Robo-advisors find new calling in SMB retirement sector

The saga of robo-advising dates back just a decade ago, but its implementation has become a staple in wealth management’s passive and active supervision. While many have entered the investment market through the likes of Robinhood and Public.com, governing those investments into one’s twilight years is a different beast.

Human wealth managers have been using automated portfolio allocation software since the early 2000s. But until 2008, they were the only ones who could buy the technology, so clients had to employ a financial advisor to benefit from the innovation.

The service model received a boost during the pandemic, with independent robo-advisors Wealthfront and Betterment both reporting double-digital increases in account openings through the year. Over 3.5 million US adults will use robo-advisors this year, and that number is expected to increase to five million by 2025, according to eMarketer.

“Robo-advisors, well adapted to operating digitally, were able to cater to previously underserved customers like younger investors who are in the early stages of wealth accumulation,” eMarketer senior forecasting director at Insider Intelligence Shelleen Shum said.

“Robo-advisors are also attractive because they are often quicker to adjust investment holdings in real time with the use of algorithms,” she said.

Versus the retail sector

Although a number of robo-advisement platforms also offer additional financial services, like checking and savings accounts, Betterment CEO Sarah Kirshbaum Levy believes these service providers have a better chance differentiating themselves through their investment capabilities.

“What I concluded was that our superpower was really about the investing platform, and less so about some of the, what I’ll call neo-banking capabilities,” Levy said at a recent CB Insights event, Future of Fintech.

“I felt like we’re emerging for a lot of players and while we could do a good job there I didn’t feel like there was as clear a path to differentiation,” she said.

This is especially noteworthy considering Levy took over as Betterment CEO in late 2020, just before the GameStop saga took place, drawing attention to these new investing platforms. Retail investment platforms has been pulling in a huge number everyday people who may have otherwise turned to robo-advisors.

“I was really pleasantly surprised to find what I felt was the diamond in the rough in the business. We call it our B2B business, but it’s our 401k, small- and medium-sized business solution. I’m incredibly excited about the growth potential there,” Levy said.

This is an interesting angle, not only because it avoids the crowded battleground of retail investing, but because it targets the same people when they aren’t on their phones: it targets them at work.

While the government scurries to catch up with the volatile movement currently being seen in the individual retail investment marketplaces, we are already beginning to see legislation that urges SMBs to offer retirement services to workers.

“There are six million SMBs in this country, and 90% of them do not currently offer retirement solutions for their employees,” Levy said.

“But there’s a ton of government regulation, both at the state level and at the federal level, being contemplated in some instances and actually being rolled out in other instances, compelling small businesses to offer retirement solutions to their employees.”


The most notable of this legislation push has been the SECURE Act (Setting Every Community Up for Retirement Enhancement), which aims to provide workers with more retirement options and incentivizes employers for offering these benefits, and was enacted in December 2019.

Now an encore to SECURE, which raised the required minimum distributions (RMD) age from 70.5 to 72, is being pushed through congress. This sequel act, titled the “Securing a Strong Retirement Act,” or “SECURE 2.0”, seeks to raise the RMD to 73 in 2022, 74 in 2029 and 75 in 2032.

This means that people will be granted three more years of tax-deferred growth in their retirement savings account, which could make a meaningful difference in many Americans retirement savings at the end of their employment period.

More importantly, perhaps, is the fact that these two bills have now come under two presidencies and both been largely bipartisan, giving retirement services a public attention boost that very well may attract new investment users.

In fact, while they may not be immediately thinking about retirement, Millennials are twice as likely as Baby Boomers to think about using a robo-advisor. This means that a push by robo-advisors to onboard this age bracket now, could yield long term results down the line.

The future of robo-advisors

Betterment recently raised a $160 million Series F, bringing its total funding raised to $435 million and granting it unicorn status with a valuation of $1.3 billion. Levy says most of that capital will be put towards initiative in that 401k model, and expanding to provide white label services to advisors who are looking to manage their own customers portfolios.

“When we think about our business, the primary thrust of the raise was really about growing these businesses that are kind of earlier in their journey,” Levy said, “because our core retail business on a direct basis has now achieved profitability. So while we will continue to innovate there, that is now self-funding.”

It will be interesting to see how younger generations adopt retirement services through workplace retirement benefits that are operated by robo-advisors.

I see the technology-driven model being very useful as machine learning continues to advance, and SMBs look to reap the benefits of ongoing legislative initiatives.

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