May 3, 2016
Welcome to Barefoot Innovation and to a new dimension in
the topics we explore. We've talked with many startups in lending,
payments, and managing personal finance. Today, we're looking at
the most exciting change underway in the investment space -
"robo-investing." My guest is Jon Stein, the founder and CEO of
Betterment.
We met in their fast-growing offices in New York, a converted
warehouse steeped in industrial character and with mouth-watering
aromas wafting from a very substantial food bar that lined one end
of the busy open space, and offering the special charm unique to
businesses where people bring their dogs to work.
In our conversations, Jon told me the story of his personal
journey. He graduated from Harvard and - since, as he says, no one
was recruiting for jobs with the description of "making people
happy" - went into finance. Eventually he went on to Columbia
Business School, gained Series 7, 24, 63 certifications, and become
a CFA, Chartered Financial Analyst. He expresses respect for
traditional financial businesses, but became frustrated by their
transactional focus, and also by his own financial life - he had 7
brokerage accounts, invested in Enron, and finally concluded that
the industry encourages the wrong investor behaviors, especially in
trying to "beat the market." He'd studied both economics and human
behavior in college (before behavioral economics caught on) and
realized that his interests lie at the intersection of behavior,
psychology, and economics. He remembers a professor saying "how
crazy people can be, and how very often they would get in their own
way, and how even when we wanted to do the right thing, we would do
the wrong thing."
He also says he always knew he wanted to do "something
big."
So in 2008, he founded Betterment.
Betterment is now the largest independent "robo-advisor,"
with $4.3 billion in assets under management and 150,000 customers.
I've interviewed many founders of startups on Barefoot Innovation,
but this is the first one
that runs commercials on television.
Betterment aims to optimize investment through automation
that produces sound advice for the long term, and that also makes
the process both easy and more affordable. It builds around what
Jon considers the MOST important advice -- which is too often
overlooked, namely -- "How much to save?" The company has also
taken on the "behavior
gap" in financial advice - Betterment has the
lowest in the industry and is trying to drive it to
zero.
They are also constantly driving for efficiency gains (his
colleagues say if you want to sell Jon on an idea just tell him it
will increase efficiency), and for fee transparency. They think
this combination of strengths - being advice-centric, transparent,
and hyper-efficient -- will revolutionize the investment world.
They also think their model, over time, can be applied to a much
broader set of financial services. As Jon's biography puts it,
"What excites him most about his work is making everyday activities
and products more efficient, accessible, and easy to
use."
One highlight of our conversation is his insights on the
thorny questions of how these innovations should be regulated,
including on the advice given, how data should be used to be sure
it's helping customers, and how performance should be
measured.
Note on upcoming podcasts
Click below to donate your "buck a show" to keep Barefoot
Innovation going and growing. (If you didn't hear my explanation on
this, it's at the end of the previous episode, with Raul Vazquez of
Oportun).
Upcoming shows are going to be so interesting. Keying off
Jon Stein's thinking on human behavior, we'll have an episode with
one of America's top experts in how behavioral economics impacts
investment and retirement savings, Harvard Professor Brigitte
Madrian. I'm delighted to say Brigitte is also my faculty advisor
on the book I'm writing on financial innovation and regulation for
my Harvard fellowship this year.
We're also working on a fascinating show on innovation
emerging in the insurance sector, dubbed, "insure-tech."
Other guests in the queue include some of the country's most
thoughtful bank compliance officers, and the very thoughtful
founders of Bee.
Note on Regulation Innovation Briefing
Series
Meanwhile, click here to explore my
Regulation Innovation briefings, while you still can for
free! The briefings are short monthly videos, each paired
with a deep article about the twin and intertwined challenges of
financial innovation and regulation. They are still free for a few
more weeks, and then the series will be for subscribers, so please
check it out.
As I said last time, these articles are the most important
and valuable thing I've ever written. I hope you'll join the
journey.