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Financial Advisors

How to Use Data as a Financial Advisor and Improve Outcomes

We have embraced data, helping us to make decisions that drive product development and produce meaningful results.

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: January 28, 2015

Dedicate resources, don’t rely on convenience, ask the right questions, and put the data to work for your customers.

Betterment’s mission is to help people become smarter investors by using smarter technology. To do that, we have embraced data, helping us to make decisions that drive product development and produce meaningful results.

One way we help investors is by pursuing behavior gap zero—that is, closing the gap between what an investor should take home and what he does take home.

Our product feature, Tax Impact Preview, is already showing to be an effective tool in this pursuit. Based on initial data, customers who used the tool, which shows the tax cost for the sale of shares, are 62% less likely to change their portfolio allocation when the cost was greater than $5. For us, this is a sign that we’re measurably closing the gap through better design.

Some financial advisors calculate tax impacts for their clients before transactions, because this information is essential in assessing the cost of a trade. We are the only smart investing service to build this into an automatically available feature and to measure the effect it has on individual investors.

If you want to bring a more data-driven approach to your work as a financial advisor, consider implementing some of the tools and processes that we use at Betterment (or learn more about Betterment for Advisors).

financial advisor data

1. Create your own in-house data team.

Last year, our engineering leadership approached me with a proposal to form an in-house data team. For a growing company, that’s a lot of resources to go into one standalone team.

But they convinced me that it would create the tightest possible feedback loop between what we could do for our customers and our technology. Traditionally, business intelligence tooling has been something that comes at a great upfront cost to an organization (it can reach into the millions of dollars). But I entrusted them to create a team in the most pragmatic way possible, and the result is our dedicated data group at Betterment called Polaris. (You can read more about Polaris’ work here and here.)

Today, the team maintains a robust data source and analytics system for the company, allowing our engineers, product managers, and investment team to test hypotheses and iterate quickly.

2. Don’t rely on found data.

Too many companies just try to mine the data that they already have: data that is a byproduct of other activities. This might be termed ‘found data.’

For example, that could be data from server logs about when customers log in. The problem with found data is that too often its very convenience is what drives the types of questions that your company asks and answers.

However, a better way to think about data is to start with the questions, not the data. Good analyses start with an important question and consider whether there is evidence for a conclusion.

Searching the most convenient data for insights offers many tempting opportunities to see interesting or unanticipated patterns, but these are not as likely to hold up in the future.

3. Define the questions and generate the data you want to analyze.

So, now you know you should start with questions, rather than found data. What kinds of questions do you want to answer?

As we’re building a feature, we ask ourselves: What is worth measuring and tracking when the customer interacts with this? What kind of behavior do we want to know more about? If we do X, will we get Y? With every product and improvement we add to our service, we create a way to track and record actionable data.

4. Improve your customers’ outcomes.

Using the robust measuring analytics and data collection system set up by our in-house team, we can see where customers are starting to behave in ways that could hurt their chances of reaching their financial goals.

Let’s return to our new Tax Impact Preview feature and how the process worked.

We started with a hypothesis: Customers would be less likely to make an allocation change if they saw in advance the actual tax hit they would incur with short-term capital gains. Next, we created a demo and user-tested it. We incorporated feedback and then we built it, complete with data-tracking features so that we could measure results in the field.

After three weeks, our data showed that customers who considered making an allocation change—but who used the tool and saw that their estimated taxes would be greater than $5—were 62% less likely to follow through on the change. Statistically speaking, that is a huge improvement in behavior, and we’re proud that we’re able to provide a smart tool that helps customers make smarter decisions. It’s just one example of how we’re implementing data into our work as a financial advisor.

There are many ways to use data as a financial advisor—this is simply one example. But the guidelines are the same: Dedicate resources, don’t rely on convenience, ask the right questions, and put the data to work for your customers.

More from Betterment:

A version of this article originally appeared in Investment News.

Betterment is the largest, fastest-growing automated investing service, helping people to better manage, protect, and grow their wealth through smarter technology. The service offers a globally diversified portfolio of ETFs, designed to help provide you with the best possible expected returns for retirement planning, building wealth, and other savings goals. Betterment is a CNBC Disruptor 50 and Webby award winner and has been featured in the New York Times, Forbes, and the Wall Street Journal. Betterment helps people to achieve a smarter financial future with minimal effort and at a fraction of the cost of traditional financial services. Learn more here.

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