This is Master's in Business with Barry Ridholts on Bloomberg Radio. This week on the podcast, I have an extra special guest. His name is Jonathan Stein, and he is the founder of essentially the very first of the robo advisors to come out UH and enter the world. Betterment is the name of the company. They manage most twenty billion dollars, quite a substantial sum of money. And you will find that Jonathan Is or better known as John is a UM enthusiastic advocate on behalf of investors. UH. He does not like the way much of Wall Street does business, the way fees are hidden, the way people are not fiduciaries to their clients, and he is looking at Betterment as a way to UH change the institution of money management if you are at all interested in the use of technology to manage both investments and cash and everything else, how things are done right and wrong in the industry. And also here some inside dirt about what he thinks about some of his competitors. Well, you're gonna find this conversation fascinating. So, with no further ado, my interview of John Stein. My special guest today is Jonathan Stein. He is the founder and CEO of Betterment, which is a algorithmic asset allocation also known by some people as a robo advisor. He graduated from Harvard got his NBA from Columbia. Betterment currently has about twenty billion dollars in assets. They have a digital advisory platform for advisors known as Betterman for Advisors, as well as a four oh one K option. Jonathan Stein, Welcome to Bloomberg. Thank you, Barry, so nice to be here. It's nice to have you. So before we start, I have to do a quick disclosure. I mentioned in the intro that you have a B two B product offering called Betterment for Advisors. My firm, Ridholtz Wealth Management is a user of Betterment for Advisors. Are robo advisor called Liftoff is powered by your back ends. So we like to engage in full disclosure around here, and I wanted to get that out. So let's start with your undergraduate You went to Harvard. What did you study there? Did you have any plans on going into finance. Yeah. By the way, I'm so excited to be working with you and lift Off. I think that's really a great thing where you and Josh and the whole team have been wonderful to work with, and we're excited to be on boarding clients and all of that. We're a fun group. Yeah, you guys, are you really are? Yeah. In college I studied economics was my major, and I studied a lot of psychology on the side, and I was really interested in the union or the interest section between those two fields. My my economics professor freshman year was Marty Feldstein, who was one of Reagan's economic advisors. He was super efficient markets. And you know, if we're all just rational and we have the right incentives in place, people will obviously do the right thing and so uh in the world will be a better and and then I love the fantasy world of economists professors. It's an amazing world to live in. Right, It's like you know, it's it's it's a beautiful place, right, no bubbles, no crashes, everybody's perfect. Everything is priced efficiently incorrectly, and all information is But on the behavioral side, I was so fascinated with how people actually work, which is not at all like the economic models to predict. We're crazy, irrational, we do the wrong thing all the time. And I really wanted to reconcile that. You know, there's like Diccartian sort of duality and in our lives of like if I know the right thing to do, but I never end up doing it because I'm driven by short term impulses, and so I wanted to do something. They're coming out of college. No one was recruiting for people who just wanted to help will make better decisions. But that's what I wanted to do. So so coming out of college, what was your first job? What did you go post Harvard? I went to a company called First Manhattan Consulting Group. Okay, now again, no, the disclosure years ago we sublet space from them, Is that right? And the legend had preceded you because over on On Park and M and ninety Park Avenue, and when we were discussing what we did, when we were having the conversation, oh, have you ever heard of betterment? Yes, we have work for us. Just a hilarious coincidence. Yeah, it was a great firm, so many smart people. You know, I'm still still friends with a bunch of people there. And I got from that vantage point to work with big banking clients all around the US and around the world brokers as well, and got to understand how the big financial institutions work and how they're very well intentioned but oftentimes haven't innovated around the customer. And I started to see opportunities to you think, financial services, to really change it, and I just wanted it all to happen, you know, Like I. Change was too slow, and by the time I was leaving there, we were moving into the financial crisis years right, two thousand and eight and on. So, So from FMGC, did you go right to betterment or was there something in between? I went to business school in between. Okay, so you went to Columbia and then you come out of business school two years later, and what where did you go from there? Then? I started Betterment right away, so right out of business school, and I knew I wanted to start Betterment going into business school, I had the name right and I started. I was talking about it on day one and I said, We're going to make financial services better. Uh. And some people would say, well, why didn't you just go and do that? And for me, business school was necessary. It was a good spot to test the ideas to get to work. And I worked with the dean of the Business school as my betterment was like my case study for my final presentation and entrepreneurial finance. So I got a lot of good feedback. You could wait out the financial crisis exactly. It was it Actually it was a good time to to not be fundraising. So you had the idea. How fully formed was it on your way into business school? And what