options and a personal, human financial manager. Krawcheck said at the time of its introduction that the firm developed the service after an influx of customer requests for a more tailored offering.

Wealthfront’s venture into high-end services incited a backlash. The Silicon Valley startup activated a new risk-parity feature earlier this month for customers with at least $100,000 without clearly communicating that this was something users would have to opt out of rather than opt into. The move resulted in higher fees for clients unless they chose to opt out. Failing to turn off the tool before a portion of their money is transferred to the new fund could carry significant tax implications when they decide to sell. According to its latest filing with the U.S. Securities and Exchange Commission, the firm has just over 1,100 clients that qualify as high net worth individuals.

Betterment is hoping to avoid a controversy with its new feature. Jon Stein, the chief executive officer, said his startup has received a great deal of demand for the ability to tinker with investment allocation from wealthier clients, who have holdings outside Betterment. Although the tool is limited to those with $100,000 or more, there’s no additional fee to use it.

One goal of the new feature is to build a more affluent base. According to a recent filing with the U.S. Securities and Exchange Commission, Betterment has roughly 750 clients who qualify as high-net-worth individuals, or those with at least $1 million at the firm or a personal net worth of more than $2 million.

To contact the reporter on this story: Julie Verhage in New York at jverhage2@bloomberg.net.

To contact the editors responsible for this story: Mark Milian at mmilian@bloomberg.net, Andrew Pollack

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