Jon Stein is the founder of Betterment. Passionate about making life better, and with his experience from his career of advising banks and brokers on risk and products, he founded Betterment in 2008. Jon is a graduate of Harvard University and Columbia Business School, and he holds Series 7, 24, 63, and is a CFA charterholder. His interests lie at the intersection of behavior, psychology, and economics. What excites him most about his work is making everyday activities and products more efficient, accessible, and easy to use.
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The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way)
Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his ...The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way) Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his successor and new CEO of Betterment. It’s the fall of 2007 on the Lower East Side. My Betterment clock starts not when we launch in 2010 but as I hash out the concept in conversations with roommates and friends. I have a crazy idea: to pursue my happiness via helping Americans pursue their happiness. I write a mission statement: empower customers to do what’s best with their money so they can live better. Investing feels complicated to most people, but the best practices are known and straightforward. Why not take the smart services used by the wealthy and institutions and make them accessible to every American? People like this crazy idea, some join me, and with sweat and sacrifice, a tiny, hungry, customer-impact-obsessed company is born. I pursue Betterment’s mission doggedly. My wife (whom I met in 2006—not coincidentally—her encouragement begets a startup) calls Betterment my “first child.” I say often (usually sincerely): “I’m the luckiest person, I have the best job in the world.” At times, it feels like all of my being, every waking hour, every dream, is intertwined with my company. I am Betterment. There is nothing else. Teammates become best friends (and each other's family: I officiate weddings of Bettementers who later have Betterment babies). I star in TV ads—never imagined that career turn. Early customers email me personally for support (and some still do—love y’all, customers). We grow to $25B AUM, more than 500,000 customers, a team of more than 300, and we move the industry forward. And yet, I know we can achieve more; we have millions more Americans to reach. The Pursuit Of Our Potential For some time, I look to bring in an experienced, dynamic operating leader to help drive the company forward. The search is not initially focused on one specific role to fill; it is about finding amazing talent that could help lead Betterment to realize our full potential. The time at home this year affords more time to devote to the search process, to talk to senior operating leaders and to think about what might be needed for the next leg of the journey. I spend time with hundreds of diverse candidates. I realize that the best way to achieve our mission might be to invite a successor to lead Betterment in the next phase of growth. Due to good fortune and intense effort in a most challenging year, the company has never been in a stronger position. Each line of business is reaching new heights in 2020. We’re beating targets, well-capitalized, with wind at our backs. It’s a good time to hand over the reins. Over the summer, I connect with Sarah Kirshbaum Levy. There is something enthralling about her. I don’t want to jinx or overload it, but outside of meeting my wife, it’s hard, at present, to think of a more consequential introduction. And this is over video conference! The Pursuit Of The One Over the next few months, I spend more time with Sarah and she begins engaging with members of the team and our board. I bring her in full-time as a consultant in a trial run. What a privilege not only to recruit my successor, but to observe her building relationships, to work side by side with her as she iterates on her plan, and to see her making every meeting more open and efficient. I give her my authority to work with the team to architect plans for 2021 and beyond, and she excels. My admiration grows as she starts effectively running the company, with my proxy. My execs tell me they have so much to learn from her. The only thing that is missing is the title—and today, we give her the title. Sarah’s Pursuits Sarah started out at Disney and spent the last 20 years at Viacom, home to beloved brands including Nickelodeon, BET, MTV, and Comedy Central. Through a series of senior leadership roles, culminating in Chief Operating Officer, she’s shepherded global phenomena, from SpongeBob to The Daily Show with Trevor Noah, connecting with audiences in meaningful ways. With her experiences leading large public companies, Sarah is the right executive to lead Betterment now, as we contemplate a transition from private to public in the coming years. For someone with a “big company” pedigree, she’s remarkably down to earth and scrappy. She’s launched and grown businesses, bought and sold businesses, managed the bottom line, and driven consumer brands to win. I appreciate her “outsider” perspective. Betterment is a unique company—not just finance, not just tech, 100% customer-impact obsessed. Take it from one who’s looked: It’d be hard to find someone who’s both spent a career in financial services and can credibly lead the change we envision: to empower customers to do what’s best with their money, so they can live better. The Pursuit Of Happiness I’ve done the best work of my life at Betterment, and I have worked too hard to stop giving it my all to realize this company’s mission, whatever form those efforts may take. From my role on the board, I’ll be supporting Sarah and her team, whether it be via recruiting, investor relations, telling our story, or upholding company culture and values. A dream for me since that Lower East Side fall in 2007 has been to build a sustainable institution, to build something that will outlast me. I’ve never taken a larger step toward that accomplishment than I am today in passing the torch to Sarah. I asked Sarah what mattered most to her in her next role, and she said, without hesitation, “A brand and mission I believe in.” She’s evidenced this for me in every interaction since. I believe that she’ll more fully realize the vision I laid out years ago, and make Betterment the most beloved, most essential financial brand for this generation. And in so doing, she’ll power the pursuit of happiness for millions of Americans.