did you learn that might have had an impact on on the company that exists today? I learned a lot about myself and my management style that my my favorite classes were things like top management process and you know, I didn't think about myself as having like a leadership style or management style, but you know, in small groups and in sessions like breakout sessions, I learned that like the types of things that I do, like wanting to hear from like everyone in the room, like you know, hearing all that feedback before coming to a decision. Like those kinds of things can be effective. And you know, there's not one right way to lead or manage. Was it was a thing that I took away, But you kind of have to lean into your own style. So you participated in one of the tech crunches. I think it was oh nine, is that right. My familiarity with that comes from the HBO show Silk on Value. Yeah, what was the experience. That's pretty accurate depiction of the Tech Crunch. Yeah, like Striking Lee. So as as with a lot about that show, Well, it true. That's what makes it so, and it's hilarious. Um So the sort of frenetic last minute things are glitching and nobody really knows who's going to be the breakout star, and everybody's sort of looking over the shoulders. That was your actual It was so intense. It was one of the most tense days in my life. I mean, and I didn't have kids at that time, right, I was, I wasn't even married, right, And I just I was up all night the night before. And I know because I looked back at like my BlackBerry and I was writing into it every thirty minutes one am, one thirty am, two am, some idea of like how I wanted to reframe my presentation. I memorized the entire thing, you know, which you should never do. It was. It was a five minute speech and I knew every word and it was all exactly memorized. And I was just so nervous about it because it was our coming out party, right, it was like this was it was. We actually launched on that day, and to me that was a big deal, Like this was our chance to debut or a chance to get customers, and if we did it, we were going to be successful and if not, no one would ever hear about us again, you know. So there's a lot writing on that moment. Let's talk a little bit about the process of raising money and what was like to be a venture founded start up. What was that like. Some people have described it as exhausting and draining and harrowing, and other people have said, you know, if you have the right idea, money seems to find it. What what was your experience. I remember saying to my co founders when we started out, at least we're going to raise some money with this thing, right, Like this is a good idea, Like people want this. We were confident that people would want it and at least we get there and maybe a little too confident, right. I We went into tech Crunch thinking, yeah, we'll get some attention and this would be the thing everyone gets funded coming out of these things. We talked to a bunch of people there at the actual conference, and honestly, we didn't know what we were asking for. Remember thinking maybe I wanted million dollars and uh, you know, frankly, in retrospect, that was way too little money, you know, but at the time it just seemed like an impossible amount of a million dollars. Think of how much? Think of like how long that'll that'll feed us for a good long time. That's almost a really nice car, right framework the framework reference is kind of crazy. So are you guys done raising capital or is there going to be more capital raises in the future. Where we were lucky in that first, you know, in those first conversations to meet Bessemer, who letter Series A, and they've been great partners for a number of years. Over the years, we've met a number of other firms that have just been awesome to work with, who share our long term vision, who have deep pockets genetic big big Swedish firm is the most recent one. Great like long term family office style investor. And all of these firms have given us enough capital where we don't have to worry about raising money again. We have you know, we we are our ambitions are to be a public company. That's the past. So you have to be watching this. I P O market and saying, what's going on? You bet you've got My friend Near Cassir, who writes for Bloomberg Opinion, said, um, Uber basically waited too long to come public. You know you need to go public sooner. There has to be some upside left on the table, and this could dog them for a good couple of years. Are you paying attention to this? I P O market. I think it's really interesting to see that gap between the private markets and the public markets. And however, you know, frankly, I don't think anyone should be that surprised by the Uber story. I mean evaluation alonguationwise, we were all saying, like three years ago, I was thinking sixty billion dollar valuation, Like pretty hi. I think someone said anybody who's in a private investor into Uber over the past four years is underwater as of May nineteen, which is pretty pretty astonishing. All right, So let's pivot from the capital structure side to the business side. I know you guys are um Matthey and you look at a lot of data. Have you figured out what the qust of acquiring a new client is like? And how do you deal with that in terms of marketing and just looking for new business. So a lot of financial services firms are effectively marketing engines, right, Like, they have a product that they make and then two thirds of the company is they're pushing that riot, pushing that product into market. We are not built that way. Most of our team is R and D. We're building, we're building technology right and of course we have an amazing programmatic marketing team helping us understand our funnel, helping us make sure that if you've visited the site, you're getting the content that you want. We might retarget you and bring you back. Uh. And we do some sponsorships and