The transcript from this week’s MIB: Jonathan Stein, founder and CEO of Betterment, is below.
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Bloomberg, Overcast, and Stitcher. All of our earlier podcasts on your favorite host sites can be found here.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest his name is Jonathan Stein and he is the founder of essentially the very first of the Robo advisors to come out and enter the world, Betterment is the name of the company, they manage $20 billion, quite a substantial sum of money and you’ll find that Jonathan is or better known as Jon is an enthusiastic advocate on behalf of investors.
He does not like the way much of Wall Street does business the way fees are hidden the way people are not fiduciaries are to their clients and he is looking at Betterment as a way to change the institution of money management.
If you are at all interested in the use of technology to manage both investments and cash and everything else, how things are done right and wrong in the industry and also hear some inside dirt about what he thinks about some of his competitors, well you’re going to find this conversation fascinating.
So with no further ado, my interview of Jon Stein.
My special guest today is Jonathan Stein, he is the founder and CEO of Betterment which is an algorithmic asset allocation also known by some people as a robo adviser, he graduated from Harvard, got his MBA from Columbia, Betterment currently has about $20 billion in assets, they have a digital advisory platform for advisers known as Betterment for Advisers, as well as a 401(k) option.
Jonathan Stein, welcome to Bloomberg.
JONATHAN STEIN, CEO AND FOUNDER, BETTERMENT: Thank you, Barry, so nice to be here.
RITHOLTZ: It’s nice to have you. So before we start, I have to do a quick disclosure, I mentioned in the intro that you have a B2B product offering called Betterment for Advisers, my firm Ritholtz Wealth Management is a user of Betterment for Advisors, our robo advisers called Liftoff is powered by your back end, so we like to engage in full disclosure around here and I want to get that out.
So let’s start with your undergraduate, you want to Harvard, what did you study there? Did you have any plans on going into finance?
STEIN: Yes, by the way am so excited to be working with you in Liftoff, I think that’s really a great thing where you and Josh and the whole team have been wonderful to work with, and we are excited to be onboarding clients and all of that.
RITHOLTZ: We’re a fun group.
STEIN: You guys are great.
RITHOLTZ: We really area.
STEIN: In college, I studied economics was my major and I studied a lot of psychology on the side and I was really interested in the union or the intersection between those two fields. My economics professor freshman year was Marty Feldstein who is one of Reagan’s economic advisers…
RITHOLTZ: Right.
STEIN: He was super efficient markets and you know if we all just rational and when we have the right incentives in place, people will obviously do the right thing and so and the world will be better.
RITHOLTZ: I love the fantasy world of the economist professors, right?
STEIN: It’s an amazing world to live in, right? It’s a beautiful place, right?
RITHOLTZ: No bubbles, no crushes, everybody is perfectly rational.
STEIN: Everything is priced efficiently and correctly and all information but on the behavioral side I was so fascinated with how people actually work which is not at all like the economic models we predict, we’re crazy irrational, we do the wrong thing all the time.
And I really wanted to reconcile that, you know, sort of like Descartian sort of duality and then in our lives of like I know the right thing to do but I never end up doing it because I’m driven by short term impulses and so I wanted to do something there, coming out of college, no one was recruiting for people who just wanted to help people make better decisions but that’s what I wanted to do.
RITHOLTZ: So coming out of college, what was your first job, where did you go post Harvard?
STEIN: I went to a company called First Manhattan Consulting Group.
RITHOLTZ: Okay now again, know the disclosure, years ago, we sublet space from them…
STEIN: Is that right? Small world.
RITHOLTZ: Your legend has preceded you because over on Park and 40th and 90 Park Ave. And then when we were discussing what we did when we were having the conversation, oh have you ever heard of Betterment? Yes we have. He used to work for us. Just a hilarious coincidence.
STEIN: Yes, it was a great firm, so many smart people, I’m still friends with a bunch of people there and I got from that vantage point to work with big banking clients all around the US and around the world, brokers as well and got to understand how the big financial institutions work and how they’re very well-intentioned but oftentimes haven’t innovated around the customer.
And I started to see opportunities to rethink financial services, to really change, and I just wanted it all to happen you know like I change was too slow in and by the time I was leaving there we were moving into the financial crisis years, right?
RITHOLTZ: Right.
STEIN: 2008 and on.
RITHOLTZ: So from FMGC, did you go right to Betterment or was there something in between?
STEIN: I went to business school in between.
RITHOLTZ: Okay, so you went to Columbia.
STEIN: Yes.
RITHOLTZ: And then you come out of business school two years later and where did you go from there?
STEIN: Then I started Betterment right away.
RITHOLTZ: So right out of business school?
STEIN: Yes, and I knew I wanted to start Betterment going into business school, I had a name, right, and I started, I was talking about it on day one and I said we are going to make financial services better and some people would say, well, why didn’t you go and do that? And for me business school was necessary, it was a good spot to test the ideas to get to work on I worked with the Dean of the business school…
RITHOLTZ: Right.
