iRobot: Jon Stein, founder and CEO of the robo-advisory firm Betterment, is striking fear in the heart of a flesh-and-blood industry
- June 1, 2018: Vol. 5, Number 6

iRobot: Jon Stein, founder and CEO of the robo-advisory firm Betterment, is striking fear in the heart of a flesh-and-blood industry

by Mike Consol

Over the years, Jon Stein dreamed of becoming a journalist, a doctor, an art dealer, a rock star and even president of the United States.

“I don’t think I’d make a great president,” he says, “but I do think I would be interested in ways to make people’s lives better.”

Long before Stein reached age 35, the legal minimum for being elected president, he found his calling — right after he learned some lessons about the private wealth market. After opening several brokerage accounts to invest his money, he was chagrined to find mutual fund companies’ persistent advice was to buy their funds, while brokers beseeched him to trade, trade, trade.

“It felt always like the right answer for them, not the right answer for me,” he recalls.

He culled additional private-wealth-market insights while working as a product development consultant with banks and brokerages, which were more interested in analyzing default rate and loan provisions and the sign-up funnel than talking to their clients about the customer experience.

Those experiences convinced Stein to create an algorithmic solution to investing and managing money. Yes, the dreaded robo-adviser: the stream of computer code that automates the management of investor portfolios and puts the fortunes of wealth advisory firms at risk — particularly those that deal strictly in the traditional (and simplistic) two-dimensional stock-and-bond portfolios, which can be more aggressively and less expensively managed by automated “robots.”

Betterment was born, a company that stakes its reputation on an approach to long-term investing it claims can help investors earn 2.66 percent more per year than investors who pay higher fees to human money managers, while automatically rebalancing portfolios and lowering investors’ tax bills.

The organization did not stop at one-off individual clients. It launched Betterment for Business in January 2016, which currently provides 401(k) programs and advice to the employees of about 400 U.S. companies, and Betterment for Advisors in October of 2014, which allows advisers to use Betterment’s technology to manage their clients’ assets. More recently, the firm launched smart-beta portfolios developed and managed by BlackRock and Goldman Sachs. Also new is a charitable giving option that allows investors to donate their appreciated shares to major charities, such as UNICEF, the World Wildlife Fund and the Breast Cancer Research Foundation, while receiving a tax deduction.

More personalized services are in the works.

Not too shabby for a guy whose original business plan called for Betterment to be a one-employee company — just Jon Stein writing code, creating new algorithms and automating business processes. It didn’t go down that way, but Stein is not complaining about the eventual outcome.


If you could go back in time, what would you tell a 25-year-old Jon Stein?

Take the leap into entrepreneurship earlier.

Tell us the story behind the Betterment name.

I had the concept of wanting to make life better and wanting to do it through financial services. Betterment is an old English word that means the act or process of making things better, making improvements. I liked that concept and wanted to apply it.

Where did the idea for Betterment come from?

I had a number of experiences that lead me to believe there was a need to create a new way to invest and manage money. I had opened a number of different brokerage accounts at maybe seven different institutions, and each of them steered me toward an answer, but it felt always like the right answer for them, not the right answer for me. I would open an account with a mutual fund company, and they would say, “Buy our funds.” I would open an account with a broker, and they would say, “Trade, trade, trade.” A mutual fund company really is designed to manufacture and sell mutual funds, not to maximize the client’s money. A broker is designed to sell stocks, and the more they sell, the more commissions they get paid; they are not designed to maximize the client’s money. I was working at a firm called First Manhattan at the time and was consulting to some of the country’s largest banks and brokers, so I knew that the innovation wasn’t going to come from within the industry, because most of my clients didn’t do a lot of thinking about their customers or innovations.

You came up with an algorithm that never takes time off, doesn’t need healthcare, never takes a day off or forgets anything, doesn’t ask for pay raises.

It hasn’t asked for a pay raise yet, but that doesn’t mean it won’t.

Is Betterment a financial company or a technology company?

Neither. We are a consumer company built around the customer, and we are rethinking financial services from a customer-centric standpoint.

I notice you don’t have a technology background, and yet you pursued a technological solution.

In the early days, I was embarrassingly ambitious and believed that I would just do it all, so I taught myself to code. I had a roommate who worked at Google as an engineer, and he pointed me toward some resources. That was 2008 and 2009, and then we hired a CTO. I continued to code quite a lot for the first couple of years, until we launched in 2010.

You had a reputation as controlling and a micro-manager. The fact that you taught yourself to code seems to point to that.

I thought I could build this business, automate things and do it on my own. I quickly learned that I would need partners and I would need to grow a team. Fortunately, over time, we hired an amazing team of many people who are much smarter than me and have all kinds of skills that I didn’t have.

Your 2018 resolution is to “reinvigorate the voice of the customer.” What are your customers saying? Is there an overarching theme or two?

In general, they are delighted. We have a Net Promoter Score of about 70, which is as high as those scores get; nobody in our industry has better than that. The average for financial institutions is closer to zero. We survey all of our customers, and we ask how many of them are likely to recommend us to a friend, and if we get an eight to a 10, we consider that a recommender; if it is a six or seven, it is neutral; and if it is a zero to five, it is a detractor.