The History of Betterment: Changing an Industry
We launched in 2010. Today, with billions under management and hundreds of thousands of happy ...The History of Betterment: Changing an Industry We launched in 2010. Today, with billions under management and hundreds of thousands of happy customers, Betterment is the largest independent robo-advisor. We manage people’s financial lives so they can live better. We tell you how much to invest and manage your money for you, all throughout your life, in a way that gives you better outcomes. We do it all so that you don’t have to. But not everyone has embraced the idea that it should be so easy. When we launched at TechCrunch Disrupt six years ago, Chris Sacca, a well-known startup investor, TechCrunch judge, and now “Guest Shark” on Shark Tank, challenged Betterment’s ease of use. “I worry that it’s too simple,” he said. “People expect a little bewilderment that gives it credibility. This starts to feel a little like a toy.” Caption: Presenting at TechCrunch Disrupt, May 2010 We faced this challenge then, and we face it now: When it comes to investing, people expect not to know what they're doing. They expect to be confused, simply because the traditional players have made it, well, confusing. Many people intuitively think that the way things are is the way they should be, or that there's something inherently good about the status quo. It's what we're used to, after all. But it shouldn’t be that way. My college behavioral biology professor, Irv Devore, who I often talk about, taught me, "Is isn't ought." Just because things are a way, doesn't mean they ought to be that way. He taught us this in the context of bio: Just because men are biologically on average stronger than women, doesn't make that right. I apply this philosophy everywhere, including to the financial industry. Just because the financial system is designed a certain way, doesn't mean it's right. It's not necessarily the best it could be, or doing what anyone intended it to do—it's just evolved this way. We can approach it with intention and design something better, like Betterment. Betterment launched at TechCrunch Disrupt, where we were up against the reservations of Sacca and others like him. Their reactions were understandable—even expected. But the resistance to the future is starting to soften. Since then, hundreds of thousands of customers have joined the Betterment mission. They’ve invested billions of dollars with us, making us the largest independent robo-advisor. People are starting to catch on. They’re starting to understand that “is isn’t ought.” Sure, we’ve got a long way to go, but we’re ready for the climb. Our Mission: Help People Live Better I started from a place that many entrepreneurs likely do: wanting to make people’s lives better. That was always my mission. Caption: Over the years, our company has grown because of hard-working people who are dedicated to sharing our product and mission. My grandfather taught me, “To those whom much is given, much is expected.” I’ve always felt lucky—blessed from the start, in a sense—and that I owe it to give back. What’s more, when researching happiness, I found that happiness comes to those who don’t seek it, but seek something else of higher purpose—and they find happiness along the way. So I seek to help others, and hope to find happiness in so doing. I started Betterment when it occurred to me that the concepts I'd learned while studying behavioral economics and biology in college could actually apply to the many mistakes I was making in managing my own investments. While economics is good at explaining the world at a macro level, it fails to explain human behavior. At a micro level, economics assumes that humans are rational, and they’re far from rational. Especially when it comes to their money; people heavily discount the future, they withdraw when markets crash, and it’s because our emotions drive our decisions. As the example of bad investing behavior, I was investing my money through seven different brokerage accounts. I was constantly monitoring my accounts (bad behavior) and trying to time the market (worse behavior), and the result was wasting time, taxes, and transaction costs, without making any more than I would have in an index fund (bad outcome). I wanted a service that did all of this for me: told me what to do with my money, and then did it. I realized that the only way I was going to get something like that was to build it myself. The Original Team Behind Betterment There was a time when I thought I would build Betterment all by myself. Embarrassingly, my first business plan had no employees other than me—I would code the site, do the marketing, the customer service, the