Betterment's hunt for assets turns to client bank accounts

Betterment’s latest platform upgrade aims to solve a curious problem for many Americans — having too much cash in checking accounts.

The leading independent robo advisor introduced a new tool to its more than 400,000 retail clients that can monitor a client’s linked checking account and steer excess funds into a low-risk ETF portfolio generating returns of about 2%, according to the firm. The tool employs a cash flow analysis algorithm that scans linked accounts daily to transfer funds identified as excess.

“The opportunity cost is huge" for clients who fail to generate returns off their savings, says Mike Reust, Betterment’s chief technology officer. “We’re not seeing a lot of people taking action on their own.”

The algorithm will also return funds to cash automatically if a client's checking account balance dips below approximately one month’s worth of expenses, which is why Betterment refers to it as a "two-way sweep tool."

“In effect, we’re analyzing transactional behavior and telling clients when they have too much money,” Reust says.

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Called Smart Saver, the low-risk ETF portfolio is comprised of U.S. Treasury and high-grade corporate bonds, the firm says. The two-way sweep feature will be introduced in stages and be available to all clients in January.

Betterment charges 25 basis points for the Smart Saver portfolio, which is invested in a mix of 80% treasuries and 20% NEAR corporate bonds, both BlackRock products, according to a spokeswoman.

Clients can customize how much cash to keep in the checking account in addition to expected expenses. Betterment will also notify the client if their balance drops below a certain range, and initiate a withdrawal from Smart Saver into their linked checking account automatically to avoid overdrafts, says a spokeswoman.

The majority of Americans under the age of 35 are choosing to keep cash on hand, according to a 2018 Gallup study. That could be because many were affected by the last recession, the study suggests. It found that only 37% of adults aged 18 to 35 invest in the stock market in 2018 compared to 52% of people in that age range in 2007.

Betterment’s average client age is 37 and its average account balance stands at about $40,000, according to a firm spokeswoman.

Americans also maintained a record-high $3,673 on average in checking accounts across all financial institutions including banks, thrifts and credit unions, according to a 2018 report by Moebs Services, an economic-research firm. Checking account funds increased in 24 of the past 30 quarters, according to the report.

“The earning potential of investing in a low-risk investment fund versus holding onto cash should be a no-brainer, but we also understand customers want the comfort of having extra cash to pay for expenses or unexpected bills,” Betterment CEO Jon Stein says in a statement.

Betterment says 30,000 of its 400,000 retail customers have $20,000 or more in checking accounts with many yielding as low as 10 basis points.

However, clients may be reluctant to hand over the keys to their cash stashes. “People won’t go from zero to automatically depositing and withdrawing in and out of checking accounts overnight,” Reust says, adding that the ongoing roll out will demonstrate the tools’ usefulness and reliability to client to build their trust in the tool.

Another concern is that even a low-risk ETF is vulnerable to the whims of the market. How will clients feel about the firm removing funds from a FDIC insured account to a money market account — especially in a downturn?

“It’s true it’s a slight different risk profile,” Reust says. “But, these portfolios are extremely low risk and are in line with the level of risk we believe is appropriate.”

The new offering will also help Betterment steer client funds from third-party financial institutions onto the firm’s platform, experts say. “It's two-way, so if your checking account is low, we'll withdraw money from Betterment into your checking account,” Reust says. “This is not a gimmick that saves money based on random events or spare change roundups.”