Editor’s note: This is part of a series of interviews with thought leaders on the future of the wealth management industry.


Hurley: What will determine the winners and losers among robo-advisors?

Stein: Partly timing. The winners are probably already in business today and it’ll become increasingly difficult to enter over time.
There are many little companies that are trying to get some traction but offer only marginal improvements. We will be the biggest, and ultimately will dominate the space.

Hurley: Why?

Stein: Because we’ve invested in a vertically integrated platform. We are doing custody as well as the front-end advice piece. We have a lower cost to serve the customer, and we can provide a better user experience.

Look at the great modern companies. Many of them were vertically integrated. Carnegie Steel: the mines, the smelting plants and the rails to deliver products. Carnegie could ship steel cheaper than anybody else could and nobody had his pricing power.

Hurley: It also helped being a monopoly.

Stein: It did. But Carnegie had all of the means to deliver from beginning to end, and that was huge. Apple has a different sort of vertical integration. They do the hardware, the software and the retailing, and they’re able to provide a better user experience as a result.

We have all of those advantages. We have price advantages, cost advantages, and we have the user-experience advantage. We do everything faster, seamlessly, more delightfully than anyone else in this space. Every survey by users of the various products today unanimously says that Betterment has the best service.

Hurley: You are competing with Schwab, Fidelity and Vanguard: massive technology platforms with great brands, thousands of clients and large 401(k) programs. How can an independent firm such as Betterment win?

Stein: We have some incredible advantages. First, Vanguard is not a technology company. They are a mutual fund company.

Schwab and Fidelity have a lot of legacy baggage. Building an investing company today is fundamentally different than 20 or 30 years ago. Whereas companies of that era thought about a ticket and a trade, we think about portfolios, aggregating individual trades into bigger trades with fractional shares with much greater liquidity. These legacy firms really struggle with these changes and are trying to staple a new service onto dated technology.

Three other trends provide us with advantages. One is cheaper diversification. It used to be very expensive and difficult to diversify a portfolio. Today, because you can get very cheap ETFs, diversification is almost free.

Secondly, in earlier years firms like Fidelity, Vanguard, Schwab had a competitive advantage to have asset manufacturing in-house because they could bundle it with other services. Today, customers want independent advice.

The third trend is the shift away from defined-benefit pensions and toward defined-contribution plans. It is a good idea that individuals are now accountable [for their long-term financial well-being] and that [financial obligations] are off corporate and government balance sheets. But most people don’t have the tools to conceptualize saving over 30 years. Without any great advice or obvious default settings, they really struggle.

If you were to build an investing company today in this defined contribution world, you’d start from a place of advice. Advice is core in what we do.

Hurley: What is the advice you provide?

Stein: I sometimes make the comparison between driving and life planning. Everyone can very clearly see that self-driving cars are taking off. It is a very complex problem to make a self-driving car, but they’re doing it; they’re solving those problems. I have a 1-year-old daughter, and I sometimes wonder if she’ll ever have to learn how to drive.

People have much less imagination about where life planning is heading. My daughter will not have to think about how much to save for retirement, how much of her paycheck to put away each month or where to put it, because it’ll just be managed for her by technology.

Hurley: Why are you so certain your technology will provide the right answers?

Stein: Because we can take account of everything that goes on in her life, monitor it in real time, compare it to what we’re doing for millions of other people and do it better than it’s ever been done before.

Hurley: You can build into technology the judgment necessary to help clients diagnose their problems, craft personalized solutions and also educate them so they can make intelligent decisions? You have immense confidence in technology.

Stein: Immense. I mean, do you believe that we’ll have self-driving cars?

Hurley: Driving a car does not involve any of the emotional issues that shape client decisions involving their money.

Stein: You think it’s more complicated to make a life plan, or to make a route plan for a car?

Hurley: A life plan.

Stein: Why?

Hurley: Because you’re dealing with human beings. At their core, advisors de-emotionalize money for the clients. Also the complexity of one’s problems changes both with wealth and age.

Stein: While advisors do a great job taking the emotion out of things, technology does it better because it has no emotion. It can hold to that even in emotional times. Technology is the emotionless investor.

Hurley: Long-Term Capital Management made similar arguments and it did not end well. How do you build technology that has the flexibility to account for potential irrationality, in particular, that of the people who use it?

