The CEO of an investing startup taking in $12 million a day on the future of finance, millennials, and happiness

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Jon Stein, founder of Betterment. Betterment

It took a year for the roboadviser Betterment to reach $US10 million in assets under management.

That day, in 2011, was a big one for founder Jon Stein, 37, who set up the company after working at First Manhattan Consulting Group. He recalls going out to dinner that evening and being in awe of having so many people trust him and his company with their money. Now the company pulls in $US12 million a day.

Betterment is the largest independent roboadviser in the world, with $US8 billion under management and 270,000 customers. Betterment is currently valued at $US700 million, according to a company spokeswoman.

Betterment provides financial advice online and via a smartphone app. Rather than using human managers to build portfolios, roboadvisers like Betterment use algorithms to determine where to invest. Global assets managed by robos could reach $US13 trillion by 2025 in a best-case scenario, according to a group of equity analysts at Morgan Stanley. That would be up from $US100 billion in December.

Betterment’s growth has been impressive, but it still faces steep competition. The wealth-management space has caught on that roboadvisers are hot, and many big firms have rolled out their own robo offerings. Charles Schwab and Vanguard are two such giants with trillions of dollars in assets under management.

Stein is resolute in his belief, however, that those firms are rooted in the old way. Business Insider recently met up with Stein at Betterment’s Manhattan office to talk about the company’s journey, the future of wealth management and the firm, and happiness.

This interview has been edited for clarity and length.

Frank Chaparro: How’s business?

Jon Stein: We have had an incredible run. We are the largest independent online financial adviser. And this has been a goal of ours since we started the company seven years ago. We just celebrated our seventh anniversary. We have grown something like 300% year-over-year for that entire time. When we first started out, it took us a year to get to $US10 million assets under management. When we did, I couldn’t believe it.

It took us another six months to get to $US20 million. It then took us another three months to get to $US30 million. We just kept growing faster and faster and faster. And today we bring in $US10 million on an average day. Our business has changed a lot, in one sense. We are growing so well, and that growth is accelerating. And our offerings are much more sophisticated than when we started.

But in another sense, we are doing the same thing we have always been doing — that is, thinking about the customer and what the customer wants, and then building financial services in a way that actually responds to customer demands, which I think is not the way the old guard has done things. The old way just sells the product. The old way has the product they want to push. Our vision is that the service should be built around the customer and it should be very personalised. It should be built for their needs. It should be very convenient and strip away unnecessary complexities, and it should give them peace of mind.

Betterment expanded its offerings in February to include human financial advisers. Eric Thayer/Getty

Chaparro: In February, Betterment rolled out an offering that would provide users with access to human financial advisers. It appears that the pure robo-only model is unsustainable and that firms have to go hybrid, with a bit of old and new. Was this the thought process behind the move?

Stein: Our goal, long-term, is to be our customers’ central financial relationship. We want them to be able to manage everything in one place when they come to Betterment. We give them guidance about their full financial life with that holistic view. That’s what customers want. They want that ability to manage everything in one place.

And that’s why we rolled out Betterment Plus and Premium. We want to be able to answer any question our clients have. We want to make it clear to everyone that people can call us and get advice and guidance on any financial question. Just call us. I don’t think we’ve been clear enough about that even today. I think there is more work to do. And I think you will see us over the course of the year rolling out better ways that make it really obvious that anyone can get financial advice here on anything. Because we have certified financial planners who are willing to answer any question.

Chaparro: It’s been said that pure roboplatforms could face trouble if there is a downturn. Without that hand-holding and someone to talk to, investors might pull —

Eli Broverman, president and cofounder of Betterment, with Stein in 2012. Betterment

Stein: Says who? I don’t think that prop really resonates with customers.

If you talk to customers and ask them, “What do you want from your financial adviser?” They don’t say, “We really want someone who is going to be there for me during a downturn.” That’s a very industry-oriented way of thinking about justifying your value as a financial adviser. It’s not really what customers care about or want. They want performance. The reason they hire us is because we maximise their money. That is core to our value.

Convenience is another. They want it easy. They want it fast. They want transfers to happen quickly, and they want peace of mind. Peace of mind is related to the idea that you can talk to someone, but it is not actually “I want someone to hold my hand in a downturn.” Rather, it is more like “I want to know that my financial adviser is on my side.”

So Betterment is a fiduciary, so we work only for our customers. We only work in their best interest, and we always have. Charles Schwab can’t say that. Schwab is a brokerage firm selling you a product. Vanguard can’t say that. Vanguard is a mutual-fund supermarket. They do not care if you maximise your money because that’s not their goal. That’s not their objective function. Their objective function is to sell funds.

The old way doesn’t really think about what is in the customer’s best interest. So it is hard to get peace of mind that you are getting what is best for your money if that’s not their goal.

