Betterment, a digital wealth manager popular among millennials, has picked Philadelphia for the first office outside its New York home base.

The company, which manages $15 billion in assets, plans to open a Philadelphia office as soon as February, according to founder Jon Stein. Betterment is looking for office space in Center City, with the intent of adding 20 employees in its computer and engineering departments by the end of 2019.

Besides Philly’s popularity with millennials, the so-called robo-adviser -- which gives digital financial advice based on set questions and algorithms -- wanted to diversify geographically to attract talent and augment its team in a city with a lower cost of living.

By using automated computer algorithms to mange assets, robo-advisers lower the cost of investing, making it popular among younger investors. For those who still use a human broker or registered investment adviser, online-only platforms such as Betterment have been growing as an alternative. Betterment competes with others such as Wealthfront and local investment giant Vanguard’s hybrid online-plus-adviser offering.

Betterment’s announcement comes days after Philadelphia-based NBCUniversal became the largest shareholder in Acorns, another automated online investment manager popular among young adults. Acorn’s latest round of fund-raising also made it the most valuable robo-adviser start-up, according to the Wall Street Journal.

Philly appealed to current Betterment employees looking to move to a smaller city while staying with the company, Stein said.

Stein said he was a lifelong fan of Vanguard founder John “Jack” Bogle, who died this month at age 89.

Stein recently reflected on Bogle’s legacy and the impact he had not only on Betterment, but on the entire financial services industry. Bogle, who stressed the importance of low fees on long-term investments, was “a huge influence” on Stein, and he said they kept in close touch since Stein founded Betterment in 2008.

“He said he appreciated everything that we do for clients, and that Vanguard was watching us closely—that they ‘could learn a lot from us'—and I was eager for his feedback.

“The thing that really got him was the international exposure we had in the portfolio. ‘The S&P 500 gives you plenty of exposure to international,' he said. 'Most of these companies are multinational, they all have people or sales overseas. Why do you need more than that?’

"I said he had a point, but that most academics agree that global diversification leads to better outcomes, and we agreed to disagree’,” Stein wrote on his website.

Betterment founder Jon Stein. The robo-adviser is planning to open a Philly office in 2019.
Betterment
Betterment founder Jon Stein. The robo-adviser is planning to open a Philly office in 2019.

Betterment is now ripe to expand. With a total workforce of 240, “we reached a point where we needed to move more significantly into a second location, from New York. It has to be accessible to us, nearby, easy to get there, easy to expand, in financial services, where supervision and regulatory are important concepts," Stein said.

"Philly is one of the most obvious places, aside from closeness, great schools, educated workforce, people we can hire to work in engineering, customer service, cost of living is cheaper.”

But why is a robo-adviser opening another physical office? Why not work remotely?

“People like coming to work, to have a sense of place, see their colleagues and share a mission. Technology crosses a lot of those gaps with remote workforce, but it’s helpful to have a place where teams get meals together, talk to each other. We looked everywhere: Denver, Austin, Portland, Seattle, San Francisco, and L.A., and when we thought about all the advantages. But for low cost and highly educated talent, Philly is right here," Stein said.

As of the end of 2018, Betterment oversaw $15 billion, and about 450,000 individual accounts. It added 100,000 customers just last year.

As for the robo-adviser landscape, “some of our thinking in 2019 is continuing our push into managing everyday cash. We launched Smart Saver, a high-yield money market fund. It’s been very successful, and adds the ability to do cash-analysis on your checking account,” Stein said.

Betterment also launched a tool called “two-way sweep" that automatically balances funds between checking accounts and Betterment’s Smart Saver, which is roughly 80 percent Treasuries and 20 percent high-grade corporate bonds. Betterment for Advisors - a service that includes a human adviser -- is also growing, he said.

The service helps "manage portfolios, do tax management, build personalized guidance into their workflow. They can grow the practice faster with less effort,” Stein said. Competitors include larger firms such as Charles Schwab and Envestnet, now owned by Fidelity. Fees are the same as for retail investors, at 0.25 percent of assets annually.

The company is keen on being transparent. “The JPMorgans of the world have an interest keeping bank and account data to themselves; our position is, that data belongs to you, the owner of the assets, the accounts. Ultimately, you can’t switch doctors if you didn’t have access to your health-care records. You can’t switch financial advisers if you don’t have access to our financial history. When customers switch to Betterment, some institutions block access to data, and say ‘you can’t link your bank account’ or the history of stock transactions, to transfer positions. We think everyone should have transparency.”