Betterment was born out of the ashes of the Great Financial Crisis. The company launched in 2010 as the embers of a brutal recession still smoldered in the rear-view mirror. Over the next decade the digital advisor grew assets under management to $22 billion, added features, and rode the wave of a decade-long bull market on a model built on passive investing through ETFs, tax-loss harvesting, and a hands-off approach with its customers. Then the coronavirus pandemic shocked global economies and sent markets into a tailspin, wiping trillions of dollars in value and record gains off the board.
While online brokerages like Fidelity and TD Ameritrade have seen heavy trading activity on the part of their clients over the past several weeks, Betterment’s customers have been resolute, and have added money into their accounts, by and large. Here are recent stats provided by the company:
- Since February 24, 2019, there was less than a 2% increase in the share of Betterment customers withdrawing funds across all millennial, Gen Z, and Baby Boomer clients
- 26% more customers made ad hoc deposits than withdrawals
- 37% more millennial customers made ad hoc deposits than withdrawals
The few who are making the most withdrawals, according to Dan Egan, Betterment’s Managing Director of Behavioral Finance and Investing, are younger, mostly male investors who are new to investing and the platform. “They are the ones who check their accounts more frequently, and they fit a profile of a young man trying to outrace the market.” Egan says another small percentage of Betterment’s younger customers have been making some withdrawals from their banking accounts to either handle bills or loans, or to create a cash cushion in the face of a recession.
While there have been a few baby bear markets and spouts of volatility over the past decade, this has arguably been the most intense psychological test of investor behavior for Betterment and other so-called robo-advisors (Betterment and other digital advice platforms don’t like to be called that anymore). They were built on the back of great technology, cheap and efficient ETFs, and an understanding of investor and market behaviors. Jon Stein, co-founder and CEO of Betterment, is a self-admitted disciple of John Bogle, the founder of Vanguard and father of passive index investing. The principles of dollar cost averaging, building a balanced portfolio that aligns with goals and life stages, and avoiding making emotional decisions, are at the core of Betterment’s digital platform.
Betterment, and platforms like Personal Capital and Wealthfront, have combined their understanding of investor behavior with technology to try to keep us from harming ourselves. If a Betterment customer over-allocates to a particular asset class or investment that veers from their financial plan, they’ll get a digital nudge or alert to make them reconsider, as consequences may include a long-term impact on their retirement goals or tax liabilities.
For Betterment’s newer and younger customers who may have just begun investing in the past year or two and have been whiplashed by the downturn, the company has started showing them charts of their portfolio’s performance going back two years to provide more perspective. “Changing that context is helping people be more comfortable taking on risk because they can see the long term rather than just be told about it,” says Egan.
CARES Act Awareness
Betterment has also noticed that some customers that are in or near retirement have been very proactive about changes to their plans brought on by the CARES Act, particularly as they relate to defined contribution plans. Given the removal of tax penalties on 401(k) account withdrawals of up to $100,000, some customers have been proactively reaching out to Betterment and its financial planners for advice on whether it makes sense to do that or take their regular required minimum distribution. “The surprise for me has been how quickly our client base has become aware of those changes to law, and have been asking us for ways on how to implement that within our system,” Egan said.