Divide between former robo-rivals widens

In a pair of blog posts this week, Betterment and Wealthfront showed how far the former fierce rivals have diverged in recent years.

On Tuesday, Betterment founder and CEO Jon Stein stated the case for traditional advisers adopting automated investment management technology, such as Betterment for Advisors. A day later, Wealthfront co-founders Andy Rachleff and Dan Carroll reiterated their belief that a purely digital service is the way forward to help the next generation save and invest.

It wasn’t long ago the two digital startups were going head-to-head for millennial assets, thumbing their noses at the industry without any competition from the traditional financial advice providers.

Today, just about every large financial institution has a digital advice product; either going directly to consumers or as back-office technology for independent advisers. These firms — the two largest startups — aren’t threatened, but they aren’t a threat either.

The answer, it seems, is make everyone clear on the different markets they now serve.

(More:​ Latest ranking of the robos still ruffling feathers)

Wealthfront has its sights set squarely on mass affluent millennials, the 32-year-old with a $130,000 income. They’re trying to help this demographic save more for retirement.

“It’s pretty clear that for most Americans, the current system does not adequately encourage them to save what is required,” the firm’s co-founders write in the blog. “Unfortunately, trying to make small improvements to this current system is like applying a Band-Aid. It’s not going to make a difference. You have to create something new.”

Their answer is to approach the problem just as Amazon approached retail and Uber approached hailing a taxi — through mobile automation. Mr. Rachleff and Mr. Carroll shared data showing regular use of Wealthfront’s automated financial advice engine, Path, correlates to an increased savings rate of 28%, which could mean an additional $1.25 million in retirement for their target client.

“Only through automation can we make a major dent in the savings gap that threatens a huge portion of the American population from retiring comfortably,” they wrote.

They conclude that “automating financial advice will lead people to better outcomes and that’s the future we want to enable.”

Betterment, on the other hand, has aimed for larger fish by introducing products for wealthier clients, including access to a team of human advisers. The firm also launched Betterment for Business to sell retirement plans, and Betterment for Advisors to bring its technology to independent RIAs.

In his post, Mr. Stein did what he could to allay any lingering fears advisers may have about embracing a robo-adviser. He compared financial advice to industries like healthcare, where modern technology is welcomed but human experience is required.

(More:​ How to offer the ideal hybrid digital adviser)

“The human factor in wealth management — encouragement during market volatility, guidance with respect to decisions, educated insights — will always be important to clients, especially as financial issues become more complex,” Mr. Stein wrote. “What advisors do that technology can’t — digging deep to understand clients’ needs, motivations and goals and using that information to offer practical and appropriate advice — is advisors’ 'job security,’ so to speak.”

Mr. Stein also hinted that more is coming, such as giving advisers the ability to use Betterment for cash flow issues like credit and mortgages.

Ironically, as Betterment grows beyond an all-digital robo adviser, it finds itself in greater competition with existing firms, including record keepers over 401(k) plans, custodians that provide adviser technology and hold client assets, and RIAs and broker-dealers that also need adviser talent.

By remaining purely digital, Wealthfront offers a focused value proposition to clients and investors.

It’s clear the companies recognize how their businesses have diverged, and they want us to know it as well. In 2018, the two biggest names in robo-advice startups still aren’t necessarily friends, but they aren’t foes anymore, either.