STEIN: Betterment was like make a study for my final presentation in entrepreneurial finance so I got a lot of good feedback from a number of professors.
RITHOLTZ: Plus you could wait out the financial crisis.
STEIN: Exactly, it actually was a good time to not be fundraising.
RITHOLTZ: So you had the idea, how fully formed was it on your way into business school and what did you learn that might have had an impact on the company that exists today?
STEIN: I learned a lot about myself and my management style that is — my favorite classes with things like top management process and you know I didn’t think about myself as having like a leadership style or management style but in small groups and in sessions like breakout sessions I learned like the types of things that I do like wanting to hear from like everyone in the room, like you know hearing all the feedback before coming to a decision like those kinds of things can be effective and there is not one right way to lead or manage was a thing that I took away but you kind of have to lean into your own style.
RITHOLTZ: So you participated in one of the TechCrunches, I think it was ’09, is that right? My familiarity with that comes from the HBO show “Silicon Valley.”
STEIN: Yes.
RITHOLTZ: What was the experience at TechCrunch like.
STEIN: A pretty accurate depiction of the TechCrunch, like strikingly so as with a lot about that show.
RITHOLTZ: Well, it does ring so true, that’s what makes it so — and it’s hilarious.
STEIN: Yes.
RITHOLTZ: And so the sort of frenetic last-minute things are glitching and nobody really knows who’s going to be the breakout star and everybody is sort looking out over their shoulders, that was your actual experience?
STEIN: It was so intense.
RITHOLTZ: Really?
STEIN: It was one of the most tense days of my life in the day and I didn’t have kids at that time, right? I wasn’t even married, right? And I just I was up all night the night before and I know I know because I look back at like my Blackberry and I was writing into it every 30 minutes, 1 AM, 130 AM, 2 AM some idea of like how I wanted to reframe my presentation.
I’d memorized the entire thing you know which you should never do it was I was a five minute speech and I knew every word and it was all exactly memorized and I was just so nervous about it because it was our coming-out party, right? It was like this with it was that we actually launched on that day and to me that was a big deal like this was our chance to debut, our chance to get customers and if we do that we are going to be successful and if not, no one would ever hear about us again? So there was lot riding on that moment.
RITHOLTZ: Let’s talk a little bit about the process of raising money and what it was like to be of venture founded startup. What was it like? Some people of described it as exhausting and draining and harrowing and other people of said you know if you have the right idea money seems to find it, what was your experience?
STEIN: I remember saying to my cofounders when we started out, at least we are going to raise some money with this thing, right? Like this is a good idea, like people want this, we’re confident that people would want it and at least we would get there and maybe a little too confident, right?
RITHOLTZ: Right.
STEIN: We went into the TechCrunch thinking yeah, we will get some attention in this be the thing and everyone gets funded coming out of these things, we talked to a bunch of people there at the actual conference and honesty we didn’t know what we are asking for, I remember thinking maybe I want $ 1 million and you know, frankly in retrospect, that was way too little money, but you know, at the time, it just seemed like an impossible amount of money, $1 million, think of how much…
(Crosstalk)
RITHOLTZ: Seems like a lot of money.
STEIN: Think of like how long that will feed us for a good long time.
RITHOLTZ: That’s almost a really nice car.
Right? The frame of reference is kind of crazy, so are you guys done raising capital or is it going to be more capital raises in the future?
STEIN: We were lucky in that first you know in his first conversations to meet Bessemer who led a Series A and they had been great partners for a number years, over the years, we met a number of other firms and they have just been awesome to work with, who share our long-term vision, who have deep pockets, Kinnevik, a big Swedish firm is the most recent one, great like long-term family office style investor and all of these firms have given us enough capital where we don’t have to worry about raising money again.
RITHOLTZ: That’s correct.
STEIN: We – our ambitions are to be a public company…
RITHOLTZ: Right.
STEIN: That is the path…
RITHOLTZ: So you have to be watching this IPO market and saying what’s going on?
STEIN: You bet, you bet.
RITHOLTZ: My friend, Nir Kaissar who writes for Bloomberg Opinion said Uber basically waited too long to come public, you know you need to go public sooner there has to be some upside left on the table and this could dog them for a good couple of years, are you paying attention to this IPO market?
STEIN: I think it’s really interesting to see that gap between the private markets and the public markets and how — you know frankly I don’t think anyone should be that surprised by the Uber story.
RITHOLTZ: Valuation alone.
STEIN: Valuation wise, we were all saying like three years ago I was saying $60 billion valuation …
(Crosstalk)
STEIN: That is pretty high.
RITHOLTZ: I think someone said anybody who’s in a private investment to Uber over the past four years is underwater as of May 2019, which is pretty, pretty astonishing. All right, so let’s pivot from the capital structure side to the business side.
