ETF.com: If you’re an investor and you come to Betterment to sign up, how does the process work? How do you find the right portfolio?
Stein: Typically investors come to us at the recommendation of a friend or family member, and they tell us about their goals. These goals can be things like saving for retirement or saving for a kid’s college, or it could be simply, “I want to build wealth” or “I want to set up a safety net fund”; things like that.
Based on those goals and the time horizons to their goals, we recommend an optimized portfolio for each goal. So, you can have multiple different subaccounts or goals, as we call them, in your Betterment account, each properly allocated.
Over time, we will manage that portfolio, which is all ETFs, for tax efficiency. We’ll rebalance it for you; we’ll make sure that the lowest-cost ETFs are in there and that every transaction is tax optimized and so on.
ETF.com: How do you reassess that portfolio allocation given that investors’ sentiment toward risk can change overtime?
Stein: Think about it like a personalized target-date fund. Target-date funds are the most popular option in 401(k)s these days, and they’re often bucketed at around five years. If you’re going to retire any time between 2045 and 2050, there is one target-date fund for you and a million of your closest-aged peers.
Our approach is much more personalized. We’ll have a recommendation that’s based on when you want to retire and how old you are today, but also based on your other goals. That recommendation will change over time.
As you get closer to retirement, we’ll start recommending a more conservative allocation. We’ll show you in the app exactly what you have to do; not only how to allocate, but how much you should contribute.
Once you’re in retirement, we have a product that tells you how much you can safely withdraw each month from your portfolio, and we’ll automatically withdraw that amount for you such that you’ll never run out of money. It’s a pretty sophisticated, full-life, end-to-end investment management system.