design, all of it—because it would be that automated. To validate the idea I was working on, I told the idea to anyone who would listen. This inevitably included Sean Owen, my roommate at the time. He was a software engineer at Google, 1600 SAT, 800 GMAT, CS at Harvard, and he is a great engineer—incredible, even. I thought, “If I can get Sean excited about this thing, then it’s a good idea.” I knew he’d be valuable, but I didn’t know how much I would need his help. To build the site, I’d have to teach myself to code. Starting from scratch is tough—starting with a roommate who knows more than 99% of engineers is a lot easier. Sean gave me the guidance I needed to get started: The reading list and the right tools for the job. While I focused on the front end of Betterment, building it in Flash and Flex (which at the time were reasonable engineering decisions—it was 2008!) Sean built everything else. He set up Apache and Tomcat servers for the website, built the MySQL database, and a Java application to run the core backend stuff. Simultaneously, I needed to understand the regulatory landscape, a complicated but inevitable part of developing an entirely new way to invest. This world was foreign to me. I purchased a legal library about the securities and investing industries. This became several encyclopedias worth of reading, on everything from trusts and estates to mutual funds to banking to derivatives, just trying to understand the legal opportunities and risks of various structures. That’s when I started conversations with Eli Broverman, who was at the time a securities attorney and is now the President of Betterment—and thank goodness I did. Caption: Betterment's President and Co-Founder Eli Broverman and me in 2012 Eli and I met over a weekly poker game we played in 2003 and 2004—Eli took my money enough times that I eventually gave up playing, but we remained friends. The timing worked out for us, as he was interested in starting his own company, too. We had lunch at a Dominican restaurant on Amsterdam Avenue, near Columbia University where I was in business school in 2007, and we sketched out a working arrangement. Suddenly, we were in business together. Our passive, goal-based, and automatic investing philosophy was clear; it’s the way I’d learned to invest from college, my financial services career, my classes in business school, and my Chartered Financial Analyst (CFA) certification. We had a genius engineer to build the service. We had an entrepreneurial lawyer to own and understand the regulatory landscape. My girlfriend (now wife) at the time, Polina Khentov, was a graphic designer, and I asked her to help us design the prototype. We had weekly meetings together in my apartment to brief on progress—we were a going concern. We fully understood the process to file as an SEC-registered investment advisor. What was missing was our status as a broker-dealer (BD): The thing that was going to allow us to take so much of the frustration out of the process of managing people’s money, and around which we wanted to build a lot of technology. Sean, Eli, and I flew to a few BD conventions and had dozens of conversations with potential partners to understand the industry. It was a thuggish space: opaque, relationship-driven, and priced to exclude any upstarts. It’s not like there was a book you could buy on how to set up a broker-dealer. We talked to everyone we knew who knew anything about how clearing and custody worked. And then we met Ryan O’Sullivan. Ryan impressively grew a retail clothing line called Le Tigre and sold it to Kenneth Cole. He was also a serial entrepreneur with broker-dealer resources at his disposal. He could connect us to the right people and help us get our BD set up. He understood the idea for Betterment and believed in the market opportunity. He was immediately excited about joining us. We had our BD partner. In August 2008, Sean, Eli, Ryan, and I signed an operating agreement as the founding members of Betterment LLC. Sean was chief technology officer, Eli was chief operating officer, Ryan was president, and I was chief executive officer. After helping us get started, Ryan moved on to pursue other business ventures, but he was on Betterment’s Board of Directors from 2010 through early 2016. We had an ambitious plan to launch in one year. As it turned out, setting up as a broker-dealer was a two-year process that included building Betterment’s core trading and custody technology, setting up operations, and gaining approval from the Financial Industry Regulatory Authority (FINRA). In January 2009, Anthony Schrauth joined as chief product officer. He was my former colleague at First Manhattan Consulting Group, and had deep