Episode Summary
Executive Summary: In this episode of The Long View, Christine Benz and Jeff Batak interview Jonathan Stein, founder and CEO of Betterment. Stein discusses how the pandemic has impacted his work and personal life, and how Betterment's digital-first model proved resilient during the March 2020 volatility. He shares insights on investor behavior, noting that only a 2% increase in withdrawals occurred, and that younger customers saw the downturn as a buying opportunity. Stein explains Betterment's goal-based approach, its emphasis on emergency savings, and its behavioral design features that discourage harmful trading. He also addresses the firm's portfolio tilts, the value of financial advice, and the competitive landscape, advocating for a fiduciary standard and Betterment's independence.
Main Topics: Pandemic Impact and Business Resilience (Priority: 5/5): Stein describes the personal and professional challenges of the pandemic, including team members falling ill and the seamless transition to remote work. Betterment's digital infrastructure handled the March volatility without downtime, and customer behavior was surprisingly disciplined. Investor Behavior During Crisis (Priority: 5/5): Stein highlights that only a 2% increase in withdrawals occurred during the peak volatility, and 26% more customers made one-time deposits than withdrawals. Younger customers were more likely to see the downturn as a buying opportunity. Betterment's Goal-Based Approach and Emergency Savings (Priority: 4/5): Betterment recommends a safety net of 3-9 months of income in a low-risk portfolio. The platform integrates this advice into its goal-based framework, helping clients prioritize savings before investing. Behavioral Design to Prevent Harmful Trading (Priority: 4/5): Betterment uses design choices like not showing red/green indicators, framing goals with time horizons, and displaying tax impacts of trades to discourage market timing. 75% of customers with taxable transactions decide not to proceed after seeing tax consequences. Portfolio Strategy and Factor Tilts (Priority: 3/5): Betterment's portfolios include small and value tilts, but Stein acknowledges these may not help much. The firm uses a robust process for fund selection and rebalancing, including tax-efficient transitions during market downturns. Competitive Landscape and Fiduciary Standard (Priority: 4/5): Stein positions Betterment as a consumer champion, differentiating from competitors that double-dip by selling both advice and funds. He criticizes Reg BI for falling short of a fiduciary standard and expresses ambition for Betterment to become a standalone public company.
Key Arguments: Betterment's digital model was built for volatility, with algorithms rebalancing tax-efficiently and buying on dips. Investors should avoid stock picking; most individual traders lose money, and Betterment's design discourages harmful behavior. Emergency savings are critical; Betterment recommends 3-9 months of income in a low-risk portfolio before investing. The most important factor for long-term wealth is savings rate, not portfolio alpha. Betterment's independence and customer-centric focus are key advantages over larger competitors that manufacture their own funds. Reg BI is a step backward; a true fiduciary standard is needed to protect consumers.
Data Points: Withdrawal increase during March volatility: 2% - Only a 2% increase in withdrawals occurred during the peak of the March 2020 market volatility. Customers making deposits vs. withdrawals: 26% more deposits - 26% more customers made one-time deposits than withdrawals during March. Younger customers' behavior: 37% more deposits than withdrawals - Millennial customers were 37% more likely to deposit than withdraw during the downturn. Stimulus check usage: Less than 15% - Less than 15% of customers who received stimulus checks put them toward near-term goals. Tax impact deterrence: 75% - 75% of customers who see the tax impact of a trade decide not to proceed. Average customer age and income: 37 years old, $120,000 income - The average Betterment customer is 37 years old with an income of about $120,000.
Pivotal Quotes: "We saw only a 2% increase in the number of withdrawals. And I'll tell you, I've been building Betterment for 10 years... This is that downturn that we've been preparing for all these years." — Jonathan Stein: Discussing customer behavior during the March 2020 volatility. "We find that when people are just kind of casually looking at making a trade... 75% of people who have a taxable transaction decide not to go through with it because of seeing that tax impact." — Jonathan Stein: Explaining how Betterment's tax impact display discourages unnecessary trading. "The most important thing we can do... is to help our customers save more. If I can get a customer to save 5% more per year over the long term, that's going to swamp by an order of magnitude the impact of here's an additional 50 basis points of tax alpha." — Jonathan Stein: Emphasizing the primacy of savings rate over portfolio optimization.
Implications: Betterment's disciplined customer behavior during the crisis validates the robo-advisor model. The emphasis on emergency savings and behavioral design offers a blueprint for the industry. Stein's critique of Reg BI and advocacy for fiduciary standards may influence future regulatory debates. Betterment's independence and customer-centric approach could drive further consolidation or public offering.
About The Long View
Expand your investing horizons and look to the long term. Join hosts Christine Benz, Dan Lefkovitz, and Amy C. Arnott as they talk to influential leaders in investing, advice, and personal finance about a wide-range of topics, such as asset allocation and balancing risk and return.