podcasts and we just had Maggie Stiff, you know from from Billions and and so and do do a campaign for us. So we've done a good bit of marketing to raise awareness and drive that top of the funnel, awareness to betterment. By and large, were so efficient. We keep becoming more and more efficient every year. We acquire more customers and spend less doing it per customer less per customer, so that's been great. So there are a number of different companies that do what you do. How do you differentiate yourself from the competition? Having competition is a blessing I know, if you you know, go to some like monopolists, they might disagree, right, they might say that it's it's great to be alone. But for us, I don't you know, we started this category right, this is smart money manager. Thing didn't exist before, and we said on stage at tech Crunch. At that launch, I was asked, Hey, how are you going to deal with competition? Do you think other people would do this? And I said, if we're successful, we're going to have lots of competition. So so let's talk about some of the giant names that have are late to the space. Schwab rolled out their version. Um, it's a little bit of an odd portfolio coast. They make their money on the banking side. There's a big I think it's like ten percent or eight percent is cash and that's the really there is nothing free, so the cash is what covers the cost of it. And then there's Vanguard, which I believe across the hundred billion dollars in their robot, they're they're just immense. Any concerns is at a different audience, a different demographic. How do you deal with those two giant firms breathing down your neck? So they're not taking customers from us. It's important to know that we're getting customers from them, and we're getting customers organically from from other firms and people who are sometimes new to saving and investing. But no one's going I'm leaving betterment because honestly, we just have a better product than these other firms. We're doing more for our customers. We've run an analysis recently that shows that if you sum up all of the investment management, tax management, portfolio diversification, etcetera. That we do for you and compare it to what you would get through doing it yourself, even net of our fees, we're earning people more in retirement than they could get on their own. And that's the value of great advice and management. So I'm very bullish on advice and these other these incumbent firms are not primarily advisors, right. They're trying to pivot to become that. They're talking a lot about it, but it's not their d n A right. Vandguard a wonderful firm. I have incredible respect for Jack Bogel. He's we wouldn't be here without him. However, that firm today is just a mutual fund sales machine. They just want to push their their their mutual funds. And there's an old kind of you know, orthodoxy that says, as long as you're diversified and have low costs, that's the best thing you can do, and like, we do that the best and that's it. Well, I'm here to tell you that's not good enough anymore. The world has changed, technology has changed, and you really need an advisor to make the most of your money today because smart money management is here and it's not going away. Um. I can say the same about Schwab. I mean, these guys did a lot to innovate. I mean, Chuck, you know, like was one of the very few people who said we're going to take commissions down, not up. That was great in the nineteen seventies when they did it. They've continued to drive that that trading price down. Now there's folks out there like Robin Hood or whatever where you can trade for absolutely free. Does that mean that's what people should do or that's a good thing. No, Absolutely, it's not a good thing. Uh. And I don't think that they're encouraging good behaviors over there, Schwab. They want you to keep a lot of money in cash, and they're robbing you with that. They're just taking your money, They're just taking it away from you. And I think that needs to be exposed and they should be held to account for that behavior. Wow, those are those are strong words. So so let's talk a little bit about UM what Vanguard has called Advisors Alpha and you have discussed in detail. Uh, tax lost harvesting is one thing that the computer does much faster than sending an accountant with a green ice shade to go through every transaction you've had. How much can the average portfolio garner in in some tax loss harvesting when we some across all of our features like smart rebalancing which figures out when you have a dividend paid, where to put that so you don't actually trigger a taxable event, or UM are lot sorting which instead of just doing FIEFO or LIFEO like most first and you know first and last and first out, which are kind of common algorithms, we will actually choose the right lot to sell or buy at any specific moment. And my favorite, which is tax coordination that looks at your roth IRA, your traditional IRA, your four own K accounts, etcetera, and puts the right assets into the right ones, to shield your dividends, to shield things that might have long term appreciation. You some across those features. And we're earning our average customer net of our fees after our fee, one point six one percent per year of alpha. It's an incredible as it's big. That's a big number, right, It's like it's like it's it's incredible, it's incredible. But we have we've run amazing you know, scenario analysis on this, and it's not like, you know, I can show you the picture. It's not like in of outcomes, you're guaranteed to be better if there's nothing like that in in investing. However, in the average case, you're one point six one per year better off with our algorithms then without them. So what does that mean in terms of returns? It's one better, but that's not that's as a percentage of the total pl How much does that show up in actual returns over over time? Well, that