experience in product development, building online banks for major global financial institutions. He was passionate about the idea of building a better, more customer-focused product, with fewer constraints than you’d have to deal with at large banks. In 2009, Sean decided to permanently relocate to London (and has since gone on to become a leading expert in the field of machine learning, as Director of Data Science at Cloudera). Shortly thereafter, we met Kiran Keshav; he ran Columbia University’s Center for Computational Biology, and heard about Betterment through the Columbia Ventures network. He took over for Sean as CTO. Our TechCrunch Launch We worked on Betterment for another year. Then, on May 26, 2010, we launched at the first-ever TechCrunch Disrupt. The stakes felt so high. And the competition felt unfair. We’d bootstrapped and forgone salaries, while others of the 500+ entrants had already raised more than $7 million (something like $25 million in 2015 fundraising dollars). Our future depended on making a positive impression. We had to perform. TechCrunch Disrupt was held in the old Merrill Lynch building on the west side of New York, 570 Washington St. It was a vast warren of austere, stained, and abandoned hallways, and looked as if no one had entered the office in the 10 years before the conference. Toward the back, behind the Red Bull booth and through one windowless room, there was an even smaller windowless room, no bigger than a janitor’s closet, for us to practice our pitch. I remember pacing back in forth in there, stumbling through my speech a hundred times, in what was the most wonderful and nerve-wracking day of my life to that date. Everyone on the team had a job. Anthony and I presented on stage, Eli and Kiran answered customer support calls from the audience, and Adam Langsner, our then-intern, manned the exhibit booth in the lobby—it was his second day of summer work. Caption: Chief Product Officer Anthony Schrauth and me onstage at TechCrunch Disrupt, May 2010 We presented, and we won Biggest New York Disruptor. Then, moments later, we went back to work—all of a sudden we had real customers (400 brave souls who trusted us with their money), and so much more to learn and build. Betterment Today, and the Road Ahead Launching there, in that old building, at the most influential technology conference in the country, was a pivotal moment for us, and we knew it. I’m not sure we would have gotten off the ground without doing it. Since then, we’ve become the largest independent robo-advisor. Our promise is to invest your money at a low cost, and manage it in a way that gives you a better outcome. Caption: The team celebrating Betterment’s 10,000th customer in November 2011—we now serve over 175,000 customers who invest more than $5 billion with us We advise you on what to do with your money based on your personal financial situation—we tell you how much to invest each month, how much risk to take on in your portfolio, and what type of investment account you should have. Then, we do it all for you. We invest your money in our globally diversified portfolio of low-cost exchange-traded funds (our investment team carefully selects these ETFs based on a variety of criteria). And we manage your money over time so that you get the best possible expected return. That means we do things like automatic rebalancing and tax loss harvesting—investment strategies that are typically time-consuming and tedious for average DIY investors to do on their own. Our customer support team (which no longer consists of just Kiran and Eli) is available everyday to help you with your account. It’s clear we’ve come a long way since that launch. It was a pivotal moment for us then, but it’s also a pivotal moment for us now. We’ve gained traction in the financial world; people are starting to understand that this is where the future of finance is headed; that “is isn’t ought.” Traditional financial institutions are starting to follow suit, and the startup investor who challenged us so many years ago is likely rethinking his point of view. But we’re not quite there, yet. We have a lot of work to do. We have to continue improving our service so that our customers can truly embrace Betterment as their central financial relationship. We have to continue growing our team to build more products, to educate more people, to give more advice. And we can’t do it without you. Thank you to the thousands of you who’ve tried Betterment, referred your friends, and trusted us to serve you for decades to come. We’re motivated by your feedback. We know that Betterment matters to you. And you can count on us to continue improving, so we can keep our promise to help you live better.