Stein: LTCM was about investing in niche markets and that is not what we do. We take the same approach as any great wealth manager: globally diversify, rebalance, manage taxes, encourage clients to think about the long term and not worry about short-term ups and downs.

We also do a lot of things to help improve the behavior of our customers. We have a much richer data set than most advisors possess and we study our clients’ propensity to change their allocations and how they react to market events.

A small percentage of our customers do chase returns. We want to discourage them from doing that. For example, we’ve introduced a feature called “tax impact.” Before clients [make a change], we’ll show them its tax impact. When customers have seen that information, about two-thirds of them decide not to make the [change to their portfolios]. Advisors also love these types of features that we’ve built.

Hurley: So the role of your firm is to provide tools to enhance the capabilities of self-directed investors?

Stein: Yes. But only a small percentage, about 1%, of people today have access to a real, fiduciary advisor. We’re now making that fiduciary advisor accessible to anybody.

Hurley: What is the profile of the clients of robo-advisors today, and what will it be in the future?

Stein: Today it is primarily early adopters, people who tend to be more comfortable with technology, the kind of people who were the first to get iPhones. That is starting to change, though, as we now have more than 100,000 customers.

Hurley: With a net worth of … ?

Stein: The average net worth of our customer today is $230,000.

Hurley: The “pre-emerging affluent”?

Stein: We have customers in every state, some with more than $10 million with us, others who are just starting out. Customers who are 96, others who are 18. Twenty-five percent are 50-plus. Many have a lot of money, many are in their 20s and are just starting to accumulate.

Hurley: So robo-advisors are best suited for people who are early adopters of technology?

Stein: But who’s going to use self-driving cars? Is it going to be early adopters of technology, or is it going to be everyone? My hypothesis is that it’s eventually going to be everyone.

Hurley: But that ignores that the best wealth managers don’t give advice; they diagnose and help solve client problems. They have an expertise and insight into extraordinarily complicated problems shared by clients that would be very hard to build into technology. Given this, why won’t they simply add technology to offset any advantages of robo-advisors?

Stein: They will. And it will be ours. We are building better and better technology for advisors every day, and for consumers too.

Hurley: Let’s turn to client recruitment. You have raised $105 million in capital but have only about $2.6 billion of relatively low-fee assets under management. How does any robo-advisor get big enough, fast enough to generate a sufficient return for its investors?

Stein: We’re already profitable on a per-customer basis and are growing incredibly quickly. Already this year, we’ve added 50,000 new customers to the platform, and we’ll add another 50,000 before the end of the year.

Our average customer today has $25,000 with us, only about 10% of their net worth. Over time, not only is their net worth increasing rapidly, but so too will their average balance.

The average customer balance at TD Ameritrade and E*Trade is at $100,000 and at Schwab it is $240,000. Over time we will approach that.

Hurley: So you view yourself as a direct competitor to those organizations?

Stein: Yes.

Hurley: This includes Fidelity, that by any measure is extraordinarily well-capitalized and that spends stupefying amounts on technology. And Schwab is a public company with a $38 billion market cap. How do you keep pedaling fast enough to stay ahead of them?

Stein: If we are successful in this business, we will have a lot of competitors. But consumers tend to not like these [older] companies. There is an increasing appetite for a new, major financial services company that is aligned with their customers. I don’t think you understand how difficult they [make it for customers to use their technology]. Technology is not any of the incumbents’ strong suit.

Hurley: Which points to an interesting question. You have a partnership with Fidelity?

Stein: We do.

Hurley: So you have a partnership with a future direct competitor?

Stein: It’s widely speculated that Fidelity is building a competitor to us. They bought eMoney, and that would be the logical move.
At the same time, they wanted to partner with the best firms out there to learn what they could and recommend a digital offering to their affiliated advisors. I think they have probably learned a lot, and we’ve both benefited in the partnership.

Hurley: There have been predictions going back two to three decades that tele-medicine was going to fundamentally alter medicine. It hasn’t. Similarly, Financial Engines, the original robo-advisor, was launched in the 1990s based on many of the same arguments that you are making for Betterment but is now a very different kind of business. How long do you think it will take for your vision for Betterment to become a reality?

