A lot of people don't invest because it's seemingly too complicated.
So many decisions to make, so much jargon, who to trust?
Jon Stein is the founder and CEO of Betterment which he describes as a mix between Apple and Vanguard. It's extremely easy to design a fine portfolio.
By removing much of the noise that distracts investors, Betterment has developed a 95% solution for 95% of investors. Plus, the firm is rolling out some functionality for investors who want a little more flexibility.
Jon's growing an online asset manager from the ground up. He shared with me that Betterment has almost 10,000 customers already with mid-$20M under management (AUM), with many of them using the goals and planning tools the site has developed.
Jon joins us for this week's episode of Tradestreaming Radio.
Announcer: You're listening to Tradestreaming Radio with your Host, Zack Miller. Expand your mind, become a better investor with tools, tips and technology from the smartest investors on the planet.Zack: And welcome to Tradestreaming Radio. I'm your Host, Zack Miller, and this is the place where smart people come to learn directly from experts. We're bundling up tools, tips and technologies to help you make better, smarter investment decisions. This is Tradestreaming Radio. Thank you again for joining us. Today's guest is Jon Stein. He's the CEO and founder of Betterment. You might have read about it. It is what he calls a 95 percent solution for 95 percent of the people. Those are his words. It's actually pretty apt. It also is sort of like a next generation of targeted funds. It simplified a lot of the investment decision process, something we've talked a lot about here, so basically you come into the system, you dial in exactly sort of your time horizon and you dial in your risk tolerance, so you get some type of basic allocation to use ATF funds in the background. That's really all you need to know, and they sort of take care of everything else, so it's really simplified on the front end, the user interface of having to make an investment decision, and on the back end, provides some sound modern portfolio theory in terms of managing their portfolios.
Interesting conversation, it's great to hear Jon's experience within banking and growing Betterment as well. Thank you, Jon, for joining us on the program. Thank you all for listening. We have an event coming up next week, Four Days to a Better Job, the 2012 financial career boot camp. Listeners of this podcast will get a 15 percent discount, so definitely come back to the website. I'll provide you with a link there. We have eight different experts talking about, really hacking ways to find a new job or break into the industry. Everybody from a career counselor at Goldman Sachs, to a financial professor that sent thousands of people from a lesser known school to work on Wall Street. It's going to be a great event, not very expensive, definitely come by and check that out. We'd love to have you participate and definitely get the 15 percent discount. Come back to Tradestreaming.com.
You'll also find archives of our program on the website, Tradestreaming.com. You can also find this podcast and our archives on iTunes, so feel free to check us out there. As always ,we want to hear from you. Send us feedback. My personal email address is all over the place. I respond to everybody, so please, I'm grateful for your listening and very grateful for your feedback as well. I want to make this very useful for you. I'll turn it over to Jon at Betterment and we'll check you again soon.
Jon: Yeah, I'm Jon Stein. I'm the founder and CEO of Betterment.com and Betterment is a better way to invest. We sometimes describe ourselves as Apple meets Vanguard. It's a really slick, intuitive user interface on a smart, efficient underlying investment.
Zack: Can you take me back to sort of the genesis of the company? How did it start, what problems were you trying to solve?
Jon: Yeah, my background was in building products for banks. I've worked for many years. I got my CSA and went to business school and all that stuff too, but my early career was in building [deposit] products and so on, for banks, and I just saw a lot of problems in the financial services industry with banks and with investment managers, and had a lot of friends coming to me as I was getting my CSA, and asking for investment advice, what should I do with my money. See no good answers and seeing that the banks were really slow to change and slow to adapt to new technologies, I saw a huge opportunity to go out and actually build this kind of next generation smart investment management tool. Really, to re-invent investing from the perspective of what we thought it should be, all the best advice that we would give to our friends [inaudible 04:04] right into the products by default.
Zack: So is this targeting people who are, who would otherwise go out and manage their assets alone, or is this sort of a replacement for professional advice?
Jon: We think of ourselves as a 95 percent solution for 95 percent of the people, but it's really for all those folks who don't want active management, who don't want to day trade or, what we really consider, gamble with their money. This is for people who want to set it and forget it. In some ways, it's the next generation of target date funds, so it's a real mass market product and it's customizable for your specific goals and personalized for you in a way that targeted funds really aren't.