is that that is the net return to a customer, that's after our fees, that's after all taxes. So if the market gives you ten, theoretically someone who's just invested in equities should see eleven six one exactly. And it's not that linear, right, it's not one per year guaranteed. But if you compound that, you know, and we've run a bunch of you know, scenario analyzes and things, and if you compounded over third years investing for retirement, and that's how you end up with more cash in the end. Let's talk a few moments about this business. There's been some pushback into the concept of automated advice giving. What do you say to people who say, this is just a temporary technology fed and people need live advisors. Being able to do this with just software isn't going to get it done. I believe live advisors provide a tremendous value to their clients. Sometimes advisors, we have a product for advisors, it's Betterment for advisors, as as you know. And sometimes advisors come to us and say, what's to keep my clients from just leaving me and going straight to betterment? And they might worry about that, and we say, well, number one, what's to stop them from doing that today? Why are they with you? And they say, well, because I tell them, I give them a full financial plan, I'm talking to them about all their needs I see or fears I'm there when the market's bad to talk to them, and we say exactly, and that is a service that they value very highly and are happy to pay for it because you're giving them a lot of value. So that kind of that relationship, all of that advice that advisors are giving is still very valuable. What we can do is we're a smart money manager, right, so we'll we'll automate like the right kinds of things with your money will help you make more on your money. And uh, and we we we try. We also, um, you know, work very hard to make it a convenient experience, right. Our mobile apps are web apps make everything very accessible. So originally you launched as a B two C as a business to consumer, and there was a pivot to add exactly what you were just describing, UM, you as a business to business being the back ends for any form of r I A or investment advisory firm. UM. How did that pivot come about? And how challenging was that transition? Getting to work with advisors was a thing that we knew we wanted to do for a while, It just it wasn't top priority we had to get. You know, we had to build I RA s for instance, we had to build a mobile at back in two thousand twelve when we were just just getting our feet under us. And it took some partners coming to us and and saying, hey, we really want to do this, we'll invest with you. Uh, if you'll, if you'll help make this a reality for us. Uh. Steve Auction was one of those early early partners uh and uh. And working with them, we had an instant client, right, so we had someone that we were building for and that was with which firm. So that was with advice period at the time. Uh and uh. And we've grown from there. We now work with thousands of advisors all across the country. Quite quite intriguing. Now, some of your competitors have tried some interesting variations UM. One of them rolled out a risk parity fund, sort of well maybe we're not in dextors, maybe we can beat the market. Didn't seem to work out too well. Uh. If you're a Bridgewater or a Q you are, Hey, that's one thing. But Wealth Front had some problems with this. I know a few other companies had looked at it. Uh. What do you think of this idea of UM? People still being enthusiastic for trying to beat the market. Everyone wants to beat the market. You do, I do, and if we could do it well, like, you know, that'd be amazing. The reason that Vanguard has the big business that they do is a lot of people came around to believe that it's really hard to beat the market net of fees, right, and the old technology of having you know, somebody who's just picking stocks for you, it was probably not the most efficient way to to deploy your assets. Now today that idea of just pure indexing is you know, it's a little bit boring and maybe it's no longer the cutting it. So people are trying alternative indexes. And to me, it's very hard to tell the difference between active and passive anymore because there's so many different types of passive out there. Well, we've and is an algorithm active or passive? Right? Is it? You know? If you in in index? Is an active choice? Right? Like? Which index? Are we going to track what gets added and what's and what's not? Do we put in companies that don't have you know, equal equal share voting things like this? Uh? And so I think those lines are going to continue to be blurred, But ultimately what what drive performance is low fees, optimizing for the things you can control, and not worrying about the things that you can't control. The things you can can control include your own behavior, right, So like auto deposit invest very regularly. They include taxes, so account for that over time. UM. They include having the right types of account set up for things so that you don't need to go and raid your retirement account to meet some short term expense. Uh So advice and planning can help with all of these things that you can control and help you make the most of your money. So some people dislike the phrase robo advisor. What what's your view on that phrase and what's your preferred terminology. I think robo advisor is fun, it's it's a hand all. It's been around for for a bit now, and it's how it's how we're now. And I use smart money Manager because I think of us like a smart home or a smart car. There's just better technology now that's available and people should all be using it. Eventually everyone will be. Uh, there's just there's a lot of inertia in our space. Well, you know, the pushback is it's not necessarily advisor and there's no robots involved. We call has has been the pushback. Um so so, given the technology that