This Is Why an ETF Portfolio Serves You Better
ETFs are the next level in access, flexibility, and cost. Here’s a look at the five key ...This Is Why an ETF Portfolio Serves You Better ETFs are the next level in access, flexibility, and cost. Here’s a look at the five key attributes that make ETFs right for Betterment customers. When we first started Betterment, our goal was to create the best possible portfolio for investors. To do this, we had to take into consideration cost, performance, and access. We needed products that could suit investors saving for a down payment on their house, major purchases and, of course, retirement. Given all of these stipulations, it’s no coincidence that exchange-traded funds or ETFs make up the core of Betterment’s portfolios. First developed in the early 1990s, ETFs now account for $1.7 trillion in assets in the United States. Betterment selects the most appropriate ETFs for our clients to build a fully diversified, global investment ETF portfolio. While registered investment advisors have been building portfolios of mutual funds for clients for decades, ETFs are the next level in access, flexibility and cost. Here’s a look at the five key attributes that make ETFs right for Betterment clients. Low cost Most ETFs are index funds, aiming to deliver the performance of a stock, bond or commodity index, minus fees—no more, no less. These funds don’t have managers who are paid to “deliver alpha” or market-beating returns. Instead, ETF portfolio managers are quantitative disciplinarians with a laser-like focus on hugging the index. The cost of an ETF covers licensing the index from a data publisher, paying administrative fees (lawyers, trusts, exchanges) and compensating the managers, who tend to work on multiple ETFs at once. All of this is bundled together into what is known as the expense ratio. In contrast, many mutual funds—particularly those that are actively managed—add costs through distribution agreements with brokerage platforms or financial advisors, and some are only available direct from the manager. With ETFs, the gatekeepers (and toll takers and middlemen) have been marginalized, allowing greater benefit to accrue to the end investor—you. For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds. Consider the price difference between Vanguard's Total Stock Market ETF (VTI) and equivalent mutual fund (VTSMX). They both follow the same CRSP U.S. Total Market Index, but there is a significant cost difference. VTI has an expense ratio of 0.05% and VTSMX has an expense ratio of 0.17%. The expense ratios for the ETFs used by Betterment range from 0.05% to 0.40%. For individual investors who want to build a portfolio, basic stock and bond index ETFs tend to be cheaper than equivalent index mutual funds. Diversified Most exchange-traded funds—and all ETFs used by Betterment—are considered a form of mutual fund under the Investment Company Act of 1940, which means they have explicit diversification requirements. They do not have any over-concentration in one company or sector, unless called out specifically in the fund offering prospectus. Diversification, both within a fund and throughout a portfolio, has been said to be the “only free lunch” in finance. This is what drives Betterment’s focus on asset allocation, ensuring that our clients aren’t overly exposed to individual stocks, bonds, sectors or countries. Tax-efficient All mutual funds are required to distribute any capital gains to their investors at the end of the year, regardless of individual trading activity or the timing of a purchase—these are distinct from capital gains you would realize from selling the share of the fund itself. That means you could buy a new fund in December and receive a taxable distribution just a week or two later! But when it comes to tax efficiency, ETFs have two jewels in their crown. First, most ETFs already have the tax efficiency of index funds—which don’t tend to generate internal capital gains due to churning (frequent buying/selling of stocks and bonds due to investor or manager movement). Second, the two-tiered market by which shares of ETFs are transacted isolates investors from additional tax consequences and limits capital gains from accumulating within the fund. Because an ETF is a type of mutual fund, shares can only be issued or redeemed through a fund administrator, once a day at Net Asset Value, like every other mutual fund. Yet ETF shares trade all day long in transactions between buyers and sellers: How do these sync? When large investors or market makers, known as authorized participants, notice an imbalance between the price of the ETF and the aggregate of the prices of the underlying securities the ETF tracks (or they need to fill a large order of ETFs for a customer), they essentially swap the underlying stocks or bonds for shares of the ETF, or vice versa. This transfer in (or out) of the fund is known as “in-kind” and limits the tax consequences for the fund by allowing it to constantly