Stein: Financial Engines, a very smart company with a lot of very smart people. We’ve studied them. They tried five different business models before partnering with Vanguard and other 401(k) providers. Their front-end technology just wasn’t there. ETFs weren’t there. Zero transaction costs weren’t there. So they couldn’t deliver a delightful user experience to customers.

Hurley: So Financial Engines failed [as a robo-advisor] because it was not easy to use?

Stein: Advice, service, experience. Those are the things that people are magnets for. We have amazing customer support. People love that they can call us seven days per week. Consumer Reports just named us as one of the best customer service providers in financial services.

Hurley: But you have only one staff person for every 10,000 customers?

Stein: It’s amazing how much that person can do, and the service works.

Hurley: Let’s take this further. Are you arguing that traditional advisors will be extinct in 10 years?

Stein: Traditional advisors are not going anywhere. Both advisors and their clients are getting older. But they have a trusted relationship with their clients and for some serve as outsourced personal assistants. The idea of having someone to call who will do anything for you is pretty appealing. If you have a lot of money, you are going to want that. But people with $10 million or less cannot afford that kind of service.

Hurley: Won’t technology allow advisors to $2 million clients to cost-effectively expand their services and in turn reduce the pressures on their fees?

Stein: I think that’s right, and many of those advisors will be using Betterment Institutional. I don’t think those guys are going away, but I do think that we will be the next great financial services company.

Hurley: And how do you define “great”?

Stein: Advice and a better quality of life for millions of people. We will be their central financial relationship.

Hurley: This suggests that you’re going to expand your services.

Stein: Yes. Advice is at the core, but we’ll be bringing back the feeling of defined-benefit pensions in a defined-contribution world. We will be the place where you send your paycheck. We’ll make sure that you do all the right things with it, and you won’t have to worry about money.

Hurley: So retail banks are another one of your targets?

Stein: Retail banking faces a threat on the lending side from a lot of new platforms, and on the deposit side is where we come in. Banks have had a nice protected oligopoly. But should anyone have a large balance in a checking account?

Hurley: Despite your success, Betterment is still a tiny company. What will be big in 10 years for a robo-advisor and for a traditional advisor?

Stein: Betterment will have at least three major business lines: direct-to-consumer; advisor-driven through Betterment Institutional; and our 401(k) offering, Betterment for Business. I believe each of those would be trillion-dollar-asset businesses.

Hurley: Next level down, what will the industry landscape look like in your view?

Stein: [With regard to traditional advisors], it’s hard to see the future. I think that platforms [like Betterment, Schwab and Fidelity] will continue to be technology hubs that’ll have advisors who are affiliating with them, and you’ll probably see some others with a more open architecture approach. We hope both to have advisors affiliated with us and directly [advise] clients on the platform.

Hurley: Traditional wealth managers will use you as a vendor, instead of compete with you?

Stein: In the same way that they use an iPhone, or they use Excel, or they use whatever they’re using today. Many of them are already using us today.

Hurley: How will they pay for the technology?

Stein: Either licensing fees as they do for many of their technologies today, or they’ll pay a percentage of assets under management.

Hurley: Given the scope of the technology that you are describing, $100 million of capital sounds like only a drop in the bucket. How much capital is it going to take for any robo-advisor to succeed?

Stein: How much capital did it take Schwab to get off the ground?

Hurley: Schwab’s success was helped by a fortuitous confluence of events.

Stein: Everyone has to get lucky at some point. And we’ve been very lucky.

Hurley: Aren’t the circumstances a little bit different today?

Stein: Maybe it’s that time when a once-in-a-generation opportunity happens. Remember, [Schwab’s success came] many years after the securities laws of the 1930s and 1940s were passed, and a lot of things were changing at that time. And a lot of things are changing today.

Hurley: Many technology companies ultimately generate a sufficient return on capital for their investors by going public. If Betterment ever becomes a public company, do you ever envision it being in the business of acquiring traditional advisors and becoming a more fully integrated firm?

Stein: We are very good at building and deploying the best in market technology. We’re not good, and we have no competitive advantage, at hiring, retaining, training advisors. I think advisors are going to keep doing what they do well, and we’ll keep doing what we
do well.

Hurley: Final question. If you had a family member who was a traditional advisor, what should they start doing now to be ready for 10 years from now?

Stein: They should sign up for Betterment.

Hurley: Thank you very much.

Stein: Thank you.


Effie Guo contributed to this article.