Zack: One of the things I like so much about the interface is you took a lot of the complexity out of the investing process. For me, it's just about dialing in my time horizon and my risk tolerance. I don't really need to understand exactly what an exchange rate or fund or anything like that is. You guys are doing that sort of in the background. Can you talk to me about how you designed the user interface?
Jon: Yes, the core is to make it simple and there's a lot of reasons to make things simple. One is there are fewer steps and so it helps people to get through those steps faster, which leads to a better experience. Another, and maybe the most important reason to keep it simple, is to focus people on the most important decisions, so 90 percent of this variance in investment outcomes really relate to the single decision of asset allocation, right, so stocks versus bonds, that kind of an asset allocation decision is most of what matters. So we really took an approach of focusing on these key questions because it mattered, not large cap versus small cap and so on, those kinds of more minutia, that really affect people less and people get distracted by, and think are just as important as the big decisions. So by focusing on these key questions, we realize this is modern portfolio theory, and there's a single slider between low risk and high risk, and that will get people to an optimal investment for them. The rest of the interface then was, for instance, linking directly to your checking account so that deposits and withdrawals look just like an on line savings account, just as simple.
Zack: Do you risk though, obviously coming at this from the professional point of view, do you risk like over-simplifying it to some extent or really, you mentioned minutia, are those things sort of unimportant in the real process?
Jon: For the real managers and people who want to get in there and select just the right level of international exposure for their portfolio, it may be 5 or 10 percent different than what it is for someone else in a kind of optimum portfolio. For them, we are developing a sort of next generation on the product, would be an under the hood cap where you can go in and customize those kinds of things, but the fact remains that for the vast majority of people, those kinds of decisions are best just left to the advisor. Let us set it for you. Let us set a default for you to anchor you to what is the generally accepted right number, and then if you have a reason that you think your numbers are a little bit different from that, then you can come in and customize what you really like.
Zack: Are you focused on also, I guess more organically on the entire investment process, like so much of investing is just learning how to save. That's rule number one. Are you focused on sort of automating that process or teaching people how to do that better too?
Jon: I think that's an area that we have to really knocked out of the park. I think that we have the best end market, goal based investing product by a large margin, and I say that because we're really the only company I know of that has implemented as goal based investing in a seamless end-to-end user experience, and we're seeing the adoption in just incredible numbers from our user base, so the way this works is, you sign up for a Betterment account. You don't have to set up goals. You can come in and manage money with it, if that's the way you want to do it, but we'll prompt you when you sign up to tell us what you're saving for and if we can, we'll ask you how much do you actually want to save, and then get to expenses. How much do you have to contribute every month or every couple of weeks to actually reach that goal, including some compounding from market returns and so on. We make all of this seem less, it's all dollar based and the money comes right out of your checking account so we make it very easy to save for a specific goal.
Zack: It's interesting because I remember years ago, I had my regular brokerage account outside Share Builder and Share Builder I feel got swept under the rug and is an obscurity now. They made it so easy just to be able to move money just in small increments and stuff like that, and I felt like there was this big goal for awhile that nobody was really focusing on and it sounds like you guys are doing a good job with that.
Jon: In Share Builder, actually I agree with you. It did a great thing in enabling automatic deposits and fractional share-based investing, so we enable both of those things as well, but I think we take it a step further by setting up an investment by default. It's funny, if you go to the Share Builder investing page, which we've looked at and in some ways they're doing some interesting things.
On their investing page it said enter symbol, enter number of shares, and then there's a link to research at the top right, so the investor is really left with very little direction and still has to go out and execute individuals trades, and by the way, pay for all those individual trades that they want to make in their Share Builder account. We decided that's not the way most people want to spend their time, is picking and balancing, and doing all of these kinds of things, so let's just take care of that, set it all up by default. People want to move their sliders and customize things a little bit after the fact, then they can, but we don't want to force customers through that burdensome process.
Zack: So it sort of almost has like a behavioral finance layer embedded in it, right, because people come, they said forget it. If you're doing that with individual stocks and sort of picking your own things, it's sort of dangerous. You guys have taken care of that. People are simply outsourcing allocation decisions to you guys.