I know you guys are mathy and you look at a lot of data, have you figured out what the cost of acquiring a new client is like and how do you deal with that in terms of marketing and just looking for new business?
STEIN: So a lot of financial services firms are effectively marketing engines, right? Like they have a product that they make and then two thirds of the company is they are pushing that market…
RITHOLTZ: Right.
STEIN: Pushing that product in the market. We are not built that way, most of our team is R&D, we’re building — we’re building technology, right? And of course we have an amazing programmatic marketing team helping us understand our funnel, helping us make sure that if you visit the site, you’re getting the content that you want, we might retarget you and bring you back and we do some sponsorships and podcasts and we just had Maggie Siff from Billions and someone do a campaign for us, so we have done a good bit of marketing to raise awareness and drive the top of the funnel awareness to Betterment.
By and large were so efficiently we keep becoming more and more efficient every year, we acquire more customers and spend less doing it.
RITHOLTZ: Per customer.
STEIN: Less per customer and so that’s been great.
RITHOLTZ: So there are a number of different companies that do what you do, how do you differentiate yourself from the competition?
STEIN: Having competition is a blessing, I know if you know go to some like monopolist they might disagree, right? They might say that it’s great to be alone. But for us, I don’t, you know we started this category, right? This smart money manager thing didn’t exist before and we said onstage at TechCrunch, at that lunch I was asked, hey, how are you going to deal with competition?
Do you think other people would do this, and I said, if we’re successful, we’re going to have a lot of competition.
RITHOLTZ: So let’s talk about some of the giant names that have ore late to the space, Schwab rolled out their version, it’s a little bit of an odd portfolio because they make their money on the banking side, is a big I think it’s like 10 percent or 8 percent is cash and that’s the really there is nothing free, so the cash is what covers the cost of it and then there is Vanguard which I believe crossed $100 hundred billion in their robo, they are just immense.
Any concerns? Is that a different audience? A different demographic? How do you deal with those two giant firms breathing down your neck?
STEIN: So they are not taking customers from us, it’s important to know that we’re getting customers from them and we’re getting customers organically from other firms and people who are sometimes new to saving and investing but no one’s going I’m leaving Betterment because honestly we just have a better product than these other firms, we are doing more for our customers, we’ve run analysis recently that shows that if you sum up all of the investment management, tax management, portfolio diversification et cetera that we do for you and compare it to what you would get through doing it yourself even net of our fees, we’re earning people 44 percent more in retirement than they could get on their own.
And that is the value of great advice in management, so I’m very bullish on advice and these incumbent firms are not primarily advisors, right? They are trying to pivot to become that, they’re talking a lot about it, but is not their DNA, right? Vanguard, a wonderful firm, I have incredible respect for Jack Bogle he is that we wouldn’t be here without him, however that firm today is just a mutual fund sales machine, they just want to push their mutual funds, and there’s an old kind of you know up orthodoxy that says as long as you’re diversified and have low cost, that is the best thing you can do and like we do that the best and that’s it.
Well, I’m here to tell you that’s not good enough anymore, the world has changed, technology has changed and you really need an advisor to make the most of your money today because smart money management is here and it’s not going away.
I can say the same about Schwab and these guys did lot to innovate them, and I mean, Chuck, you know, was like was one of the very few people.
RITHOLTZ: Walked the talk, that was everywhere.
STEIN: Who said we’re going to take commissions down not up, that was great in the 1970s when he did it, they continued to drive that trading price down, now there are folks out there like Robin Hood or whatever where you can trade for absolutely free. Does that mean that’s what people should do or that’s a good thing? No. Absolutely is not a good thing. And I don’t think that their encouraging good behaviors over there at Schwab, they want you to keep a lot of money in cash and they are robbing you with that, they’re just taking your money, they are just taking it away from you and I think that needs to be exposed and they should be held to account for that behavior.
RITHOLTZ: Wow. Those are strong words. So let’s talk a little bit about what Vanguard has called Advisors Alpha and you have discussed in detail on the tax loss harvesting is one thing that a computer does much faster than sending an accountant with the green eye shade to go through every transaction you’ve had, how much can the average portfolio garner in some tax loss harvesting?
STEIN: When we sum across all of our features like smart rebalancing which figures out when you have a dividend paid where to put that so you don’t actually trigger a taxable event or are lot sorting which instead of just doing FIFO or LIFO like most like first …
(Crosstalk)
STEIN: First in first out, last in first out, which are kind of common algorithms we will actually choose the right lot to sell or buy at any specific moment in my favorite which is tax coordination that looks at your Roth IRA, your traditional IRA, you 401(k) accounts, et cetera and puts the right assets and to the right ones to shield your dividend to shield things that might have long-term appreciation, you sum across those features and we’re earning our average customer net of our fees after our fee, 1.61 percent per year of alpha.
It’s an incredible number.
