Amazon’s insurmountable rise is one that every new startup seeks to replicate.
The ecommerce juggernaut, which has humble beginnings in the book business, is transforming the retail business.
Betterment, the largest independent roboadviser in the world, with $US9 billion under management and 270,000 customers, thinks it might be able to do the same in finance.
Rather than using human managers to build portfolios, roboadvisers like Betterment use algorithms to determine where to invest. Incumbent players in financial services have been rolling out their own roboadvisers recently, and many people view that as an existential threat to roboadvice startups.
“[W]e think the incumbents are best positioned to win market share, and we see the fact that ~70% of the companies we interviewed either just launched or are about to launch such offering as a step in such direction,” Morgan Stanley said in a recent note.
But Stein views the situation through a different lens. In a recent interview, Business Insider asked Stein to explain how his firm can survive and lead the way against such stark competition.
“For the same reason why we often see those few innovators break out,” he said.
“You could also ask ‘Why did Amazon break out and become the dominant online retailer?’ — some would say dominant retailer period,” Stein added.
According to Stein, it’s because Amazon had one pure focus. It didn’t have to worry about conflicts within the organisation of those interested in preserving with the old way and those looking to innovate. This is how Betterment is set up, according to Stein. It’s not how legacy firms are set up.
We later asked Betterment to clarify the comments on Amazon. Stein thinks his firm “could become the Amazon of financial services,” according to an email from Betterment spokeswoman Arielle Sobel.
Legacy firms such as Vanguard, Charles Schwab, and Morgan Stanley, Stein says, are trying to incorporate two infrastructure that are incompatible with one another. As such, they will be unable to provide the financial advice people will want in the future. Here’s Stein on Morgan Stanley:
“[Morgan Stanley] is having a really hard time shifting to this new paradigm of pure customer alignment because that’s not their model. Their model is brokerage alignment. It is a brokerage model. They are there to sell you a product, whatever product makes them the most money. That tends to be the one that they favour.
Morgan Stanley declined to comment on Stein’s comments. The Wall Street giant has taken many notable steps to digitize its wealth-management offerings. As Business Insider’s Matt Turner reported, the bank is planning to roll out a goals-based roboadviser option for the children of existing wealthy clients and for Morgan Stanley stock-plan participants.
Here are the relevant passages from the interview:
Chaparro: Incumbents have had their own robo offerings for years, and they have their big brand and infrastructure to back them up. What makes you so certain Betterment can survive up against such competition?
Stein: For the same reason why we often see those few innovators break out.
You could also ask “Why did Amazon break out and become the dominant online retailer?” — some would say dominant retailer period. And why wasn’t it Barnes and Nobles, Target, or Walmart, or anybody else? It is because Amazon has a specific focus. They didn’t have conflicts with a set of existing infrastructure and systems and people who were built around doing things the old way.
Morgan Stanley, for instance, is a firm set up to serve clients the old way. As a result, they are having a really hard time shifting to this new paradigm of pure customer alignment because that’s not their model. Their model is brokerage alignment. It is a brokerage model. They are there to sell you a product, whatever product makes them the most money. That tends to be the one that they favour.
The DOL’s fiduciary rule, which is now partially enacted, tries to eliminate those conflicts of interest under retirement accounts. We think every account should have an adviser that is aligned with customer interest. We think that is the future of the industry.