In our second segment on "Millennials and Money," we focus on the rapidly-growing field of automated financial advisors. In a recent Oxford University study on jobs that are most at risk of displacement in the next machine age, personal financial advisors rank as the 8th occupation on the list. This same study predicts that 60% of the advisory industry will be automated by a post-financial crisis generation of startups over the next several decades.
Not surprisingly, such assertions have stirred up considerable anxiety among traditional financial advisors who have subsequently ascribed the disparaging moniker "robo-advisors" to their new competitors. To get additional insight on the disruptive trends associated with next-generation financial advice, M{2e}'s Jaclyn Drobny and Chris Smith spoke to two executives -- Sarah Michaelson and Catherine New -- who work in marketing and content services, respectively, for Betterment, an online investment advisor and asset manager that strives to use technology to provide customers with a sophisticated, yet accesible, way to invest and grow their money. With no minimum balance requirement and some of the lowest fees in the industry, Betterment builds passively managed investment portfolios of index and exchange-traded funds designed to achieve better returns over time.
The company recently received $32 million in its latest round of funding. Many researchers have suggested that the growth of online financial advisors is symptomatic of a generational shift in the investor community between older Baby Boomers and younger Millennials. Demographers generally identify members of the Millennial generation as those individuals born between 1981-2000. This cohort is collectively 80-million strong in the US -- larger than the Baby Boomers and Gen Xers that came before them. Globally, Millennials constitute about a third of the world's population, approximately 2.5 billion people. This group has come to serve as convenient short-hand for a wide range of social dynamics -- many technologically driven -- that are rapidly transforming the marketing strategies of companies all over the world. Financial communication professionals are devoting considerable attention to cracking the Millennial cultural code. However, even though Millennials themselves are heavily represented among Betterment's operations and senior management team, the company does not view the behavioral tendencies of young digital natives purely in isolation.
“I don’t think that Millennials have such a distinct way of thinking that is differentiated by their age," said Michaelson. "I think there is just a growing change in how people are approaching the products that they use and probably Millennials as a younger generation are adopting it a lot faster than the older generation.”
In what follows, Michaelson and New elaborate on Betterment's marketing strategy and its approach to client communication and investor education. The resulting Q&A took place over the course of several distinct interactions that have been amalgamated and edited for publication.
Chris Smith: Sarah, how did the recession create a market opportunity that Betterment's CEO Jon Stein identified and acted upon?
CS: So, just to clarify, Betterment follows a passively managed, indexed model of money management?
SM: That’s correct.
CS: And it’s an algo-driven service?
SM: It is, yes. We use an algorithm to provide advice for our customers and we use automatic rebalancing, automatic reinvesting of dividends. We are also using smart ways to reduce taxes on the investment account. And we have a lot more innovations coming down the pipeline, as well.
CS: How hard has it been to appeal to prospective clients with this automated and less emotional approach to investing? From a behavioral standpoint, I’m sure a lot of individual investors like to think of their portfolio like it’s the Kentucky Derby!
SM: We are probably not the best product for the people who are addicted to the off track betting approach in their stock portfolios. Customer education about passive investing is important. We have to deal with decades and decades of marketing that tells customers they can stock pick their way to better returns in their portfolio. That’s the number one thing we try to explain to customers: Very few people are able to out-perform the market over the long term, whether they are market timing, or stock picking. The other thing you brought up, that we are very focused on is taking a closer look at investor behavior. Because Betterment aims to take the emotion out of your investing, such as fear at the bottom of the market and then greed at the top of the market, we deliver better take-home returns for our investors.
CS: There was a story not too long ago about how retail investors are finally making their way back into the stock market, but perhaps at precisely the wrong time since we are already six years into a historic bull cycle with many indexes at, or near, all-time highs.
SM: We really do try to urge people not to market time. People are reading in the press right now about stocks being at all-time highs and they might be thinking that is the time they should sell. But you really have no way of knowing that. This could be an all-time high but we could also be only 50% of the way toward another market high and if you sold now then you’d be sitting on the sidelines. The reality is that most of the market appreciation happens on a couple of days over the year and unless you have a crystal ball, it’s impossible to know when that will be. So, we always advise our customers to be in the market and risk-adjust their investments based on when they anticipate they will need the money.
CS: What differentiates Betterment from the other online advisors that are out there?