RITHOLTZ: That seems like a lot.
STEIN: It’s big.
RITHOLTZ: That’s a big number.
STEIN: Wild. It’s like – it’s incredible but we have – we have run amazing you know scenario analysis on this and it’s not like I can show you the picture, it is not like in 100 percent of outcomes, you’re guaranteed to be better off, there’s nothing like that in investing.
However in the average case, you’re 1.61 per year better off with our algorithms than without them.
RITHOLTZ: So what does that mean in terms of returns? It’s 1.61 percent better but that’s not that’s as a percentage of the total pie, how much does that show up in actual returns over time?
STEIN: That is the net return to a customer, that is after our fees, that’s after all taxes…
(Crosstalk)
RITHOLTZ: So if the market gives you 10 percent theoretically someone who’s just invested in equity should see 11.61 percent?
STEIN: Exactly, and it is not that linear, right? It is not 1.61 percent per year guaranteed but if you compound that that you know when we run a bunch of you know scenario analyses and things and if you compounded over 30 years investing for retirement that’s how you end up with 44 percent more cash in the end.
RITHOLTZ: Let’s talk a few moments about this business. There’s been some pushback into the concept of automated advice giving, what do you say to people who say this is just a temporary technology fad and people need live advisors, being able to do this with just software isn’t going to get it done?
I believe live advisors provide a tremendous value to their clients, sometimes we have a product for advisers, it’s Betterment for Advisers is as you know and sometimes advisors come to us and say what’s to keep my clients from just leaving me and going straight to Betterment and they might worry about that and we say, number one, what’s to stop them from doing that today, right? Why are they with you, and they say well because I tell them I give them a full financial plan, I’m talking to them about all their needs, I soothe their fears, I’m there when the market’s bad to talk to them and we say exactly. And that is a service that they value very highly and are happy to pay for because you’re giving them a lot of value.
So that kind of the relationship all of that advice that advisors are giving is still very valuable, what we can do is we’re the smart money manager, right? So we will automate like the right kinds of things with your money, we will help you make more in your money and we try we also work very hard to make it convenient experience, right? Our mobile apps are web apps make everything very accessible.
RITHOLTZ: So originally you launched as a B2C, as a business to consumer and there was a pivot to add exactly what you were just describing. You as a business-to-business being the backend for any form of RIA or investment advisory firm, how did that pivot come about and how challenging was that transition?
STEIN: Getting to work with advisors was the thing that we knew we wanted to do for a while, it just wasn’t top priority, we had to build IRAs for instance, we had to build a mobile app back in 2012 when we are just getting our feet under us and that it took some partners coming to us and saying hey we really want to do this, we will invest with you if you if you help make this a reality for us.
Steve Lockshin was one of those early partners and in working with them, we had an instant client, right? So we had someone that we’re building for.
RITHOLTZ: And that was with which firm?
STEIN: So that was with AdvicePeriod at the time, and we’ve grown from there, we now work with thousands of advisors all across the country.
RITHOLTZ: Quite intriguing , now some of your competitors have tried some interesting variations, one of them rolled out a risk parity fund sort of well maybe we’re not indexers, maybe we can beat the market, didn’t seem to work out too well.
If you’re a Bridgewater or an AQR, hey that’s one thing but, Wealthfront had some problems with this I know a few other companies had looked at it, what do you think of this idea of people still being enthusiastic for trying to beat the market?
STEIN: Everyone wants to beat the market, you do, I do and if we could do it, wow, that would be amazing….
RITHOLTZ: Right.
STEIN: They are great at making money for themselves, not necessarily for their customers. The reason that Vanguard has the big business that they do is a lot of people came around to believe that it’s really hard to beat the market net of fees, right? And that the old technology of having you know somebody was just picking stocks for you was probably not the most efficient way to deploy your assets.
Now today, that idea of just peer index saying is you know it’s a little bit boring and then maybe is no longer the cutting edge, so people are trying alternative indexes and to me it’s very hard to tell the difference between active and passive anymore because there’s so many different types of passive out there, while we and is an algorithm active or passive, right? And the index is an active choice, right? Like which index are we going to track what gets added and what’s not, we put in companies that don’t have you know equal share voting, things like this, and so I think I those lines are going to continue to be blurred but ultimately what would drive performance is low fees optimizing for the things you can control and not worrying about the things that you can’t control.
Te things you can control include your own behavior, right? So like auto deposit, invest very regularly, they include taxes so account for that over time, they include having the right types of account set up for things so that you don’t need to go and raid your retirement account to meet some short-term expense, so advice and planning can help with all of these things that you can control and help you make the most of your money.
RITHOLTZ: So some people dislike the phrase robo advisor, what’s your view on that phrase and what’s your preferred terminology.
STEIN: I think robo advisor’s fun, it’s a handle, it’s been around for a bit now and it’s how we’re known, I use smart money manager because I think of us like a smart home or a smart car, there is just better technology now that’s available and people should all be using it, eventually everyone will be, there’s just — there’s a lot of inertia in our space.