we've seen, given how it's deployed, what is the next logical step for this sort of advice we we've you've rolled out a four oh one K department seems to be fairly um human intensive. There's so many people along the lines that sales arc has to take forever. What else are you looking at as a possible way to use your technology to make investing more efficient. I'm so bullish on the four own cabinus. The better effort for a business line has been great. We've been growing that quickly. Uh and I I just keep trying to lean into that, Like, more of that we can do that the better because all these employers are really concerned about employee wellness and the best benefits to retain the best talent. And that's where we really stand out as having this great client experience and personalized advice for every participant. Nobody else offers that, right, It's a it's a really great plan. But as I look towards the future, the things that I'm excited about now are around your everyday cash management. Right, UM, When I think about um our mission to begin. Going all the way back to the launch, we said we want to help customers do what's best with their money so they can live better. And people took that to mean when we launched investing that we were all about being just a financial advisor and just sort of a wealth manager. Maybe we're sometimes put in that category. I've always thought of us as this holistic smart money manager, and that includes your every day checking and savings and all of these kinds. So so Schwab has effectively become a bank. Goldman Sachs is a bank. Are you saying Betterment is becoming a full FDIC in shored bank. Is that the plan? I'm not saying that. I'm saying, you know, I'm saying that I'm trying to get you to tell me whether or not that's gonna happen. You know, In the last last December, we launched smart Saver, which was our high yield savings account alternative. Then we launched two ways Sweep early this year, uh, and that allowed people to automatically move money back and forth from their checking account. And your sweep is a reasonable fee. You mentioned Schwab. They there's a big Wall Street Journal article their sweep is no longer a high paying short term um fund. It's really a low paying cash account. It's crazy that they were able to get away with that, isn't it. It's complicated enough that nobody really understood what they were doing. But it's real money. And in my office and I'm sure in yours, it meant that anything we custody to SWAB there had to be a decision made. Hey, for this much money, for more than this many days, it has to come out of cash and go into this bond short term bond fund. Because it's a substantial difference and interest rates. I think people, customers, citizens need to stand up and demand better. I just it just frustrates me to no end that these banks and brokers can get away with this kind of behavior because that's where they make most of their money. Right, SCHWAB makes more than fifty of their profits off of your idle cash. If you're a SWAB customer, you don't know how much you're just giving them money, just giving it away, and they are lending it out for mortgagees and whatnot, and you're getting nothing off of that, well, practically nothing. It's a very low amount. It's nothing, but They're not alone in this, right, you know, Bank America is doing this, JP Morgan is doing this. This is how they're all making their money. So those retail accounts is where all the money is in banking, and I think it's time for a change there. I don't think most people are aware of that because you're taught, oh yeah, just put your money in your checking incot your savings account. That's a safe place to put it. I'll tell you. As a consultant back at First Manhattan Consulting Group, I saw some really bad practices with those checking accounts, crazy amounts of fees charged to people, and then and then the interest is silly low. But it's a collective active problem. Where collective collective action problem, I mean where uh you know, basically you're only losing a few hundred dollars a year, you don't care that much. You have to band together. We all have to demand better. And that cash management, to me is a super exciting spot for us where I think we can make a real impact on all of americans lives. So let's talk a little bit about the different model portfolios that you guys run there, mostly Vanguard. Last time I looked old Vanguard, mostly Vanguard. In our core portfolios that we recommend for customers, something like seventy percent of every of every dollar would go into one of a couple of dozen Vanguard funds. Now. The other thirty percent is across black Rock and Schwab funds, and and there's there's others in there as well. What we do is we're independent. We don't make any money off the funds that we offer. We don't offer any of our own funds, and that makes us virtually unique, by the way, in this in this space, you're a fiduciary to your clients or a fiduciary to our clients. So you're not a broker. You're not selling shelf space, you're not getting kickbacks. There's none of that, right, And and all these all these other firms do right, even Vanguard, right, they're only selling their own funds. Schwab has their own funds in their portfolio. So all of these guys are double dipping. In my view, they're charging you not just for the fund, but also for the advice on top of We get paid for advice, and that's it. And I think that advice, that simplicity of what we do is how you know that we're acting in your best interests. So talking about Van Goard and the fiduciary um obligation, you wrote a very lovely tribute after Jack Bogel, founder of Vanguard, passed away. Um tell us about what motivated that, what was your relationship with Jack, and what did he mean to you. Jack. I wouldn't be here without his influence and example. When I was initially thinking about doing something in this space, the examples that