SM: First of all, we are a broker-dealer, so we optimally invest the money for our customers – some of our competitors just provide advice. Second of all, we are vertically integrated which means we are the broker-dealer; there is no third party managing the investments for you. So, we are able to allocate the money from all the accounts we have under management much more efficiently and pass those savings along to our customer base.
CS: How would you describe the quintessential Betterment investor?
SM: We have many different customer segments, across, geography, gender, age, etc., but our ideal investor is someone who is investing for the long-term and who wants to get a better net-of-fees return.
CS: What has proven to be the most effective marketing mix for getting the word out about the Betterment advantage?
SM: In terms of focus, we try to work largely in digital channels. So with our customer relationship marketing, we are primarily emailing our customers and pointing them to information on our website and also on our blog which has incredible content on it with very well-researched financial advice. In terms of customer acquisition, we use all the various blogger networks, social media, all of the available digital channels. Digital marketing is lower cost and is also much more data rich so we can learn about what works with our customer base, and it also achieves faster results. We’ve experimented with some traditional marketing channels and it just takes longer to get things to market, and it takes longer to see results from them. Our customer is coming to us online, and they expect to hear from us online, so that’s where we want to be.
Jaclyn Drobny: Do you have a sense of where your prospective clients get their financial information? Is it from traditional newspapers, or are social media platforms more prevalent sources of information?
SM: People Google! That’s probably the first place people will go for information on a product, and they are often looking for third party product reviews. So, the most effective places for conversion for us are places where a third party has evaluated us, favorably, obviously, but in a fair way, comparing us with the competitors and alternatives in the space. It goes back to the transparency of information and that realness and honesty about the best options that are out there. We do work with the press, the New York Times and the Wall Street Journal, and if we get press there it is extremely valuable to us. Also, our relationships with our content affiliates are very valuable to us. It is not a dishonest relationship; our affiliates really believe in what we do and in our mission, so, they wholeheartedly recommend it to their following. The readers of those blogs have a trusted relationship with those affiliates, and they will often follow their advice. That is very powerful.
JD: Describe the shifts you are seeing in the way advisors communicate with their clients.
SM: I think the most basic and obvious shift stems from the fact that the online platforms for many investment managers are pretty far behind other industries from a tech and user experience (UX) perspective. I think that people have come to expect that they can find certain information at their fingertips. When they log into their account and are able to understand the product that they have, their investments, how their money is invested, the returns, the performance, they can access all of their statements online in a very user friendly way. That sort of elegant presentation is important.
I think, traditionally, older people tend to have one-on-one contact with their financial advisor. They get a call from them once or a few times a year, maybe even visit them at their branch. The change that we’re seeing -- not just for financial services, I think that it's true in other places too -- is that people don’t necessarily want to talk to somebody. It takes a lot of energy to actually talk to somebody and have human interaction. So, investors constantly want advice and they do want to talk to somebody but most of the time, and this is the part that we offer, they just want to make sure that everything [in their portfolio] is tracking properly. So we don’t do any paper communication with our customer base. We do everything via email and online, and that is totally satisfactory with our customers; which I think is a big departure from traditional financial services. We don’t have branch offices, but we do have a very robust customer service department, and our customer service is available seven days a week, either by phone, or by email. [Our customers] don’t get routed into a big call center. We respond to all emails within one business day and customers are repeatedly so surprised and delighted that they hear from us so quickly, and that they hear from somebody that is physically at our firm. I’m continually surprised by about how little other investment managers use email to communicate with customers, and the diminished level of responsiveness at other companies, and the comparatively low level of knowledge by their customer service representatives.
CS: Sarah, describe how your company utilizes its blog to communicate with customers, and your content strategy, overall.
SM: Traditional advising communication focuses on market trends and the performance of the fund over the past quarter, that type of thing. Our blog is geared more to helping our customer understand our product and understand the innovations that we are doing. Most customers can't tell you what they are paying in fees on their IRA. But, they should be thinking about that. It's their money that they are paying and those fees compound over time and can add up to over tens of thousands of dollars over 30 years. So, we view our blog as primarily an investor education tool and a way to communicate how transparent our services really are compared to others. Traditional advisors strive for financial education through periodic seminars and one-on-one communication, but we are trying to reach our customers in a similar manner through the articles that we write.
CS: That's really interesting, because coming out of the financial crisis, many people were struck by the cognitive gaps that made investors so prone to buying subprime, even toxic, financial products. Robert J. Shiller from Yale suggested that this information gap demonstrated just how far we still have to go in this country before we have genuine "financial democracy." Catherine, it sounds like Betterment, and its blogging platform, strive to intervene in this area in a pretty compelling way.