If they claim to like Betterment, what is the reason generally given?

They like Betterment because they can set it and forget it. We manage and optimize things for them by reducing their taxes, reinvesting their dividends and rebalancing their portfolio. That happens without them having to lift a finger.

How often do they get communication from Betterment?

Customers can talk to us at any time. We have live customer support seven days a week. They can chat with us by voice, by text message, within the app. And when do we reach out? Well, that depends on your preferences; for most customers, they don’t really want to talk to us very often.

But don’t they want a quarterly report?

That information is always available on the mobile app, so customers can check any time to see performance over any time period, right up to this very second. There are quarterly reports available, as well; they are available in the app, or we email if the customer prefers.

Recently the Dow dropped about 1,000 points. Did your clients panic?

We saw three times the normal volume of traffic, people logging in to check their accounts. At the same time, we saw an increase in the number of transactions, both deposits and withdrawals. The interesting thing is the deposits were up more than withdrawals, so people in general saw it as a time to buy stocks cheaper. We have a very sophisticated customer base; they are all professionals, and the largest single profession of our customer base is engineers. They are high earners, with an average income well north of $100,000.

When you attended Harvard University, what did you think you were going do with your life?

I had no idea really. I was learning a lot; I felt lucky to be there. And in my freshman year, I took economics and human behavioral biology, and those two classes had more of an impact on my life than any others — economics because it explains the world, and behavioral biology because it is about how we actually make decisions. People don’t necessarily make great rational decisions the way the economic theorists would like us to.

How does the current Betterment operating model differ from your original business plan?

Aside from that embarrassing stage where I was the only employee in the business plan, it really hasn’t changed. The same things are important — the revenue model is the same, the customer focus is the same. I started the company to help bring great financial guidance to everyone, and that remains our mission today. Maybe the main difference is that we have added some lines of business over time, so we have added the Betterment for Business, which is our 401(k) platform, and we have Betterment for Advisors, where we partner with financial advisers.

You have said your family encouraged you to take the risk on Betterment. How so?

I would say they were hesitant at first. There was some skepticism when I told them that I was going to create a financial services company during what was one of America’s largest economic crises, in 2008, and it took some time to convince them that this was a good idea. They knew I was passionate about it; they knew that I was ready to give it a try. Eventually they were supportive.

Your family must be blown away by your success.

I think that is a fair characterization. They are really proud.

Are you blown away by your own success?

No, because this is really just day one for us. I know that we have so much work still to do. Of course, I am proud of what we have done and proud of my team and the work they do, but I see so much still ahead. More is ahead of this firm than is behind it.

Characterize your client base.

Today we have north of $13 billion of assets and over 300,000 customers, and we are growing fast. Our average customer is 37 years old, with a salary north of $100,000, so they are sophisticated people.

What do you expect Betterment’s AUM and clients numbers to be in five years?

I would like us to be managing $100 billion, with millions of clients.

Are you on that trajectory now, or do you have to accelerate growth?

We have accelerated our growth every year. I don’t think getting there is a given, or that it will be easy, but I do believe that it is possible.

How do people find Betterment?

Still, to this day, despite all of our excellent marketing work, the No. 1 reason that people come to us is because they heard about us through a friend.

Betterment relies on investors with a do-it-yourself mentality. Is that cohort waxing or waning? In other words, are millennials and members of Gen Z pointing that direction?

Yes. People are becoming more and more comfortable with the idea that technology can make life better. People who use Amazon and Uber and Airbnb and other apps that make their lives easier, they are coming to expect that same kind of convenience and performance from financial services — and the traditional firms struggle to provide it, and they certainly struggle to do it in a way that is really aligned with a customer’s best interest. This is a shift that is helping us, and so is the transition toward exchange-traded funds and passive investing. That is wind at our back.

What do you tell prospects who ask about Betterment’s performance record vis-a-vis a fee-based wealth adviser?

We have a graph on our site that shows our performance over many years and compares it to that of fee-based financial advisers and, of course, we, on average, will outperform. With averages, there are always exceptions, such as that one active fund that outperforms the passive funds. But, generally, those are the minority, so if you are a betting person and you were trying to make the most of your money, the thing you ought to do is follow the evidence. All the evidence suggests that we will outperform anything else you can do with your money.

Is your clientele entirely North America–based? How big a footprint does Betterment have beyond U.S. borders?

We are just in the U.S. because there is so much opportunity to grow here. Although we get constant inbound requests from people around the world, we just don’t entertain those because any time spent going abroad would be time taken away from our U.S. customers, and we are really focused on doing the best we can for our customers here.

How does the sign-up process work for new Betterment clients?

We start by asking you some questions about your age, income, whether you’re saving for retirement, for a major purchase — or are you just saving to build wealth? Based on those answers, we recommend goals and different accounts. We will create portfolios, then manage them over time. You ultimately have control; you can change the portfolio.

How many different models or portfolios are available?