RITHOLTZ: Well you know the pushback is that it’s not necessarily an advisor and there’s no robots involved, why are we calling it robo advisor has been the pushback.
So given the technology that we’ve seen, given how it’s deployed, what is the next logical step for this sort of advice, so we’ve — you’ve rolled out a 401(k) department seems to be fairly human intensive, there are so many people along the lines that sales are cast to take forever, what else are you looking at as a possible way to use your technology to make investing more efficient?
STEIN: I’m so bullish on the 401(k) business Betterment for business line has been great, we’ve been growing that quickly and I just keep trying to lean into that, and more that we can do, the better because all these employers are really concerned about employee wellness and the best benefits to retain the best talent and that’s where we really stand out as having this great client experience and personalized advice for every participant, nobody else offers that, right? And so it’s a really great plan.
But as I look toward the future, the things that I’m excited about now are around your every day cash management, right? When I think about our mission to begin, going all the way back to the launch, we said we want to help customers do what’s best with their money so they can live better and people took that to mean when we launched investing that we’re all about being just a financial advisor and just sort of the wealth manager maybe so were sometimes put in that category.
I’ve always thought of us as this holistic smart money manager and that includes your every day checking and savings and all of these kinds of….
(Crosstalk)
RITHOLTZ: So wait a second, so Schwab has effectively become a bank, Goldman Sachs is a bank, are you saying Betterments is becoming a full FDIC insured bank, is that the plan?
STEIN: I’m not saying that, I’m saying…
RITHOLTZ: No, no, I’m saying that.
STEIN: (LAUGHTER)
RITHOLTZ: I’m trying to get you to tell me whether or not that’s going to happen.
STEIN: Yes, well, you know, last December we launched Smart Saver which was our high yield savings account, alternative and we lunched Two-Way Sweep early this year and that allowed people to automatically move money back and forth from their checking account.
RITHOLTZ: And your sweep is a reasonable fee, you mentioned Schwab, they, there was a big Wall Street Journal article, their sweep is no longer a high paying short-term fund, it’s really a low paying cash account.
STEIN: It’s crazy that they were able to get away with that.
RITHOLTZ: Isn’t it? It’s complicated enough that nobody really understood what they were doing, but it’s real money and in my office and I’m sure in yours, it meant that anything we custodied to Schwab, there had to be a decision made, hey for this much money for more than this many days, it has to come out of cash and go into this short-term bond fund because it’s a substantial difference in interest rates.
STEIN: I think people, customers, citizens need to stand up and demand better, it just frustrates me to no end that these banks and brokers can get away with this kind of behavior because that’s where they make most of their money, right?
Schwab makes more than 50 percent of their profits off of your idle cash, if you’re a Schwab customer, you don’t know how much, you are just giving them money, just giving it away and they are lending it out for mortgages and what not and you’re getting nothing off of that.
RITHOLTZ: Well practically nothing, it is a very low amount, a couple of BPs, it’s nothing.
STEIN: But they are not alone in this, right? You know Bank of America is doing this, JPMorgan doing this, this is how they’re all making their money, so those retail accounts is where all the money is in banking and I think it’s time for a change there.
I don’t think most people are aware of that because you’re taught, just put your money in your checking account or savings account, that is a safe place to put, they tell you as a consultant back at First Manhattan Consulting Group, I saw some really bad practices with those checking accounts, crazy amounts of fees charged to people and the interest is silly low it but it’s a collective active problem where — collective action problem I mean where you know basically you’re only losing a few hundred dollars a year, you don’t care that much, you have to band together, we all have to demand better.
And that cash management to me as a super exciting spot for us where I think we can make a real impact on all of Americans lives.
RITHOLTZ: So let’s talk a little bit about the different model portfolios that you guys run, they are mostly Vanguard last time I looked, all Vanguard mostly Vanguard?
STEIN: And our core portfolios that we recommend for customers something like 70 percent of every dollar I would go into one of a couple dozen Vanguard funds, now the other 30 percent is across Blackrock and Schwab funds and there’s others in there as well, what we do is we’re independent, we don’t make any money off the funds that we offer…
RITHOLTZ: Right.
STEIN: We don’t offer any of our own funds, and that makes us virtually unique by the way in this in this space.
RITHOLTZ: You’re a fiduciary to your clients.
STEIN: We are a fiduciary to our clients.
RITHOLTZ: So you are not a broker, you are not selling shelf space, you are not getting kickbacks, there is none of that.
STEIN: Right, and all these other all these other firms do right, even Vanguard, right? They are only selling their own funds, Schwab has their own funds in their portfolio so all of these guys are double dipping in my view they’re charging you not just for the fund but also for the advice on top…
RITHOLTZ: Right.
