Betterment CEO Built His Business by Not Watching Stock Market
(Bloomberg Businessweek) -- In 10 years, the man who helped popularize robo-advising has built a company that manages $20 billion on behalf of 500,000 customers and, at last count, was valued at $800 million. And, as he tells Bloomberg Businessweek Editor Joel Weber, he barely pays attention to the stock market.
JOEL WEBER: The financial-services industry has so many players. You jumped into the fray 10 years ago with Betterment. What motivated you to enter such a competitive landscape?
Jon Stein: I had graduated from college and opened, like, seven different brokerage accounts. And what I found was they were very good at telling me what they wanted me to do for them: “Trade this, buy this fund, do this thing.” But none of them were telling me what was right for me.
So I thought it was time to build a service around what’s right for the customer: “These are your goals. Here’s how much you need to contribute to reach your goals. You’re on track and everything’s OK.” That’s the kind of messaging that Betterment delivers. And now we’ve created a whole category—this idea of a more advised, customer-centric future for financial services.
That category is the robo-adviser, which you helped create in the aftermath of the financial crisis. You had zero customers then; now you have 500,000 and $20 billion of assets under management. And here we are living through another crisis. How are Betterment customers behaving during the pandemic?
I like to say that we were born in a crisis and that we’re at our best in a time like this. In March, when volatility was at its highest, all of our algorithms and automation kicked into high gear. We saw $8.5 billion of trading that month. And a lot of that was two-sided trading, meaning we were selling off assets that hadn’t fallen in value to buy assets that had. When things rebounded as they did, that rebalancing made our customers a lot of money. We were also tax-loss harvesting and taking advantage of all the opportunities in this environment. We do that without customers having to do anything. They can just stay the course, they’re on track to their goals.
And we’ve been growing. March was a record customer-growth month for us. Q1 was a record quarter. Q2 set another record. So we’ve seen sustained inflows and continued customer growth, which is exciting.
What kind of flows are you projecting for the year?
This is a particularly challenging time to project. But in the worst time, we still saw 26% more customers making deposits than withdrawals. And for millennials it was even more—37% more deposits than withdrawals. So across our entire customer base, and particularly for our younger customers, they’re just continuing to deposit, continuing to grow their accounts with us.
One thing that’s really interesting about Betterment is your emphasis on behavioral science. You appeal to a side of the brain that investors might suppress when things get really bad. How do you keep people committed when the sky looks really dark?
Behavior is huge. We’ve done a lot of analysis of customer behavior over time to help people stay the course. We’ve seen, for instance, that if we put red and green colors on gains and losses, customers are more likely to trade than if it’s just black and says, “You’re on track.” That’s in contrast to, I think, some services out there that are really trying to gamify trading and leaning into the gambling element, which I think does appeal to a segment of customers.
Betterment is all about making the most of our customers’ money in the long term. And that generally means not trading. Because when customers trade, they tend to underperform the market significantly over time.
Retail day trading has been such an interesting phenomenon during the pandemic. What do you make of that?
I think people are bored. Casinos are closed, there’s no sports or sports betting. So people are just looking for ways to let off that same steam. And that’s OK. That’s a very human thing to do. It’s fine to do with small change. It just shouldn’t be your primary investing strategy.
How do you approach converting someone from being that day-trading type into more of a long-term investor, especially with a younger crowd who may not have as much investing experience?
Yeah, I mean, I was one of those people. When I opened all those brokerage accounts, I wanted to read the financial news, understand which companies I might buy, and go invest. I learned the hard way. I bought Enron on the way down thinking, Wow, this is a great deal. Which is reminiscent of Hertz these days.
I made some good investments, too, things that I bought cheap and made several times my initial investment on. But I also had some mutual funds, and over time I found that those were performing about as well as I was, even though I was investing all this time into trading—and stressing. And I realized the best use of my time wasn’t day trading, but to pursue something else with my free time.
Maybe that’s a thing that some of us just have to go through. As a company, we at Betterment ought to accept customers as they are. Come as you are. We’re all human and subject to these same kinds of behavioral biases. So let us take your portfolio and coach you over time to reach an optimal allocation for your goals.
Your platform lets investors personalize their portfolios and set goals. I’m wondering, what are some of your favorite goals people have set?
There are some amazing ones: wedding rings, trips, babies, “FU” money, all kinds of fun goal names. We’ve had 300,000 or 400,000 achieved goals over the last 10 years. Even though most of our customers are saving for long-term things like retirement, they might have near-term goals on the side—be it safety net or a shiny sports car or what have you.
You’ve also recently begun offering checking and savings accounts, which has you really looking like a bank. What do those offerings accomplish for you?
The thing most in your control is how much you’re saving. You can’t control what’s going to happen to the market or what’s going to happen with tax rates. But you can control how much you’re contributing every month or year. And so we realized that if we wanted to have the most impact for our customers, one of the most important things we could do is help them manage their everyday spending and savings better. And so from the very original vision, we had talked about eventually getting into checking and savings. And we just did both of those things within the last year. These are amazing services: high-yield savings, ATM fees reimbursed worldwide, fee-free checking, mobile-deposit capture. You can manage everything from your phone, and it’s all linked and integrated to this best-in-market investing and retirement solution. It’s very easy to automate all of your money, to have your paycheck come in and have a regular contribution going into your IRA, your HSA, or even your 401(k). It’s all integrated and working smartly for you.
I’m curious about how your customers used their stimulus checks. What was surprising to you about those numbers?
Most of our customers put their stimulus check into savings and investments. I think part of that is because a lot of our customers are professionals, who maybe aren’t living paycheck to paycheck. Many times they were putting it toward safety-net funds or retirement or building wealth. Very little was going towards a short-term savings goal.
