Revolutionizing wealth management with Jon Stein, Founder & CEO of Betterment

In this fourth episode of Focus on the Founder, Jon Stein, Co-founder & CEO of Betterment joins us to discuss his career journey, experience starting Betterment while in business school and thoughts on wealth management and investing more broadly.

Jon Stein (Founder & CEO, Betterment)

Achieving Personalization At-Scale

Betterment is a robo-advisor platform that provides investment advice and wealth management at a low price point. The wealth management space is fiercely competitive. Startups like Betterment, Wealthfront, and Robinhood as well as incumbents like Vanguard and Schwab have all entered the space, competing to provide personalized, low-cost advice to consumers.

Since Betterment launched in 2010, their assets under management have grown rapidly, reaching almost $12 billion earlier this month. During this conversation, Jon discusses his experiences growing Betterment, and how Betterment has succeeded in such a competitive environment through truly putting the customer first. As always, you can find the full podcast episode on SoundCloudiTunes, and Google Play.

Key Thoughts from Jon on…

The reasons behind founding Betterment:

While working for the First Manhattan Consulting Group, Jon advised some of the world’s largest banks and brokerages. In the process, Jon gained an insider’s perspective on how banks operate and serve their customers. His product-development engagements with banks typically involved working on the key aspects of their products such as default rates and internal transfer pricing. Notably, these larger players paid almost no attention to their customers during the product-development process, as they focused much more on optimizing their data and existing flows, which Jon found perplexing. While working in Australia, Jon encountered user-centric financial products not available in the US at the time, such as the mortgage-offset account which combines a traditional mortgage and deposit account.

These experiences helped frame the problem that Betterment aims to solve — that “the old way of managing money is broken.” Investment management should be held to a higher standard — one which focuses far more on consumers.

Building a team:

Jon committed to starting Betterment before starting his MBA at Columbia Business School. In the early days, building Betterment was a two-fold challenge — building the actual product and navigating the regulatory challenges of being an investment advisor.

Sean Owen, Jon’s roommate at the time, provided much of the early engineering expertise. Sean was a software engineer at Google who studied computer science at Harvard, and built the back-end of Betterment while Jon worked on the front-end. Jon eventually met Eli Broverman during a weekly poker game. Eli, who was then a securities attorney, provided the legal expertise and helped Jon navigate through complex regulatory landscape. Sean and Eli’s skillsets were diverse and congruent with the early challenges that Jon needed to solve.

The fundraising journey:

Betterment launched at TechCrunch Disrupt in 2010, where they competed against 500+ entrants, many of which had already raised some amount of funding. Betterment went on to win the competition, giving him crucial exposure to customers and investors. Immediately following the competition, Betterment signed up 400 new customers, who helped drive Betterment’s initial organic growth by way of referrals. The boost in credibility from the event made it easier to hire new employees, and helped Betterment rapidly grow from what was at the time a four-person team.

Just as important, preparing for the Disrupt presentation helped Jon and his team internalize their story and understand how to best pitch the idea. A month following the TechCrunch competition, Jon was able to raise $3 million from Bessemer Venture Partners.

How Betterment puts customers first:

Since the initial investment from Bessemer, Betterment has secured $275 million in funding and has grown significantly in employee count and AUM. In this period of growth, Jon doubled down on the theme of bringing the voice of the customer into every interaction. This focus has helped Betterment withstand the test of time and compete effectively against a host of startups and incumbents offering similar services.

Private Robo-Advisors in the Wealth-Technology Category

Source: CB Insights

Betterment puts the customer first by:

1. Personalizing advice

Betterment’s vision is to provide excellent financial guidance that is easy to understand and available to everyone. Betterment is unique in that it offers a spectrum of interaction-types: customers who prefer human interaction can receive hybrid-robo solutions through Betterment’s unlimited text messaging and premium telephone access services. By prioritizing the education of their end-user, Betterment offers a suite of solutions to improve consumer-access to financial markets.

2. Building trust

Financial services as an industry has historically had a low NPS. Betterment strives to build trust with its customers as both an ethical obligation and a means of differentiation. In addition to investment advice, Betterment publishes scores of articles helping consumers understand their personal finances, navigate through tax reform, and manage their expenses. Betterment also has no holdings of their own; thus, they eliminate many of the conflicts of interest present in most banks.

3. Combining responsibility with wealth creation

Betterment offers a way for consumers to hold well-diversified portfolios that are also socially responsible through their socially responsible investing (SRI) portfolio. Social responsibility doesn’t just afford Betterment an additional dimension of personalization; it also reflects well on their brand as an ethical investment advisor.

The future of investment management:

In this bull market, massive amounts of capital have been pushed into indices and ETFs, which represent a little over 10% of the global equity market capitalization. In fact, these indices and ETFs, spearheaded by firms like BlackRock and Vanguard, have outperformed an overwhelming majority of hedge funds.

Net flows into U.S.-based passively managed funds and out of active funds in the first half of each year

Source: Bloomberg, ICI

Jon explains that Betterment is here to stay even in increasingly likely bear market scenarios, as the same principles of minimizing cost and managing tax burdens that currently power Betterment’s platform still apply during downturns. Through careful risk-management, alternative investment strategies, and optimizing customer behavior to prevent market panic, Betterment aims not only to protect its customers in bear markets but also provide them competitive returns.

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