Editor’s note: We reached out to Vanguard and Charles Schwab to respond to Stein’s comments.

  • Charles Schwab said: “Jon is wrong about his fiduciary point. All of Schwab’s advisory services, including our roboadvisory service, Schwab Intelligent Portfolios, are fiduciary, which means we put our clients’ interests first when giving advice.”
  • Vanguard said: “As the industry’s only client-owned asset manager, Vanguard is not only structured to serve our clients’ best interest, but guided by the noble premise that an investment company should exist to make money for our clients — not from our clients.”

Chaparro: What is your target demographic?

Stein: We look at our target customer as someone who is 35 to 55 years old with $US100,000 to $US2 million of investable assets. But we are open to everyone. We get a lot of people with less than that because we have no minimum balance. The folks with $US10 million plus are well-served by private wealth managers and family offices. The folks in the $US2 million to $US10 million range are decently served. But people with less than that are just getting ripped off, and not getting a lot for the financial advice they pay for. So that’s the market we serve best.

Chaparro: UBS put out a note last week about how the millennial generation is about to benefit from “one of the largest intergenerational wealth transfers in history.” Do you view this as a tailwind for Betterment?

Stein: Definitely. I think every 30 or 40 years, historically, in this industry, there has been a new wave of technological change or regulatory change that brings about a new crop of firms that grow to be significant players in the space. I think the last time we saw this was with the growth of Vanguard and Schwab, which were both born in the 1970s. And it took them a long time to get scale. Probably about two decades.

We think we can accelerate that, and we are already growing faster than they did in the early days. We are also growing faster than mutual funds did in their early days, and we are growing faster than ETFs in their early days.

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Millennials are about to benefit from ‘one of the largest intergenerational wealth transfers in history,’ according to UBS. Jason Kempin / Staff / Getty Images

Chaparro: Why has that been possible?

Stein: With Betterment, it is obvious why you should switch from the old way. We do things for you that the other firms do not. For starters, we make you more money — more take-home returns than you can get anywhere else. That is the value that we provide.

The headwind to growth is that people hate to talk about finance. And there is a lot of inertia as a result. People feel like “I am probably not getting the most out of my money.” They have doubts and are not confident in their money management, but they think that everything else is equally bad — everything is the same, essentially.

Our job is to open people’s eyes that Betterment represents a generation shift — that it is a different way of thinking about your money and what it can do for you. We’re not looking to tell people that they have been doing the wrong thing for the past 30 years, because they haven’t. This didn’t exist before. But now that it does, and they have to take advantage of it.

Chaparro: When we think about what matters to millennials, the things that come to mind are transparency, customer service, and performance. How does Betterment stack up on those fronts?

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The Betterment team in 2011 celebrating its 10,000th customer. Betterment

Stein: On every point, we win.

On performance, we do more to personalise the portfolio to meet your actual needs than anyone else. And that helps improve performance. We help improve your take-home returns through tax-loss harvesting, through dividend shielding, through intelligent rebalancing and other intelligent software.

On the theme of convenience, I’ll call it — customer service, as you mentioned, is a part of that. That’s a big piece. Being accessible and being able to answer questions is an integral component. But convenience also includes other things, such as having faster money movements and a faster sign-up process, and making it easier for customers to add beneficiaries to their account. We are better at all of those things. And that translates into a much better customer experience. I think we are much higher than the average. We are tied with Vanguard’s levels of customer satisfaction.

And on transparency, that ties into our pillar of making sure our clients have peace of mind. Peace of mind is driven by, yes, understanding what you own and understanding how the service works. Having that level of comfort is very important. And we are very clear on all of that. But I also think peace of mind comes from knowing that your financial provider is working in your best interest. We are doing that in a way that others are not.

Chaparro: Morgan Stanley put out a big note on the future of fintech back in May in which they argued that “only a handful of roboadvice startups will survive.” Those that don’t survive will consolidate or be bought up by legacy firms. Do you think this is how things will play out?

Stein: It’s the way things have gone in every other industry and during every other cycle in this industry. So I expect that is right. That doesn’t mean there aren’t going to be new ideas coming out and new competitors emerging for decades to come.

But we have to ask ourselves: How many of these players can actually make it to scale? In financial services, it is not many. How many big financial services brands have broken out in the last three decades? It is very few. What’s the brand-new bank that has come along? There’s none. What’s the new investing firm that has broken out and taken a lot of share? There are a couple that I probably know of, but they’re not on the public’s radar. Maybe like Financial Engine or DFA.

There are a couple of firms that have gotten big, but they’re not a huge name. PayPal did it. Capital One did it. But it’s few. So I agree with their thesis: Few will survive, and there will be consolidation.
Chaparro: Incumbents have had their own robo offerings for years, and they have their big brand and infrastructure to back them up. What makes you so certain Betterment can survive up against such competition?