STEIN: We get paid for advice and that’s it and I think that advice that simplicity of what we do you know they were acting in your best interest.
RITHOLTZ: So talking about Vanguard and the fiduciary obligation, you wrote a very lovely tribute after Jack Bogle, founder of Vanguard passed away, tell us about what motivated that, what was your relationship with Jack and what did he mean to you?
STEIN: Jack, I wouldn’t be here without his influence and example, when I was initially thinking about doing nothing in this space the examples that inspired me were the investing efficiency of Vanguard and the online simplicity of ING Direct, now this was back in 2006 when ING Direct was an independent brand and you know, was innovating in web financial services, and that’s now a part of Capital One and is no longer the case.
But I was inspired by Jack and when I met him, it was just like it was like meeting you know your idol, I just couldn’t believe it and he talked to me and he signed my book and he said I know you’re going to do a lot of good for a lot of people and I was so touched by that, I was really encouraged and inspired to move on and over the years we kept in touch, I went to his office, we talked a number of times at conferences and this and that, I and I just think he was such a good person and he cared about his people, he cared about his customers that example is his with me all the time.
RITHOLTZ: So let’s talk about the fiduciary rule since were discussing caring about your customers or at least doing what’s in their best interest, we were supposed to have at least for retirement accounts, a moderated version of the fiduciary rule and that in April 2017 got killed at least temporarily set back, what are your thoughts about this and again full disclosure, you’re a fiduciary of your clients, I’m a fiduciary to my clients, so I’m not arguing against this, we’re on the same side of the street with this but there is always a lot of pushback anytime the fiduciary rule comes up.
STEIN: I think this is why we have a collective action problem ,there are so — these firms are making so much money for recommending the wrong thing off of suggesting that you keep more money in cash, of suggesting that you should just by our mutual fund because it’s just as good as anything else out there, that is such a profitable thing because it’s a way of hiding a fee from you.
Now the thing, you might say why can’t regulatory action solve this, why don’t they do something about it? Well, it takes a crisis and in the mortgage crisis, we had that moment we had to people on TV who had lost everything because they’ve gotten a mortgage that they didn’t understand, and so we regulated mortgages and now frankly I just got a mortgage and so I can tell you ….
RITHOLTZ: A pain in the neck, isn’t it?
STEIN: It’s still a pain in the neck but it is pretty clear at least what you’re paying and what you’re getting.
RITHOLTZ: Right.
STEIN: Those disclosure forms are good .
RITHOLTZ: Right.
STEIN: Now all we are asking for with the fiduciary rule, and with the SEC’s best interest rule is to have clarity around disclosures on what you’re paying for and what you’re getting and of course these financial firms are arguing against that with all of their might because they love burying fees, they love taking advantage of your behavior and hiding fees in places that you won’t notice them like all this money just sitting here, we won’t pay you any interest on it or you’ll only pay us if you overdraft or if you pay late because people think, I am smart, I won’t pay late, I won’t keep very much money in an account, I will manage this and the firms have all your data and the know you won’t do those things, you will misbehave, you will accidentally forget something, you won’t actively manage it because you don’t have infinite time, and so what you need increasingly as an advisor in your corner doing these things for you, you need advisor, you need a smart money manager, you need the best technology, you need both of those things.
RITHOLTZ: So if I recall under the Obama administration when they wrote the white paper about the fiduciary rule, just in retirement accounts, they claimed excess fees were North of $17 billion a year, that’s a lot of money collectively that should be going towards people’s retirements and it’s not, so is this just as the fiduciary rule just about money is that why people are opposing this?
STEIN: That’s it, it is that $17 billion that should be going to clients is going to the industry, right? The industry didn’t argue that number they just said if this rule goes through, it will impact our profits by $17 billion. Okay so you want that money to go to consumers, to individuals, or do you want it to go to the financial services industry?
Personally I’m all about the consumer, I’m super passionate about making things more transparent about giving — letting people know what they’re getting, letting them know what they’re paying for and let them make the decision if they want the high-priced option you can have it but we have the transparency.
RITHOLTZ: That’s fair enough. So from your perspective, you sit at the nexus of technology and financial services, I won’t use the terrible phrase that that everybody else uses, but looking forward, what does the next 20 years or so in that space look like, what changes should we expect?
STEIN: We think about the self managing wallet, we think about the self driving car, right? And if you like me, I believe that sometime over the next 20 years, we are going to have self driving cars, right? I don’t know if it is going to be…
RITHOLTZ: 20 years, probably less than that.
STEIN: It could be, right? And eventually, that is just going to become the way that we get around and everyone’s going to be used to it.
Right now, it still seems a little far-fetched, look at the self managing while at the same way I can’t imagine that you’re going to get in a self driving car to take you to work and then at the end of the day you’re still going to have to figure out how much to put in your Roth versus your traditional IRA and did I actually balance my checking account this month?
