Betterment for Advisors Takes a Unique Approach to Active Investments

Robo investment advisors have threatened to make human advisors obsolete and the rise in passive investments may lead to less demand for active management. However, a recent partnership between Betterment and Dimensional Fund Advisors (DFA) indicates that there may still be a need for certain types of traditional investment services.

As of October 15, advisors vetted by Dimensional may invest in DFA mutual funds and model portfolios through the Betterment for Advisors platform.

Established in 2010, New York-based Betterment’s founders believed that algorithms can democratize investment advice. The company is now the leading independent “robo-advisors,” a select group of companies that promote passive management, which threatens to make human advisors obsolete. Better has $20 billion of assets under management.

Austin-headquartered Dimensional Fund Advisors built its almost $600 billion business mostly by establishing good working relationships with advisors. The firm’s funds are only accessible through advisors and other wealth management professionals.

Bryce Skaff, head of Dimensional’s Global Client Group, says:

“Advisors owe it to their clients to do lots of due diligence, be intellectually curious, and understand the strategies in which they have client assets invested.” 

Thousands of investment professionals are familiar with DFA funds, Skaff reveals.

DFA was founded in the early 1980s by a University of Chicago economist and Nobel Prize winner. The company’s investment strategy is developed according to Fama’s research which reveals that markets are efficient, however, certain factors of stocks can earn market-beating returns. 

For instance, smaller market values and lower valuations can generate higher profitability. DFA uses advanced trading methods without fees. The total expense ratios for DFA funds are less than 90% of their respective Morningstar category peers.

Over the last twenty years, 85% of Dimensional funds outperformed their benchmarks. DFA’s business has expanded without traditional advertising, however, one of the company’s main products, mutual funds, have been losing assets to exchange-traded-funds (ETFs).

Skaff notes:

“I think of it as the evolution of both active and passive. You take the good attributes of passive” which include transparency, tax efficiency, and process-driven investing.

He adds that investors can also take the best of active to increase returns in what’s referred to as “systematic alpha.”

Robo-advisors are currently using the best technology to automate certain aspects of financial advice while acknowledging that human advisors may still provide valuable input.

In 2014, Betterment introduced Betterment for Advisors after learning that advisors used the platform to invest on behalf of their clients. The idea behind the service is to use technology to simplify and automate certain parts of the investment process. 

This approach allows advisors to spend more time on activities that robots cannot perform, according to Jon Mauney, head of product at Betterment for Advisors, which has over 3,000 advisors at 500 different companies. 

Prior to the DFA deal, advisors using Betterment had several options, including the company’s flagship portfolio and other portfolios created by Blackrock, Goldman Sachs, and Vanguard.

Betterment and DFA began looking at a potential partnership due to several requests from clients. Betterment is tasked with developing the capability to trade individual mutual funds. 

Brad Felix, who launched no-minimum, fee-only financial advisory firm RhineVest using Betterment for Advisors, says:

“We’ve been wanting to use Dimensional funds on the Betterment platform since the beginning. I don’t think active managers earn their fees in a lot of instances, but I also recognize there are inefficiencies in the market that you can capture.”

Felix was placed on the list of approved advisors after his company was acquired by Truepoint Wealth Counsel. Following Betterment’s beta release with DFA, he was able to give his clients, most with less than $1 million in assets, access to DFA funds. 

He now has 87 DFA funds and 10 model portfolios to choose from. The different packages allow you to invest only $10, without having to pay trading fees. That pricing is “a huge advantage for advisors working with smaller accounts,” Felix notes.

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