Stein: For the same reason why we often see those few innovators break out.

You could also ask “Why did Amazon break out and become the dominant online retailer?” — some would say dominant retailer period. And why wasn’t it Barnes and Nobles, Target, or Walmart, or anybody else? It is because Amazon has a specific focus. They didn’t have conflicts with a set of existing infrastructure and systems and people who were built around doing things the old way.

Morgan Stanley, for instance, is a firm set up to serve clients the old way. As a result, they are having a really hard time shifting to this new paradigm of pure customer alignment because that’s not their model. Their model is brokerage alignment. It is a brokerage model. They are there to sell you a product, whatever product makes them the most money. That tends to be the one that they favour.

The DOL’s fiduciary rule, which is now partially enacted, tries to eliminate those conflicts of interest under retirement accounts. We think every account should have an adviser that is aligned with customer interest. We think that is the future of the industry.

Editor’s note: Morgan Stanley declined to comment on Stein’s comments. The Wall Street giant has taken many notable steps to digitize its wealth-management offerings. As Business Insider’s Matt Turner reported, the bank is planning to roll out a goals-based roboadviser option for the children of existing wealthy clients and for Morgan Stanley stock-plan participants.

Chaparro: Naturally, there are a lot of folks in wealth management and financial services who don’t agree with the DOL’s rule. How do you respond to folks who argue that it’s bad for clients because it limits choice?

Stein: I think the industry will say and do anything it can to hang on to the old way. No one argues with the idea that about $US20 billion will flow from financial industry profits to client wallets if the rule is enacted. Parties on both sides agree with that annual estimate. So is that a good thing? If you’re on our side, then it is.

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Stein at the 2010 TechCrunch Disrupt conference. Betterment

Chaparro: Is this model part of the reason why you left Wall Street?

Stein: I left Wall Street because I wasn’t fulfilled with the idea that I could have a career by just helping banks sell more product and helping banks make more money. I wanted to be able to get closer to the customer and to build something that mattered, that made a difference in the world, that really changed the game. And I saw a bunch of opportunities to do that.

The most glaring one was investment management, where there had been no innovation from a customer perspective in decades, in my opinion. Maybe there had been innovation on the back end for the affluent. But for the mass-market customers, the side we tend to serve, there had been very limited improvement. And so much technological change has occurred.

I mentioned this idea that advice is core. That is an important part of our vision. If you believe in technology as much as we do, you then believe, for instance, that someday we will have self-driving cars. It is not a controversial thing to say that will probably happen. I think it is controversial, relatively, today that someday we will have self-managing wallets. You earn some money, and you have some preferences about how you want it saved and spent, and I believe your wallet will manage and optimise itself. You will have the right amount going into the right accounts, the right amount set aside for different needs. You can always change. Just like with a self-driving car, you can change your destination.

But all that optimization is happening for you, in a way that’s aligning with your best interests. And as an adviser, we can build that future. A broker can’t build that because that’s not their core. A mutual-fund company can’t do that. I think we are best positioned to be the financial-services firm of the future because we started with this vision of advice.

Chaparro: What’s the next innovation you are excited about?

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Stein says he thinks some firms are stuck in the ’80s. Harpers Bazaar

Stein: As far as future innovation is considered, I think we can stand out the most in personalisation. We want to do more and more to give you a personalised index.

The idea that you should buy a fund with 5 million other people who are buying that fund, that is a very 1980s view of the world. Why? Because that’s the only technology we could support at the time. Building indexes was hard and took a lot of maths.

We can do so much better than that now. I can build you an index that takes into consideration your risk tolerance, your goals, your values and personal preferences about what kind of companies you want to invest in, and any changes that come up in your life. We can build you this separately managed index fund that will yield a higher performance. I think that’s a very exciting lane.

Chaparro: As part of your strategy to target younger folks, I imagine you guys are constantly advertising on podcasts. Shifting gears a bit, do you listen to podcasts?

Stein: I do. I was driving over the weekend, and I just heard one of our ads. This weekend I was listening to “Reply All,” “99% Invisible,” and “StartUp.” I listen to a lot of them.

Chaparro: What other hobbies do you have?

Stein: We have a garden on our deck. We’ve got tomatoes, cherries, strawberries, squash. In past years, we’ve had okra.

Chaparro: How did you get into gardening?

Stein: Also, I’m a big student of happiness and figuring out what makes us happy. Part of the reason why I started this company is I think having purpose and doing something with purpose is one of the key drivers of happiness — much more so than financial gain or money.

More money doesn’t really make people happier. Having purpose and having peace of mind about your money makes us happy. Gardening is one of those things that is well-correlated with happiness. I just like the idea of it.

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