inspired me were the investing efficiency of Vanguard and the online simplicity of iron g Direct. And now this was back in two thousand and six when iron g Direct was an independent brand and you know, it was innovating in web financial services and that's nowther part of Capital One and it's no longer the case. But I was inspired by Jack, and when I met him, it was just like it was like meeting you know, your idol. You know, I just couldn't believe it. And he talked to me and he signed my book and he said, uh, you know, you're going to do a lot of good for a lot of people. And I was just so touched by that. I was really encouraged and inspired to to move on and over the years we kept in touch. I went to his office, we we talked a number of times at conferences and this and that. I uh, I just I think he was such a good person and he cared about his people. He cared about his customers. That example is with me all the time. So, so let's talk about the fiduciary rule. Since we're discussing um, caring about your customers or at least doing what's in their best interest. We were supposed to have at least four retirement accounts UH a moderated version of the fiduciary rule, and that in April twenties seventeen got a killed at least temporarily set back. What are your thoughts about this? And again full disclosure, You're a fiduciary your clients. I'm a fiduciary to my clients, so I'm not arguing against this. We're on the same side of of the street with this. But there's always a lot of pushback anytime the fiduciary rule comes up. I think this is why we have a collective action problem. There are so these these firms. I'm making so much money off of recommending the wrong thing, off of suggesting that you keep more money in cash off of suggesting that you should just buy our mutual fund because it's just as good as anything else out there that is such a profitable thing, because it's a way of hiding a fee from you. Now, the thing you might say, why can't regulatory actions solve this? Why why don't they do something about it? Well, it takes a crisis. And in the mortgage crisis, we had that moment. We had you know, people on TV who had lost everything because they had gotten a mortgage that they didn't understand, and so we regulated mortgages. And now, frankly, I just got a mortgage, and so I can tell you it's still a pain in the neck, but it is pretty clear at least what you're paying and what you're getting. Those disclosure forms are good. Now, all we are asking for with the fiduciary rule or with the SEC's Best interest rule, is to have clarity around disclosure, around what you're paying for and what you're getting. And of course, these financial firms are arguing against the with all of their might because they love burying fees, They love taking advantage of your behavior and hiding fees in places that you won't notice them like, oh, this money is just sitting here, we won't pay you any interest on it, or oh, you'll only pay us if you overdraft her, if you pay late, because people think, well, I'm smart, I won't pay late and I won't keep very much money in that account. I'll manage this. And the firms have all your data and they know you won't do those things. You will misbehave, you will accidentally forget something, you won't actively manage it because you don't have infinite time. And so what you need increasingly as an advisor in your corner doing these things for you. You need an advisor, You need a smart money manager, You need the best technology. You need both of those things. So, if I recall under the Obama administration when they wrote the white paper about the fiduciary rule just in retirement accounts, they claimed excess fees were north of seventeen billion dollars a year. That's a lot of money collectively that should be going towards people's retirements and it's not. So is this just is the fujuciary rule just about money? Is that why people are opposing this? That's it, that's that's seventeen billion dollars that should be going to clients is going to the industry. Right. The industry didn't argue with that number. They just said, if this rule goes through, it will impact our profits by seventeen billion dollars. Okay, So do you want that money to go to consumers, to individuals, or do you want it to go to the financial services industry. Personally, I'm all about the consumer. I'm super passionate about making things more transparent, about giving letting people know what they're getting, letting them know what they're paying for, and let them make the decision. If they want the high priced option, you can have it, but just have the transparency. Uh. That's that's fair enough. So from your perspective, you you sit at the nexus of technology and financial services. I won't use the terrible phrase that that everybody else uses, um, but looking forward, what does the next twenty years or so in that space look like? What changes should we expect. We think about the self managing wallet, we think about the self driving car. Right and if if, if you like me, I I believe that sometime over the next twenty years, we're going to have self driving cars. Right, I don't know if it's going to be twenty is probably less than that, it could be, right and uh, and eventually that's just going to become the way that we get around and everyone's going to be used to it. Right now, it still seems a little bit far fetched. Well, I look at the self managing wall at the same way. I can't imagine that you're going to get in a self driving car to take you to work, and then at the end of the day you're still going to have to figure out how much to putting your wrath versus your traditional I RRA And did I actually balance my checking account this much? Of course, that's going to be managed by, you know, a smart system, and that system exists right now, and it just keeps getting better every day, so it's time to start using it. Do you look at companies like Amazon as