ETF.com: Some say that investors who turn to automated advisories are really looking for long-term, low-cost investing as opposed to outperformance. Do you see that in the Betterment client?
Stein: I think anyone who reads the same articles you and I read has an understanding of market dynamics and would agree that it’s essentially impossible to outperform the market, unless you have better information. That information can come in the form of deep research. It can come in the form of insider information. It can come in the form of faster execution than other market participants have. But it’s impossible for the average retail investor to beat the market.
From our perspective, we do everything that’s sensible for the average retail investor to get an edge, and a lot of that comes down to tax efficiency, it comes down to automation, and it comes down to controlling human behavior such that we don’t get in to our own way, and make bad decisions that harm our own returns.
ETF.com: Do you think automation is the best cure for irrational investing?
Stein: Yes, I do. That’s a good way of saying it.
ETF.com: Do you have a preference for a specific ETF provider? How do you go about picking the right ETFs?
Stein: We have no preference for ETF providers. We look at what are the lowest-cost ETFs in each asset class, and rank every ETF that is available based on the expense ratio, based on the trading spread, and based on tracking error. Through that ranking we choose the top as the primary ticker, and then we choose a secondary and tertiary ticker, which we alternate people into when we’re doing tax-loss harvesting or transactional tax optimization.
ETF.com: Who is your main competitor in this space? Is it a firm like Wealthfront?
Stein: We clearly have similar missions, but I see this market as being so big that our competition really is the firms from where our clients are coming. We get the most customers from Vanguard, from Schwab and from Fidelity. That’s our real competition.
ETF.com: How does Betterment differentiate itself from its competitors?
Stein: This is how we are different from the standard Vanguard, Fidelity, Schwab: We are an advised account, whereas they are not providing advice. They are basically supermarkets where you have thousands of different choices, and it’s up to you—the customer—to figure it all out and then to do it.
Relative to them, we’re a more advised—and automated—solution, which means you’ll get better returns, you’ll have a better customer experience, because you’re advised along the way, and you’re more likely to actually reach your goals than by using a do-it-yourself method.
It’s also lower cost, so it really wins on every count, and that’s because we are built on newer technology and we don’t have to deal with the legacy system and infrastructure that those firms do.