We don’t really think of it that way. There are effectively an infinite variety of portfolios. If you choose the Betterment core portfolio — nothing fancy, a very-low-risk, mostly bond portfolio — there are 101 different portfolios just in that core. There is really, for every one of the 75 million American investors, there are 75 million unique portfolios available at Betterment.

The robo-adviser stereotype is no human interaction.

We have live customer support seven days a week. Anyone can talk to a licensed financial expert, many of them are CFPs, and they are available to all of our clients. That surprises some people who think of robos as not being customer friendly, but our customer support was ranked by Consumer Reports as the best in the business and tied with firms like Charles Schwab or USAA, who are known for their customer friendliness. After saying all that, I should also point out that advice doesn’t necessarily mean human-driven advice. There are lots of ways to provide advice and guidance without having to call us and talk to somebody. If you have ever used Google Maps to get directions, that is guidance tailored to you that is specific to your situation, and it is automated.

What limitations or restrictions does Betterment place on clients?

You can’t pick individual stocks here. We get customers who say they want to own Apple or GE, but we don’t do that, and the reason is because there are plenty of places where you can put 5 percent or 10 percent of your money into a casino, which is what stock-picking is — you can do that. We don’t think that is a terrible idea, especially with a small portion of your money, while you keep the rest invested intelligently in a globally diversified portfolio that is constantly being optimized.

Many investors are adding real assets to their portfolios, and even investing and owning the assets directly. Can Betterment accommodate them?

We do not have commodities as an explicit asset class in the portfolio today. I am bullish on the idea of direct real estate investing or consumer credit investing, and many other types of real assets beyond REITs and commodities, but very few of those products are liquid, so it is hard to provide retail investors with liquid access to some of those hard assets today.

Who or what do you consider to be Betterment’s chief rivals?

Our No. 1 rival is inertia because people are so stuck on their current situations. When I think about where these people are, they are at the big incumbents, they are at Schwab and Vanguard and Fidelity, so they are also our rivals. In a sense, they are our partners, as well, because we use some Vanguard funds, we use some Schwab funds, because those firms are very good at manufacturing low-cost exchange-traded funds. Where they are not as good is in providing maximized returns for their clients. That is what we do best.

The big players are starting robo-advisory services. I would think they could pose a challenge to Betterment.

Most of these firms are doing it to copy Betterment and to say “we have a me-too option” and “please don’t leave us.” Vanguard doesn’t even claim to have a robo-adviser; they have a whole different thing — just a call center that provides advice. They don’t call it a robo-adviser because there is very little technology. Most of these firms aren’t leading the way; they are following, and they are doing the minimum to be more customer friendly.

Do you consider Betterment a passive or active investor?

I am evidence-based, and while in a traditional sense most of our portfolios are passive, they are passive because most of the evidence suggests that to maximize net take-home returns, you want to minimize costs, and passive products tend to be low cost. We also have a smart-beta portfolio run by Goldman Sachs that costs around 10 to 15 basis points. We chose it because it’s a well-run, low-cost portfolio.

How do you like to spend your time outside of work?

Spending time with my two daughters and exploring the world with them.

First choice for a new career?

Doctor. I actually originally took a pre-med course as an undergraduate because I love the idea of helping people and getting to know them.

Most influential book you have read?

Thinking, Fast and Slow by Daniel Kahneman

What are you afraid of?

Losing touch with family, friends, colleagues — it’s hard to keep up with everyone I love.

Biggest lesson learned?

Don’t try to do everything by yourself. Work is better with a team.

Best piece of career advice ever received?

Make it real. I did this by making a sign-up flow for Betterment and summary page of the account as soon as I thought of the idea for the company. It needed to feel tangible.

Favorite quotation?

John Stuart Mill, English political economist: “[Happiness is] attained by not making it the direct end. Those only are happy … who have their minds fixed on some object other than their own happiness. ... Aiming thus at something else, they find happiness by the way.”

Tell us something people would be surprised to know about you.

I love taking naps.

What is your idea of perfect happiness?

Helping everyone make the most of their lives.

You’re organizing a dinner party. Which three people, dead or alive, do you invite?

I would cancel the dinner party and throw a weekend rager with history’s greatest scientists and philosophers.

Which historical figure do you most identify with?

I loved the Cornelius Vanderbilt bio, The First Tycoon. He and I are not the same, but what an impact he had on America.

What is your greatest extravagance?

Round-the-world vacations with my family.

What is your biggest regret?

I don’t believe in regrets. I believe that everything that happens is a learning opportunity and makes you who you are today. I look forward.

What phrase is most overused in your industry?

Robo-adviser. Where are the robots?

If you could change one thing about yourself, what would it be?

I’d be a bit taller and have a little less of a taste for ice cream.

What is your most pronounced characteristic?

My laugh. It’s loud.

If the most recent year were set to music, what would be the first cut on the soundtrack?

“Everything Now” by Arcade Fire.

What book might people be surprised to find in your bookcase or iPad?

The Undoing Project by Michael Lewis. I’m reading it now.

How do you want to be remembered?

As a person that changed the financial services industry for the better and always made sure to put his customers’ best interests first.

Mike Consol ( is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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