Of course that is going to be managed by you know a smart system and that system exists right now and it just keeps getting better every day so it’s time to start using it.
RITHOLTZ: Do you look at companies like Amazon as potentially coming into the financial services space? I know lots of people love posited that thesis but what else is coming along to disrupt financial services?
STEIN: We see the financial services a broad space and certainly Amazon and Apple are interested in the payment side, besides closer to commerce which is their core, right? They would rather earn that 3 percent interchange than you know, have some other third-party earn it, for them to get into say managing on wealth is a little further afield, but may be in between us some of this every day cash management that I was talking about. Maybe they will play there.
I think certainly the large incumbent in financial services could use some challengers, frankly so could these large these large IT companies use some challengers, I think they’re in a lot of businesses right now and fortunately in financial services, we have a pretty good regime of our competition being good, right? There’s all kinds of laws around snack size of banks and competitive pricing to keep it a dynamic competitive market.
RITHOLTZ: You see prices continuing to go lower even in your space or is that 25 basis points is a pretty reasonable price point and how much lower could that possibly go?
STEIN: If you have a competitive market like financial services, prices would generally follow to the cost, right? If there’s you only get real difference — divergence between price and cost when you have more monopolistic areas, now I think one of the interesting things that is going on is there is a monopolistic tendency in retail banking right now so the banks, they control 40 percent of retail branches opened 80 percent of accounts over the last five years.
RITHOLTZ: If you go back 30 years the five biggest banks had less than 10 percent of the total deposits, now it’s practically 50 percent, it’s amazing how much …
STEIN: That’s right.
RITHOLTZ: How much consolidation there has been in that space, especially after the crisis.
STEIN: So there is less and less competition and none of those banks those big ones, those big four or five are price leaders, none of them are actually giving customers the best deal, the reason they’re growing is because technology is becoming a bigger and bigger asset to these institutions and those who can afford to invest in it are and I do worry about the smaller institutions who can’t make those kinds of investments, we’re empowering investment advisers with the best technology, who is empowering the banks?
I mean I’m sure there’s a bunch of like B2B businesses out there but it’s hard to compete with like that the big consolidated, say, you know, JPMorgans and Bank of Americas.
RITHOLTZ: Any of the money center banks are not under the same price competition that smaller companies are, is that the argument?
STEIN: They have different ways that they compete let’s say, I think that’s right and it’s getting harder for say a small regional retail banks to raise deposits, that’s a spot where I think we want to help them so you know, we’re looking broadly at the financial services landscape and thinking about how can we make things better for end consumers?
I think competition is great in this space, we want to continue to encourage it and people like to speak up and demand better.
RITHOLTZ: We have been speaking with Jonathan Stein founder and CEO of Betterment, if you enjoyed this conversation, well be sure and come back and check out the podcast extras where we keep the tape rolling and continue discussing all things robo advisers related.
You can find that at iTunes, Overcast, SoundCloud, Stitcher, Bloomberg wherever your finer podcasts are sold. We love your comments, feedback, and suggestions, write to us at MIBPodcast@Bloomberg.net, check out my daily column on Bloomberg.com/opinion, follow me on Twitter @Ritholtz, I’m Barry Ritholz, you’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast. Jon, thank you so much for doing this, I’ve been looking forward to this for a while, I think you guys are in a really interesting space and I followed your progress over the years.
Although I’m astonished how effective you have been on the space has been on the venture capital side because unless and until there’s an IPO, exits are becoming fewer and further between, we’ve seen a lot of people say well we don’t have to buy, we have seen a few companies get bought but a number of the latter entrants said well we can build this ourselves, Vanguard built it themselves, Schwab built it themselves although I know they had a series of small related acquisitions.
Some of the big first round robos that had achieve some AUM scale got purchased primarily for the AUM, what’s the exit strategy? Is it IPO or a big entity down the road?
STEIN: We’ve always said since we launched that we want this to be an independent public company if we were to have the impact we want, that’s the route that we have to take, we want to have such a strong relationship with our customers and constantly reinvest in that in their well-being which is not what the typical incumbent is trying to do …
RITHOLTZ: Right.
STEIN: They are great at making money for themselves not necessarily for their customers.
RITHOLTZ: Do you get any pushback on that philosophy from hey, it’s been a decade since your first venture capitalist backed you, I know these guys have a tendency to want to see something eventually, what’s the relationship like and what are they were they pressing you to do?
STEIN: Our investors have been fantastic from day one if we knowing that this is a long-term generational type opportunity, we went into it eyes open we said is it not going to be a thing that we quickly flip and sell, we are trying to build an institution here, if you look at the cycles in the space, it’s every 30 or 40 years you get another generation of companies that grow up and so in the last major one was back in 70s when Schwab and Vanguard both launched about 75, and they are big company today, they didn’t displace the old companies, they didn’t put Merrill Lynch out of business, they didn’t put Morgan Stanley out of business, those continue to be companies too.