We’ve seen so much more awareness of social injustice and economic inequality of late. One fact about equities is that a lot of people just aren’t invested in them, especially Blacks and Latinos. So how do you get more people investing?
I’ve seen some of this data, and it’s striking. Far too little of the wealth in this country is in minority hands. The numbers just haven’t changed. It’s been eye-opening. Like many people in this time, I’ve been learning and seeing what more we can do. My team has a ton of energy around social-justice and equality-driving initiatives. I think in part that energy comes from them being so motivated. It’s what brought them to Betterment in the first place. We are a mission-driven company. We believe everyone should have access to great financial advice. We have no minimum balance, no minimum fee. We’ve always thought, We’re open to everyone.
But now, in this time, we’re thinking even harder about what can we do to un-bias our advice, to reach new demographics, to improve our hiring diversity, and so on. Because we have to do better at moving the needle on these metrics.
We continue to face a retirement crisis in the U.S. What policy changes might help address this colossal challenge?
I think policy changes are ultimately what’s needed to help people save enough for retirement. Something like only 11% of retirement spending today comes from personal savings. A third of it is Social Security. A third of it is people working in retirement. There’s some other government programs and this and that, but very little is actually from investments. And yet, when you think about retirement, the conventional wisdom is, “You have to save for your own retirement, that’s part of life.” But it’s really a small set of people who do. And we all ought to be doing it. And yet the behavioral economics side of me knows that just telling people to do a thing or giving them tax incentives to do a thing isn’t going to drive real change.
We have to make it a smart default, like they do in Australia, where everyone is required to contribute to a superannuation fund. We have to decouple it from the employer. Why should this have anything to do with where you’re working? It should be something that’s available to everyone, that’s portable across companies, where there’s competition in the market instead of everybody having to use an employer-specified plan.
At Betterment, we’ve often said that we are trying to build the feeling of defined benefits in a defined contribution world. Since the 1980s we’ve been living in a world where pensions have been declining. Today almost no one has a pension, unless you’re a government employee. Instead we have defined contribution plans, like the 401(k). But through technology, through smart advice, we can help people feel, I’m on track, I’m saving enough, even in our defined contribution world. That’s what making advice accessible to everyone is all about.
Betterment was built on the back of the exchange-traded fund. If I radically simplify what you do, you have low-cost, plain-vanilla ETFs beneath a layer of advice and personalized portfolios. Could you have built Betterment without the ETF?
There’s no way. We’re standing on the shoulders of giants, those who came out with ETFs and popularized them. When we launched in 2010, it was just at that inflection point where ETFs were broadly enough adopted and liquid enough that you could have a product like Betterment with a globally diversified portfolio all through ETFs. We couldn’t have existed before then because buying mutual funds meant building a pipe to each mutual fund company, which is a very expensive undertaking. And so we just use ETFs. You can do everything with them now. So this revolution of advice depends on ETFs.
But there’s another revolution coming. Today we can do so much more personalization. We’re hearing more and more calls for socially responsible investing, women-led investing, Black-led investing. Leaning into that, building truly personalized portfolios with specific stocks for specific clients that still track an index—that’s clearly where things are trending, in our view.
Does that mean that you won’t need ETFs?
ETFs are an efficient way to get an index. But if you want to personalize that index for any reason, there will be more small, separately managed accounts or direct indexing. Personalizing an ETF involves buying some of the individual stocks that track the index [while excluding others].
How else do you want Betterment to innovate?
We’re also doing much more around cash management and automating the flows into your various accounts. We’ve already launched our two-way sweep, which through cash analysis of your checking account, figures out how much cash you need to cover 21 to 35 days’ worth of expenses. It always maintains that much in your checking account by looking at your bills and paychecks—in a real-time way—and then sweeps all the rest into savings. If you have a big bill come up or need extra cash, it automatically sweeps money back into your checking account. That kind of smart automation—putting things on autopilot and just letting you be—is the future of all financial services.
There’s been so much downward pressure on fees. What sort of downward pressure do you expect on your business?
A lot of that has been the move from active funds to passive funds. We’ve seen less pricing pressure on advice fees. Investment advisers haven’t been reducing their fees. These are highly trained people who know how to talk to clients and understand how to manage a portfolio. The cost of the technology they’re using, which we also provide with Betterment for Advisors, has come down—or at least ours has.
Where I see the next price battle, I hope, is around banking services. Because I think banks charge too much in nuisance fees. They try too hard to push people into debt. They don’t pay people any interest on their savings. Those traditional ways of making money off of people’s weaknesses I don’t think are aligned with the kind of society that we want to create, where people are empowered and get to manage their own money. A great adviser would tell you, “Don’t pay these fees. Don’t go into debt. Earn something on your savings.” And as a great adviser, we’re trying to drive that price competition into banking and everyday cash-management services.
How do you feel about going public?
I’ve always wanted us to be an independent public company. It’s been my ambition from Day One. And we’re moving along that path. We’re continuing to grow and attract customers at an exciting rate. Ultimately this is a scale game. And for us to be a large-scale player, we’re going to have to be a public company—someday.
Any sense of what that timeline might look like?
Not today, no.
So 10 years on, what advice do you have for your younger self?
Just go and build it. Make it real. What customers want is performance, convenience, and peace of mind. Keep investing in those themes and you’re always going to be attracting more customers and doing better for them.
Jon, how often do you actually look at the stock market?
It depends on how bad of a day it’s been. [Laughs.] I generally don’t. My uncle calls me sometimes and says, “I assume you saw what happened in the market today.” And I always say, “Nope.” Because my investments are with Betterment, I do not look at the day-to-day ups and downs. In March, when things were looking really bleak, it was hard to avoid. You can’t avoid it on days like that. But by and large, I don’t have to. I have a financial adviser. It’s called Betterment.
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