Betterment CEO: Robo Advisors Prevent Errors

July 14, 2014

Jon Stein also says retirees want and like automation as much as millennials.

It turns out that automated financial advisories are not just for the younger crowd. There’s no question that these service providers, such as Betterment and Wealthfront, have a clear following among the younger generation of investors who, having been through two market downturns already, embrace low-cost passive automated ETF portfolios as a long-term solution.

But it’s increasingly evident that retirement-age and near-retirement investors are also jumping onto this bandwagon, Jon Stein, CEO of Betterment, told us in an interview. According to him, they too want low-cost simple solutions to ensuring that they will have enough money through retirement. And why shouldn’t they? As Stein points out, automation helps protect investors from giving in to their emotions and making mistakes that can cost them serious money.

Betterment should know it. A pioneer in the space, having launched in 2010, it now boasts north of $700 million in assets under management. The firm, which has been expanding by roughly fivefold a year, only sees the pace of this growth picking up steam ahead. How did Betterment come to be?

Jon Stein: My background is in economics and human behavior, and I was always fascinated, on the one hand, with how valuable rational economic decisions can be for us. I became interested in investing, and thinking about the long term, etc. On the other hand, I was fascinated with how crazily irrational we often are as humans—how many bad decisions we make, and how we get in our own way.

I found in my own investing that even though I studied economics, earned my CFA, and was consulting banks about their investing practices, I was making some of the same common mistakes that I should have been smart enough to avoid.

One of my first investments was Enron, and, of course, it went to zero. I should have known better than to be buying individual stocks, but there I was making these same common mistakes. I had about seven different brokerage accounts. I had tried everything else out on the market. I had read every book on investing.

None of the accounts did everything right for me in a sensible way. I was looking for the simple elegance of an “ING Direct” and the investing efficiency and savvy of a Vanguard. I just found that nobody put it all together in a well-packaged, well-aligned-with-the-customer kind of a way.

So, I sought out to build it and brought the early team together. We started out with a very simple portfolio of just stocks and bonds. It was fewer ETFs than we have today. Over time, we’ve become more and more sophisticated, and we now have a full investment team, and we have external advisors who advise on our portfolio allocations and the advice we give customers.

But that core mission is still to be aligned with our customers; be transparent; and help them achieve the best returns possible.



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