The more recent one, there was sort of like a mini one when e-trade and so on launched in the early 90s, right?
And today I think we’re in a new era, we are in the smart money management era and we are the leader in that space, nobody is close to us, right? We have more assets, we have a bigger reputation than any other firm, and sure there’s company saying hey we you know do something about recommending portfolios, that’s nothing new, that’s not smart money management, we’re the smart money manager, right? Like we’re the one that’s actually doing all the right things with your money.
RITHOLTZ: Quite interesting. All right, so let’s jump to our favorite questions, these are what we ask all our guests, our speed round, you might be the first person who can answer this question, what was the first car you ever owned, year make and model?
STEIN: I started driving when I was 15 in Texas where I grew up, you can get a hardship license right and my hardship was that both my parents worked and I lived a long way from school and there was no bus so I get to get a license early, I got a Nissan Stanza, it was a 1990 red Nissan Stanza, it was the nerdiest car that I probably ever could have had…
RITHOLTZ: Impressive. So you mentioned Jack Bogle as a mentor, who else were some of your early mentors?
STEIN: I got to think my parents and my grandparents, my family who was just such fantastic influences to me, my parents were city planners, they taught me about efficiency and the value of good design and I learned to love business through my grandparents who ran a furnished furniture factory in upstate New York and I love their style of just building a community around a factory, I thought it was so fantastic.
RITHOLTZ: Who influenced your approach to investing?
STEIN: Well, aside from Jack Bogle.
RITHOLTZ: Obviously he is front and center.
STEIN: He is huge, I learned a lot from the Chicago school so one of my professors at Harvard and undergrad was worked with the Chicago guys, he worked with Dick Thaler and I learned about Richard Thaler I learned about Fama and French and now we’ve partnered with Dimensional Fund Advisors, DFA and it’s almost coming full circle back to that relationship, right? I always thought that like Fama and French and Thaler were on to something.
RITHOLTZ: And Fama and French a big advisers to DFA and been pretty much from the beginning.
So everybody’s favorite question tell us about some of your favorite books.
STEIN: I love Sapiens, a big fan of that but probably my favorite is Dan Kahneman’s Thinking Fast and Slow, it is a tome, right? It is a thick one, and but it’s a page turner too, it’s a fascinating read.
RITHOLTZ: The first three quarters of that you just really blow right through it.
STEIN: Right through it.
RITHOLTZ: Yes.
STEIN: It’s fascinating.
RITHOLTZ: Absolutely.
STEIN: it’s how we think, it’s how we work and I talked about that union of like rational and irrational, he explains, right, he gets it.
RITHOLTZ: And got a Nobel for getting it. Any other books you want to mention or just leave it with those two?
STEIN: I will leave it there.
RITHOLTZ: What do you do for fun? What do you do out of the office?
STEIN: All of my time outside of work these days is occupied by my family, I got a three year old and a four year old, two daughters and I just love spending time with them, it is such a precious age right now I can’t do anything else.
RITHOLTZ: What are you most excited about in the financial services industry today?
STEIN: I think this idea what happens with every day money management is hugely exciting, I know I keep coming back to it it’s ripe for change and integrating that with this long-term financial plan is the realization of our mission, it’s a thing we’ve been talking about for years that we can really help you with your long-term goals unless we help you with how do you save more today.
RITHOLTZ: What sort of advice would you give to a recent college grad or a millennial who came to you and said I’m interested in a career in FINTECH, how would you advise them?
STEIN: I think having real passion is important, we always look for passion obviously like you got to have horsepower, you got to work hard and get things done but showing like something that you have real passion about is important, the other thing is openness, can you listen, can you know somebody’s got all the ideas and not listening to others, that is not really a recipe for success.
RITHOLTZ: And our final question, what is it that you know about the world of investing technology, anything else related today that you wish you knew 10 plus years ago when you were first starting?
STEIN: Back when I was a student I was learning all the stuff about how to invest and said that I was just as dumb as the next person and of course and I went out and started managing my own money and I bought Enron on the way down, you know, I made some of the same dumb mistakes that I read about and I wish I hadn’t done that, I wish you know I’d I learned my of my lesson, we’re all just as dumb as the next person in the end, I certainly am anyway.
RITHOLTZ: Quite interesting, we have been speaking with Jonathan Stein, founder and CEO of Betterment, if you enjoyed this conversation well be sure look up an inch or down an inch on Apple iTunes where you can see any of the previous let’s call it 243 such conversations that have taken place over the past five years.
We love your comments, feedback, and suggestions, write to us at MIBPodcast@ Bloomberg.net, if you enjoyed this conversation will give us a review on Apple iTunes, lastly I would be remiss if I did not thank the crack staff that helps put this conversation together each week. Atika Valbrun is our project manager, Madena Parwana is our producer/audio engineer, Taylor Riggs is our booker producer, Michael Batnick is our head of research.
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
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