Betterment CEO Jon Stein Interview with Questions from Top Investment Bloggers

Betterment CEO Jon Stein was kind enough to answer a variety of questions about Betterment investment services, his personal experiences, and the state of Wall Street.

Several top investment bloggers also contributed questions to put Mr. Stein on the hot seat and pick his brain about the decisions behind Betterment’s success.

Betterment accounts offer a simple, automated solution to investing in a diverse portfolio of stocks and bonds.

Learn more about Jon Stein and what it takes to be CEO of the Betterment investment company.

1. As the CEO of an investment company, can you give us an outline of your daily work routine and what job duties you perform for Betterment customers?

One great thing about founding a start-up is that every day is different. Each day presents new projects and challenges and that keeps things exciting. Some days I am working with our talented development team on figuring out complex code, other days I spend analyzing data, trying to gain a better understanding of how to improve our business, and still other days I brainstorm with our marketing team on how to best send the Betterment message. Generally, 7:30 to noon I spend working, noon to 5 I’m in meetings, and 5 to late I catch up on work and emails.

One mainstay of every day, however, is customer interaction. At Betterment, we all participate in answering customer phone calls and emails – even me. I regularly respond to support emails and if you have a question you’d like to call about, you might just get me on the other end of the line! This is very important to me because it’s how we learn what our customers want. In fact, over the past few weeks I have been scheduling phone calls with some of our customers to get their feedback, which is extremely valuable. These calls have been informative, entertaining, and eye-opening, and they bring me that much closer to really understanding Betterment users.

2. At what age did you first become interested in the stock market and do you remember the first stock you owned?

I remember when I was 6 or so my grandparents saying they wanted to buy me a share of Disney stock. They never did. But each year I would remind them about it and check on the price. I’d tell them how much it’d be worth now if they’d bought it then. That was my first lesson in the power of compound interest and returns.

3. Have you or your company felt any effects from the Occupy Wall Street protests?

It’s funny you ask this. While Occupy Wall Street has not hurt our business in any way – we had our biggest week ever just a couple of weeks ago – it has definitely opened our eyes to the necessity for transparency in the financial services industry. Customers deserve financial services that are productive and transparent, and there is a real need to level the playing field; companies should not profit at the expense of their customers, but rather be open with their customers about what they stand for and what they promise to deliver.

We feel so passionately about this sentiment, that we’ve joined forces with Perk Street Financial and Bill Guard to spearhead a movement called SlashDeclare. Through this movement, financial services companies have come together to declare what their customers deserve. We realize that the current system has failed, but there is a plethora of new financial services companies that are designed to meet the needs and rights of the 99%. Betterment is one of those companies. As part of the movement, each company involved is creating their own “SlashDeclare” page. You can check ours out at www.betterment.com/declare. On there you will see our “Bill of Rights” to our customers – what we stand behind.

We now have a bunch of other companies on board, including Pay Perks, We Pay, Quovo, Plantly, Planwise, Payoff, BlueLeaf, Kapitall, and Nerd Wallet, and know that the list will continue to grow. You can check out our main page at www.SlashDeclare.org, which will serve as a hub for information on the movement and also a place where you can find other SlashDeclare pages as they roll out.

We are optimistic this initiative will bring about some positive change in the financial services industry.

4. What sort of person should open a Betterment account? Is this for the average Joe or for the seasoned investor?Question #4 submitted by Financial Success for Young Adults.

The beauty of Betterment is that it makes investing accessible to everyone. There is not one “type” of person who should open a Betterment account, because it has benefits for both new and seasoned investors.

You can be a beginner with little knowledge of investing and still earn market returns on a diversified portfolio. We provide you with information and advice along the way, so no prior knowledge of investing is necessary.

At the same time, most of our best customers are experienced, active investors who want to put some money in a smart account where they can enjoy benefits like automatic rebalancing, fractional share trading, and easy access. They know the sound investing practices they should be following, but they don’t always have the time to check if their portfolios are rebalanced, or to re-invest dividends. We automate good investing behaviors, and save people time, and seasoned investors appreciate that benefit.

Perhaps our prototypical customer is a young professional – 33, doctor, lawyer, ex-military, or engineer – savvy about saving and investing, and too smart to waste time with Wall Street brokers or mutual fund warehouses.

In short, Betterment is an excellent platform for anyone who wants a simple, smart, and cost efficient way to invest for the long term.

5. What value does Betterment offer to charge an annual advisory fee versus the investor doing it on their own for potentially cheaper?Question #5 submitted by Good Financial Cents.

Relative to the benefits you receive as a Betterment investor, the annual advisory fee is incredibly low. Betterment automates good investing behavior, and while an investor may be able to “do it on his own” for a lower price, there is something to be said for the cost of your time and effort. In order to get that lower price, you must remember to do things like re-invest dividends, regularly rebalance your portfolio, and make regular contributions to take advantage of dollar cost averaging. There are definitely people who do this, but it certainly takes a lot of time and diligence, and we all know that time these days is scarce. At Betterment, we’ve created a way to make all of those behaviors automatic for you, so you can go back to doing what you really enjoy in life, instead of constantly watching your investments.