Catherine New: Definitely, definitely. That's a word [democratization] that we use a lot internally. It's kind of a funny word for marketing practices, but we do use it a lot internally. Another way we refer to our product is that it's a "hedge fund for the people." It's a way for everyone to get in on sophisticated investing. We want to make sure that investing is not just an exclusive club for super-rich people. And, those are all the values that certainly brought me in the door at this company and what we communicate as part of our value proposition to new customers.
SM: That's absolutely right on. And, I'll tell you, financial education is one of the hardest things to do. I mean, walk out of your office door and try to talk about an IRA with somebody and watch their eyes glaze over. It's not something that people really want to talk about. Yet, it is so critical. It's not like understanding how your car works, which you can get away with not knowing much about. Knowing about money is so much more important, because it allows you to live your life. It allows you to do things like send your kids to college, or to have a secure retirement, or to have a home and a lifestyle that you're comfortable with. So people should really understand how to be smart with their investments and what they are paying for with their investment provider.
CN: In terms of our strategy, it's evolving as we grow as a company. I actually came to Betterment through an interview with our CEO when I was covering personal finance for theHuffington Post, and I really liked Jon alot, and really believed in the mission that he has for the company. As a result of that conversation, I followed him and the company as a reporter, just sort of on the side. Eventually, I became a customer of Betterment's on my own, just to start doing smart moves for my own personal finances. And then all the pieces sort of came together last year, and I came on-board. And, not to be self-aggrandizing about it, but it takes a lot for someone to pull away from the career journalism track, so I really believe in this company, from start to finish. I have no questions about what we are doing. I so full-heartedly believe in it. In my heart, I really am a consumer-oriented reporter. I covered Occupy Wall Street and a lot of the credit scandals that led to Dodd-Frank, etc. So that's just a little background on my story with the company as a preface for talking about the way I think about content strategy. Because I come from journalism, I always think about the reader and the consumer first, what they want to read about, what needs they have that we can meet. I came in with that point of view, and then learned how to collaborate with marketing where they are coming from a much more data-rich, analytics place of, "Here are the numbers. This is the opportunity we want to go after." And, so, it's a sort of dance, back-and-forth, that sort of combines the two vocabularies. All that said, there are at least three big pieces of what we do with content. First, investor education, where we teach people about investing. Second, acquisitions, where we do outreach to new customers with what marketers might call "top of the funnel" stuff designed to get people in the door, and get their curiosity piqued, maybe by talking to them as they reach some kind of inflection point in their own lives. And, third, building brand awareness and familiarity with Betterment, building trust with the brand, building voice with the brand, a kind of association with what kinds of content you can expect when you come to our brand. So, those are sort of the three biggest moving parts. And, on top of that is this really beautiful and intuitive UX that really makes people feel at home. All of those elements are what we try to communicate, as part of our communication.
CS: Catherine, can you say a bit more about how you navigated the transition from traditional business, economics, and personal finance reporting to brand journalism, and, specifically, to your work building brand awareness for a high-tech startup, like Betterment?
CN: There are sort of two parts to that. There's the play-by-play chronology of how it happened, that I briefly just described to you. But, the longer view over my career in journalism gives more details to the story. My first few years as a journalist, I was an inforgraphics editor and reporter for a wire service. There, I was doing mostly data visualizations, maps, and a lot of graphics reporting. So, I had both the daily experience and then I had a pretty good sense of visual journalism. From there, I took a detour and worked for Columbia Business School for a couple of years, during 2008-2010, and that really got me hooked into business and economics. I didn't really plan it, but it was a very well-placed serendipity in my life! So, I was there at the Business School right as the financial crisis was happening, and I had this front row seat, so to speak, and I just got really fired up about economics reporting. At that point, I wanted to get back into the daily reporting flow, and went to the Huffington Post and learned, "Here's how you move product!", basically. So, all those pieces rolled up into getting me here. The past makes total sense now, in hindsight. And, actually, the transition has been incredible. I really love being in content marketing and brand journalism. It's super exciting. So, for us, we're all about transparency and constatantly striving to pull back the curtain on how, and why, we do things, how our engineers are writing code, really every aspect of what we do. I think that's really a new thing for companies. So, that's where that journalism mentality really dovetails neatly with where I am now. The journalism and technology aspects have come together in a really exciting way. I think the biggest thing for young journalists to have under their belt, as they seek to make a similar transition, is fluency with analytics, and being able to have several vocabularies. So, for instance, I have my marketing vocabulary. I have my journalism vocabulary. And, I know where one ends, and the other begins. It's important that along the way, you help others to be able to discern between the two, while simultaneously being comfortable actually having both vocabularies. That's new. In the past, I think journalists would say, "No, I don't want to have the marketing vocabulary. It's impure." And, that conservative approach to it is just not going to work in the future!
