Betterment Interview

October 19, 2011

Betterment is a unique investing company that I had a chance sit down and chat with for an hour when I was in Chicago at FINCON.  I was familiar with the company, we’d already researched their service and written up a Betterment review, but it was nice to be able to sit down and pick their brain about how people are using their product.

The Reason for Betterment

It was interesting to hear Jon Stein’s story (the CEO & co-founder) about how he used to consult for big financial institutions and saw first hand how their accounts and products were designed solely with the interest of the bank or brokerage in mind – not the customer.  His experiences were what led him to help create Betterment; to offer everyday investors a simple & relatively low-cost option for regularly investing their money.

Something else I got out of our talk was a feel for all the behind the scenes work that Betterment does for investors in terms of asset allocation, investing efficiency, and portfolio rebalancing. 

Investing & Trust

One of their challenges so far has been earning the trust of new customers. I didn’t have any great suggestions for them in that area other than to highlight all the information they have on their site about how the investment baskets are setup – who chooses the investments and what method they use to analyze and select the ETFs.

Something that Jon did share was that once people decide to try out Betterment, the percentage of investors that keep using the service is pretty high – a decent indicator that people using Betterment are happy with what it’s providing them.

Prior to our meeting at the conference, Jon had answered the two questions I’ve been asking others about financial bullies.  Here are his answers.

Describe a time that a person or company tried to take advantage of you financially and what you did to stop them.

A topic that has been top of mind for me since founding Betterment is the fact that financial institutions have long been taking advantage of regular consumers. 

Modern Portfolio Theory tells us that everyone should be invested in the same portfolio – the market portfolio. Yet, if you look around, there are so many trading sites and so much emphasis on beating the market and creating the right portfolio for an individual. I realized through my training in psychology and behavioral economics that all these alternatives exist because we humans are predictably irrational – we tend to think we’re better than average, on average. We see patterns where they don’t exist. We remember our winners and forget our losers (even though the losers pain us more). We intuitively think that we can outperform.

The whole brokerage and investment industry has grown to serve these irrational behaviors – and as a result it doesn’t serve our best interests very well. What makes trading fun and addictive is exactly what makes it harmful to our wealth – that it’s driven by irrational impulses.

I founded Betterment to steer people away from being taken advantage of in this regard. I knew a better investment company would start with the assumption that what people really want, when we consider things rationally, is the best return (factoring in costs) for the least risk. It should help people avoid the temptations of alternative strategies and bad ideas.

Describe a time you were bullied into a financial decision (by a person or a company).  How did it end up impacting you and if you could go back in time how would you handle it differently?

When I graduated from Harvard, I went out and started investing on my own. The first thing I did was to invest in Enron, a company whose growth seemed remarkable, but which had just hit a road bump, and its share price had fallen. I thought I was getting a great deal – buying something at half price!

Of course, the stock soon fell to zero, and I lost that first investment.

It taught me an important lesson – I’m no smarter than thousands of others looking at the market, and I don’t have better information. And I had forgotten the cardinal lesson of Modern Portfolio Theory – that there’s no better portfolio to own than the market portfolio.

If I could go back in time, I would make sure to remember those important financial lessons I learned in school. I would realize that individual investors often underperform the funds in which they invest. And I would in no way try to “beat the market.”

Betterment Bonus

Thanks to Jon, Brittany, and Johanna  for sitting down with me in Chicago and answering all my questions.   They are offering a bonus to new customers who want to try out Betterment.  There are no account minimums for the service but if you open an new account and deposit at least $250 to try it out, they’ll give you $25 – Click here for the bonus.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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