potentially coming into the financial service the space? I know lots of people of UM positive that thesis, But what else is coming along to disrupt financial services? We see the financial services a broad space, and certainly Amazon and Apple are interested in the payment side, the sites closer to commerce, which is their core right. They would rather earn that three percent interchange than you know, have some other third party earn it for them to get into, say, managing on wealth is a little further afield. But maybe in between some of this everyday cash management that I was talking about, maybe they will play there. I think certainly the large incumbents and financial services could use some challengers. Frankly, so could these large uh, these large I T companies use some some challengers. I think they're They're in a lot of businesses right now. And um, Fortunately in financial services we have a pretty good regime of competition being good. Right, There's all kinds of laws around mack size of banks and competitive pricing to keep it a dynamic competitive market. You see prices continuing to go lower even in your space or is that you know, twenty five basis points is a pretty reasonable price point. How much lower could that possibly go? If you have a competitive market like financial services, prices will generally follow to uh to the cost. Right if if there's you only get real difference divergence between price and costs when you have more monopolistic areas. Now, I think one of the interesting things that's going on is there is a monopolistic tendency in retail banking right now. So the banks that control fort of retail branches opened eight percent of accounts over the last five years. If you go back thirty years, the five biggest banks had less than ten percent of the total deposits. Now it's practically fifty. It's amazing how how much consolidation and there's been in that space, especially after the crisis. So there's less and less competition. And none of those banks, those big ones, those big four or five, are price leaders. None of them are actually giving customers the best deal. The reason they're growing is because technology is becoming a bigger and bigger asset to these institutions, and those who can afford to invest in it are And I do worry about the smaller institutions who can't make those kinds of investments. Were empowering investment advisors with the best technology, who's empowering the banks. I mean, I'm sure there's a bunch of like B two B businesses out there, but it's hard to compete with like the the big consolidated say, you know, JP Mortgage and Bank of America's, any of the money center banks are not under the same price competition that smaller companies are is that is that the argument they have different ways that they compete. Let's say, yeah, I think that's right, and it's getting harder for say small regional retail banks to to raise deposits. That's a spot where I think we want to help them. Uh So, you know, we're looking broadly at the financial services landscape and thinking about how can we make things better for and consumers. I think competition is great in the space. We want to continue to encourage it, and people have to speak up and demand better. We have been speaking with Jonathan Sedin, founder and CEO of Betterment. If you enjoy this conversation, well, be sure and come back and check out the podcast extras when we keep the tape rolling and continue discussing all things robo Advisor related. You can find that at iTunes, Overcast, SoundCloud, Stitcher, Bloomberg, wherever your final podcasts are sold. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg dot com slash Opinion. Follow me on Twitter at rid Holts. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. John, Thank you so much for doing this. I've been looking forward to this for a while. UM. I think you guys are in a really interesting space, and I've followed your progress over the years. Although I'm astonished how effective you have been on the the space has been on the venture capital side, because unless and until there's an I p O, exits are becoming fewer and further between. We've seen a lot of people say well, we don't have to buy. We've seen a few companies get bought, but a number of the latter entrance said well, we could build this ourselves. Vanguard built it themselves. Schwab built it themselves, although I know they had a series of small UM related acquisitions. UM some of the big first round robos that had achieved some a UM scale got purchased primarily for the a U M. What's the what's the exit strategy? Is it I p O or a big, a big entity down the road. We've always said since we launched that we want this to be an independent public company. If we're to have the impact we want, that's the route that we have to take. We want to have such a strong relationship with our customers and constantly reinvest in that in their well being, which is not what the typical incumbent is trying to do. Right, They're great at making money for themselves, not necessarily for their customers. You get any any pushback on that philosophy from hey, it's been a decade since your first venture capitalists back to you. I know, these guys have a tendency to want to see something eventually, what what's the relationship like, and what are they what are they pressing you to do. Our investors have been fantastic from day one. They've they've known that this is a long term, generational type opportunity. We went into it. I was open. We said this is not going to be a thing that we quickly flip and sell. We're trying to build an institution here. And if you look at the cycles in this space, it's every thirty or forty years you get another generation of companies that grow up. And so the last major one was back in seventies when Schwab and Vanguard both launched about seventy five, and they're big companies today. They didn't displace the old companies. They didn't