CS: That's really the kind of openness we want our students to adopt, as they pass through our Media, Economics & Entrepreneurship program here at USC Annenberg. So, where you are at seems to be where the opportunities will be, going forward.
CN: It makes me hopeful. I mean, you talk to any working journalist in my cohort, which is to say someone who graduated from J-School in the past decade -- now, for me, it's been 13 years -- and we've been through alot. Our industry has just imploded on itself. The newspaper business is very distressing to watch. So, five years ago, the big question was, "Where are the new opportunities going to be?" And, I think now the answers to that are taking some form. Initially, the response was to run and say, "Look at that shiny ball!" Then run over there and say, "Look at that shiny ball!" And, so, we are growing here at Betterment, and I just posted a listing on the Columbia J-School listserv for a new Investment Content Writer position we are looking to fill, and even just a couple of years ago I would have been uncomfortable posting a position for a brand journalist in that forum. The response would have been, "What are you trying to do here? This is a marketing job, not a journalism job. Why are you fishing to fill this at a journalism school?" But, today, brand journalists have a growing legitimacy about what we're doing, because of the rigor that we are applying to the work that we do.
CS: Sarah, there's a deafening level of noise coming from financial media. How does Betterment help investors cut through the static and locate the signal?
SM: The worst thing someone can do is get caught up in the clutter from the financial media. We've built our product so that our customers don't have to get involved with their investments on a daily basis. That allows them to devote their time to what they are good at and what they are passionate about, not this financial services stuff.
CS: Many critics anticipate that automated financial advisors will struggle mightily with client communication the next time we have a serious financial crisis. What's your feeling about that?
SM: I think that's why we try to educate our customers so heavily on the "set and forget," passive, approach to investing. We make a really concerted effort to get customers to focus on the long-term. And, we do make a consistent effort to reach out to customers on a one-on-one basis. I send email out to clients automatically everyday asking customers how they are doing, and customers reply with questions, or concerns, they may have about their account, and we individually reply to every single one of them, within a day. So, there is a relationship being built there, and we have probably a much stronger, more informed, responsive and solution-driven customer service team than most of these large financial providers. We have a very personal and compassionate relationship with our customers at Betterment.
CS: Commentators, particularly those from the traditional registered investment advisor (RIA) community, frequently describe providers in your industry as "robo-advisors," which has such a pejorative ring to it. How do you and your colleagues at Betterment regard this nomenclature?
SM: I agree with your assessment of that: We are not a fan of it. It does come off as negative and I think it's an inaccurate characterization. As I mentioned before, I think that we actually have a much more personal relationship with our customer base than a lot of the bigger financial institutions. I think that we are quite responsive to our customers, as well. And, what we end up automating is actaually stuff that should be automated. We are taking the emotions out of investing.
CS: So, do you make the virtues of automation explicit in your marketing appeals?
SM: We do. We do say that. That being said, I do think there is a place for traditional financial advisors in terms of estate planning, trusts, complicated tax issues, etc. But, what we are trying to do is automate the piece that can be automated.
JD: Do Millennials see the value in paying for financial advisors? How might software-based advising services appeal to the specific attitudes and expectations of Millennials?
SM: I think that a lot of people do not see the value in paying for financial advisors. I think that is why the MER or the fee has been kind of baked into your portfolio returns for so many years. Our fee happens to be one of lowest in the industry; its 0.15-0.25% for most accounts. It is such a low fee for the amount of value that we provide and we are able to do that because of how much automation we do, and because of leveraging technology to provide really sophisticated investment value at scale. I think that people do really see the value of that, particularly when you put it up against the much higher fees of 1-2% of traditional financial advisors.
JD: How has technology affected the value proposition of financial services for young customers? Does Betterment’s accessibility and efficiency impact the way Millennials prioritize investing?