Jon: Right, behavioral sign-in is really underlying a lot of the way that we think about developing this project. It's about keeping it simple, focusing on what's really important, setting up default so that we anchor people to what we think is a smart default for them, and then automating everything so that there's as little human involvement in the process if possible. You can go in and you can change things at any time, but by thinking about things from a behavioral finance perspective, we've really taken some of the risk out of the investment process.
Zack: Can you talk a little bit about adoption numbers? I don't know how much you're willing to share, but you said that it's being adopted well. Can you talk a little bit about how the company is growing?
Jon: Yeah, it's been incredible to see, especially the adoption of the automatic deposit features. Today we've got mid-20's, millions under management and we've got almost 10,000 customers. We've got a lot of mid-size accounts of people just putting in significant amounts of money and saving for a goal, because I think that's the product that's really, just like I said, knocked out of the park, and I think the way that we're moving, and the story that we're hearing from customers a lot now, are these kind of higher balance managers, maybe more like people in your audience who, first of all, are concerned about, they're a little bit more fee-conscious I think, than the general consumer, and secondly, they want just that extra little bit of control. They want to go under the hood and they just want to personalize their portfolio just a little bit. They still want it rebalanced and taken care of and managed, kind of like their index funds that they invest in, but they want that extra control, and that's the next kind of a turn on Betterment products, continue to serve these, what I would call strivers, who are either depositing and saving for goals, but also better served as managers who really love our product, but are kind of hung up on a couple of things.
Zack: That's so interesting. I had Mike Kane from Hedgeable on last month and we were just talking about the business of actually growing an on-line asset manager from the ground up. He was under the impression, he even used these words, he said it was impossible to build any asset manager starting from zero, so for him it was about making the right partnerships to grow and bring in assets. You talk about that process, it is hard to get new assets under the hood isn't it?
Jon: No, we've been very lucky. In our early growth, I think we've seen really incredible growth for start-up.
Zack: What would you attribute that to?
Jon: I think it's product. I really think it comes down to having a good interface and having the right product for the time. People are looking for alternatives. They're frustrated with their old money managers, they're not talking to them. For instance, average age at Merrill Lynch, for their asset advisory business, because we talked to one of the former heads of that business, who said that the average age today is 63.
Zack: Wait, of the advisor or the client?
Jon: Of the client.
Jon: All right, incredible, right, 63.
Jon: Now 10 years ago, guess what it was 10 years ago.
Jon: Close, 55, so it's aging almost one for one, year by year. Their customers are getting older and they're not replacing them with younger folks because younger folks aren't interested in these products. They don't speak to them. I think that we've done a great job of addressing the younger, more internet-savvy consumer. Our median age of our customers is 33.
Jon: So that's where we're growing. 50 percent of our customers are between 25 and 35, another 30 percent are between 35 and 45.
Zack: So for you, it's a game of skill. You're not going to get the $10 million dollar accounts, but you don't need that. You're just going to go mass market and grow a big business that way.
Jon: That's right. We'll get a couple of $10 million dollar accounts down the road...
Zack: But that's not the target.
Jon: ...but that's not really where we're focused. That's right.
Zack: That's the way it should be, because in my book which I published in 2010, Tradestream Your Way to Profits, I talked about this growing trend towards automated professional grade tools and you guys are that. You're like the paradigm of that, and you guys weren't around then when I wrote the book, but it's great to see your growth. One last question I ask all participants on the show, where do you go to learn about your own investing, any tools or resources, obviously Betterment is what you use to manage your money, but are there other resources that you find off-line or on-line that you could recommend that you just find yourself bumping up against?
Jon: I go back to the greats of behavioral finance and modern portfolio theory. We talked to a lot of these guys, [inaudible 16:20], [Mike Norton], Dick [Saylor], all of the behavioral finance professors, and of course, love the sort of random walks down Wall Street and all the [inaudible 16:31] and [Core] long term index, investor, Jack [inaudible 16:39], big fan of his. I met him while I was in business school. I told him about Betterment and he said you guys are doing a great thing and you're going to help a lot of people. That's sort of the pantheon that we look to and where do we find them? There's a number of on-line resources where you can read about these guys and, of course, their books. We list some of those out on our web page under their references section.
Zack: Jon, thanks so much for participating.
Jon: Yeah, my pleasure, Zack. It's been a lot of fun.
Betterment (that's an affiliate link to get $25 when you open an account)