put Merrill Lynch out of business. They didn't put more against Stanley out of business. Those continue to beat companies to the more recent one. There were sort of like a mini one when E Trade and so on launched in the early nineties. Right, and today, I think we're in a new era. We are in the smart money management era, and we are the leader in that space. Nobody is close to us. Right, we have more assets, we have a bigger reputation than any other firm. And sure there's companies saying, hey, we you know, do something about recommending portfolio too. That's nothing new. That's not smart money management. Where the smart money manager? Right? Like, where the one that's actually doing all the right things with your money? Quite quite interesting, all right, So let's jump to our favorite questions. These are what we ask all our guests. Are our speed round. Um, you might be the first person who can't answer for this question. What was the first car you ever owned? Your making model? I started driving when I was fifteen. In Texas, where I grew up, you can get a hardship license, and my hardship was that both my parents worked and I lived a long way from school and there was no bus, so I got to get a license early. I got a Nissan Stands. It was a red Niscense Stands. It was the nerdiest car that I probably ever could um So, so you mentioned Jack Bogel as a mentor. Who else were some of your early mentors. I gotta think my parents and my grandparents. My family was just such fantastic influences. I mean, my parents were city planners. They taught me a bad efficiency and the value of good design. And I learned to love business through my my grandparents, who ran a furniture furniture factory and and upstate New York. And I love their style of just building a community around that factory. I thought was so fantastic. Who influenced your approach to invest him? Well? Aside from Jack Bogol obviously was huge. I learned a lot from the Chicago School. So one of my professors at Harvard and undergrad was worked with the Chicago guys. He worked with Dick Taylor, and so I learned about Richard Taylor, I learned about Fama and French And now you know, we've partnered with Dimensional Fund advisors Dave uh and it's almost coming full circle back to to that relationship, right. I always thought that like Fama and French and Taylor were onto something, and Fama and French were big advisors to d f A and have been pretty much from from the beginning, So everybody's a favorite question. Tell us about some of your favorite books. I love Sapiens, big fan of that, But probably my favorite is Dan Kneman's Thinking Fast and Slow. It is a tome, right it is, you know, a thick one, and but it's a page turner too, So for three quarters of that you just really blow right through it. Yeah, fascinating, absolutely how we think. It's how we work, and it's that I talked about that union of like rational and irrational. He explains it right, He gets it and got a Nobel for getting. Any of the books you want to mention or just leave it with those two leave it there. What do you do for fun? What do you do out of the office. All of my time outside of work these days is occupied by my family. I've got a three year old and a four year old, two daughters, and I just love spending time with him. It's such a precious age right now, I can't do anything else. What are you most excited about in the financial services industry today? I think this idea of what happens with everyday money management is hugely exciting. I know I keep coming back to it, but it's ripe for change, and integrating that with this long term financial plan is the realization of our mission. It's a thing we've been talking about for years. But we can't really help you with your long term unless we help you with How do you save more today? What sort of advice would you give to a recent college grad or a millennial who came to you and said, um, interested in a career in fintech? How would you How would you advise them? I think having real passion is important. We always look for passion obviously, like you gotta have horsepower. That's like you gotta work hard and get things done. But showing like something that you have real passionate about is important. The other thing is openness. Can you listen? Can you You know if somebody's got all the ideas and not listening to others that that's not really a recipe for success. And our final question, what is it that you know about the world of investing technology? Uh, anything else related today that you wish you knew uh ten plus years ago when you were first started well back when I was a student, I was learning all this stuff about how to invest, and to that I was just as dumb as the next person. And of course then I went out and started managing my own money, and I bye end Ron on the way down. You know, I made some of the same dumb mistakes that I had read about, and I wish I hadn't done that, and I wish, you know, I learned my my lesson. We're all just as as as as dumb as the next person. In the end, I certainly am anyway, quite quite interesting. We have been speaking with Jonathan Stein, founder and CEO of Betterment. If you enjoyed this conversation, we'll be sure and look up an intro down an Inch on Apple iTunes. Well, you can see any of the previous let's call it two hundred and forty three such conversations that have taken place over the past five years. We love your comments, feedback, end suggestions right to us at m IB podcast at Bloomberg dot net. If you enjoyed this conversation, well give us a review on Apple iTunes. Lastly, I would be remiss if I did not thank the Crack staff that helps put this conversation together each week. Blatka val Bron is our project manager. Medina Irijuana is our producer, Slash audio engineer Taylor Riggs is our booker producer. Michael bat Nick is our head of research. I'm Barry Ritolts. You're listening to Master's in Business Von Bloomberg Radio