SM: That’s a good question; I don’t know that it has, I don’t know that it has yet. We’re hoping with our mission we will be able to get customers to prioritize their investing, just in the sense of saving earlier, saving more frequently, whether for retirement, or for other goals that they have. With Betterment you can set up specific goals for things you are saving for in your life, so for example you could be saving for a house, you could be saving for your kids education, you could be saving for retirement, you could be saving for your five year anniversary and you have individual goals set up there. I think that makes our product more accessible, investing more accessible, and a more tangible and relevant experience. You can set up bi-weekly auto deposits against all of those goals for as little as $10 or $25 and see how the money accumulates.
Part of our mission is to simplify and help explain to people the importance of contributing to an IRA, contributing to a Roth IRA, and consolidating your IRA and Roth IRA in a lower fee account; the earlier you do that the better. If you wait to long you can never get those years back of saving and investing in the market.
I think that we are changing the way that customers are seeing investments because we are making it easier to do and we’re making it simpler, but we’re doing it in a very sophisticated way as well, with all the work that we’re doing kind of behind the scenes. If you talk to anybody who is actually in asset management professionally they would say that this is the way that a retail investor, with less than $10 million to invest, should invest. They’re not going to get benefit from actively managed funds, or stock picking, they’re going to benefit from passively managed investments and low cost investing. Our hope is that we are going to change the way people prioritize investing, that is definitely our mission.
JD: Sarah, are referrals a big source of Betterment’s customer acquisition?
SM: Yes, definitely. If you think about it, where you invest your money is an extremely difficult and important decision and it is not something that you take lightly. It’s not like buying a pair of shoes at Nordstrom. You’re not going to do it over and over again, and you only make changes a few times. So, there is often a go-to person -- whether that is your father, your brother, or your girlfriend who works in finance -- that you seek out and ask, "Hey, what should I be doing with my money?” So, those referrals do mean a lot, particularly if that person is a customer that is already invested in Betterment. When I have referred my own family members, or referred friends of mine, once they start talking about the product and they go online and visit the product, the product really sells itself. It makes so much sense. You are not going to outperform the stock market by stock picking. You should be in low cost funds, because the fees compound over time, and that’s money in your pocket. The UX is so pleasant and delightful compared to any other UX out there for online investment management, or offline investment management, that the product kind of sells itself.
CS: Finally, Catherine, do you target any particular segments with your content, including content specifically geared to the unique needs and attributes of Millennials?
CN: In terms of reaching them through online marketing, I don't directly deal with that as much as Sarah and our marketing folks. In terms of story topics and themes, we put emphasis into that age group, mostly, because, as digital natives who were reared on Apple computers, we all speak the same language. I mean, the vast majority of the age group in our office is between 25- and 40-years-old. Let me give you a couple of concrete examples of things we've had a lot of success with. We recently did a content-sharing piece on student loans that looked at the trade-offs in the repayment process: Should you accelerate the loan payments, or should you reduce the monthly payment and invest the balance? Should you pay off all your loans before you start investing, or should you start investing while you are paying off your student loan? So, that was a story that was very much targeted to a generation for whom the question will be how much their loan burden will be, not whether they will have one. Another story we did related to how, if you go deep into the personal finance blogosphere, there's a big infatuation with people who retire early. And, when I say "early," I mean like between 30 and 35. These are people who basically spent the first decade of their working lives squirreling away money whenever possible and being extremely proactive investors, and by the time they are 35 have $1 million. A lot of them blog about, "Here's How I Did It!" So, we interviewed a couple who did that and ran it with the headline,"This Couple Retired in Their 30s. Could You?" That story has done very, very well for us. It's a real life story about how people are managing their money. The other group we are really interested in reaching are not the Millennials themselves, but the parents of Millennials. So, one of the storylines that I'm thinking of pursuing is about how parents and their children talk about money and the historical lines of financial communication between parent and child. And, since so many of our customers are in their mid-30s, how about reversing the conversation and asking, "How are the kids recommending better investing options to their retirement-aged parents?" Those are just a couple of the ways that we have talked to that particular deomographic. And just to underscore the point about transparency, we realize that members of that generation still feel burned by the credit crisis, and feel like no one is really watching out for their best interest. I mean, try reading a statement from a large financial company on any of their financial products and you have no idea what they are talking about. Everything is filled with legalese and small-print disclosure. So, we really hope to roll out more content around what we find when we look under the hood of other providers. We've been really good about being transparent about our own products, and now we want to take that approach when we look at other investments and help people realize that the vegetable dish they thought they were eating is actually filled with high-fructose corn syrup!