Besides automating crucial investing processes, Betterment also provides a ton of other benefits:

  • A straightforward pricing model without hidden fees.
  • We pay for all of your transactions so they’re free to you.
  • No minimum balance.
  • Focus on the only two investments that matter to 99% of investors – a great stock basket and a conservative bond portfolio.
  • An incredibly simple user experience that makes it easy to understand your money and control your exposure to risk.
  • Automatic, seamless diversification (which means higher returns with lower risk).
  • The ability to see how others like you invest.
  • Transactions in exact dollar amounts (not whole shares).
  • Goal-based advice and accounting.

6. Can you disclose on average how much your investors (in Betterment) are making?Questions #6 and #7 submitted by Investorz Blog.

An average investor who invests $10K will on average double his money in 10 years. Of course, an investor’s return will depend on a variety of factors, including the asset allocation he chooses.

7. Why haven’t you created a way for Betterment investors to take on short positions?

Taking on short positions requires the ability for you to time the market. In order for you to make money, you have to buy the stock back at a lower price than what you sold it for. You’re taking a huge risk for a short term gain.

While many people try to make money doing this, at Betterment we are more focused on long-term investing. We want our customers to think of their long-term goals – retirement, buying a home, saving for education – and invest towards them, rather than gambling with short-selling, trying to seek small, short term gains at a huge risk.

Perhaps most important to note is that market timing rarely succeeds. Did you know that most individual investors under-perform the funds in which they invest by 5%? This is because no one really has better information than anyone else. People more often than not sell when the market is low and buy when it’s high; they remember their winners and forget their losers. As Modern Portfolio Theory teaches us, you are best off investing in the full market basket and not trying to time individual stock sales.

At Betterment we stand by avoiding the “game” of market-timing in order to optimize long term returns for our customers.

8. Why did you choose to invest funds from investors in ETFs and not index mutual funds?Questions #8 and #9 submitted by My Personal Finance Journey.

Betterment uses ETFs in both our stock and bond portfolios because of the liquidity, low management fees, and tax advantages they provide. An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets, like an index mutual fund, but trades like a stock on an exchange. ETFs are bought and sold like stocks throughout the day, which, for investors, means there’s flexibility (called liquidity). Compared to mutual funds – which have many hidden costs and penalties for early withdrawal – ETFs are relatively transparent and easy on the wallet. The flexibility of ETFs, while still providing optimal diversification (through our ETF portfolio investors have a little piece of over 3,500 companies), made them the right choice for the Betterment basket. They also allow our investors the ability to seamlessly add and withdraw funds at their convenience without a penalty – something mutual funds would not permit.

9. Why did you feel the need to invest in all of these different equity ETFs (shown below) to make up the equity portion of the portfolio, when investing in VTI would technically cover the entire stock market by capturing the Wilshire 5000 index?

  • 25% VTI: Vanguard Total Stock Market
  • 25% IVE: iShares S&P 500 Value Index
  • 25% VEA: Vanguard Europe Pacific
  • 10% VWO: Vanguard Emerging Markets
  • 8% IWS: iShares Russell Midcap Value Index
  • 7% IWN: iShares Russell 2000 Value Index

VTI is a market-cap-weighted index. As such, it is skewed toward large-cap growth stocks – exactly the wrong skew if you want to maximize long-term returns. Research shows that small-cap and value stocks outperform over the long term, so our portfolio weights reflect the proper representation of these types of companies in a total market basket. There is also value in owning multiple funds and re-balancing between them to take advantage of natural mean-reversion between indices.

10. If rumors are true that Betterment is going to be offering Traditional and ROTH IRA accounts, would you be able to speculate about what the fee structure would be for these? Would the fee structure be the same as the type of accounts that are currently offered?Question #10 submitted by 20’s Finances.

We are really excited about IRAs, as they are something we have always wanted to offer our customers. As we’ve fine-tuned and improved our product, IRAs are definitely the next logical step. So don’t consider them a rumor! IRAs are a sure thing for Betterment customers, and you can expect them before the end of the year. In fact you can see a countdown to our IRA launch here: www.betterment.com/ira.

We haven’t given too much thought to IRA pricing – everyone seems happy with our existing fee structure and we aim to keep everything simple and transparent. That means, for now at least, IRA pricing will be identical to regular pricing. No maintenance fees, no opening or closing fees, no surprises.

That’s the end of the interview questions.

Thank you to Jon Stein for taking the time to answer these questions.

Thank you as well to all of the finance bloggers who submitted questions.

Review this Betterment New Account $25 Bonus Offer if you are interested in opening a Betterment investment account.

Please feel free to leave follow-up comments and discuss these answers further.

Comments

  1. says

    I’m a big supporter of what you all are doing, Jon! Keep it up! Thanks also for addressing my question about why ETFs vs. index mutual funds. I could imagine that ETFs would be better since investors are no-doubt going to come in and out of their positions more often than I do with my index mutual funds.

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