raise its cost basis of individual securities by swapping out the securities with the largest built-in gains first (swaps, as opposed to sales, don't realize the gains.) In the event that the fund needs to sell securities itself, having a high basis would limit its tax liability. Non-ETF mutual funds don't have this luxury. Flexible ETFs are the duct tape of the investing world. They can be accessed by anyone with a brokerage account and just enough money to buy at least one share (and sometimes less—at Betterment we trade fractional shares, allowing our customers to diversify as little as $10 across a portfolio of 12 ETFs.) While most ETFs are straightforward in their exposure, they are used in so many ways, that they have become an essential tool for all kinds of investors—short-term traders and long-term investors alike. This versatility as an investment vehicle helps keep ETF pricing true to the price of the underlying assets held by the fund. Sophisticated ETFs take advantage of decades of technological advances in buying, selling and pricing securities. Alongside their modern structure sit myriad data points watched by investors and advisors who are constantly analyzing the funds and their investments to make sure that the fund prices stay true. They are looking at what they know about the portfolio, what is happening in the market, and how the ETF is trading throughout the day. The net effect: multiple market forces keep the ETF trading in-line with the underlying holdings.
Further writing from Jon Stein
The Fiduciary Rule Is on Life Support – We Must Act NowThe Fiduciary Rule Is on Life Support – We Must Act Now Whether or not the fiduciary rule survives could directly impact you. Because if it dies, and your money manager is no longer required by law to act in your best interest...are they going to anyway? You give your retirement money to a money manager. You expect them to look at all the investment options out there and make decisions based on what’s best for you, your portfolio, and your money’s growth over time. You expect them to act in your best interest—to do the right thing for you. You expect them to charge reasonable fees, try to minimize taxes, and make decisions that are going to get you the returns you deserve. You expect all of this because it’s their job. It’s what they’re paid to do. They’re the expert, the professional. Surely they’re going to advise you on the best investment decisions for you...right? I wish it were that simple, and I can’t believe it isn’t. But today, many money managers are not doing what’s best for you. They recommend funds because they make money selling them. They charge confusing fees that you can’t see. They push you into investments that are in their best interest—not yours. And the one thing that was going to help stop it might not survive. President Donald Trump on Feb. 3 signed a memorandum directing the Department of Labor (DOL) to reconsider its fiduciary rule, which would require money managers who provide retirement advice to act in their clients’ best interests. The rule was set to go into effect on April 10, but the DOL on Feb. 10 reportedly filed for a 180-day delay, putting the rule at risk of being diluted beyond recognition or, worse, thrown out completely. Whether or not this rule survives could directly impact you. Many companies were planning to make positive changes in response to the rule and publicly supported it, back when they were going to be required by law to do what was best for their clients. But now that the Trump administration is threatening the rule’s existence, we expect many of those institutions to remain silent, indicating that their former support was solely for public display. We believe that, in some ways, silence from those institutions is as bad as lack of public support. Because if your money manager is not openly supporting the rule, then they may not be willing to fight for you. And once the rule is gone for good, it could mean reverting to business as usual. We encourage you to reconsider your money manager or, at the very least, push them to clarify their stance. Because if the rule dies, and they’re no longer required by law to act in your best interest...are they going to anyway? The State of the Industry (Also Known As “Why This Rule Must Live”) The fiduciary rule’s six-year history has coincided with a secular shift in the industry that has felt promising and good. We’ve seen positive evolutions, like easier access to low-cost investments (e.g., exchange-traded funds) and heightened awareness of how financial providers are compensated. As the Washington Post’s Barry Ritholtz put it, “The fiduciary rule is not shaping investor behavior, it is now catching up with it." But now that the rule has the potential to be thrown out, we have to reexamine the conflicts of interest that are costing American workers and their families $17 billion a year—and that could persist without the proper regulations in place. Many money managers (brokers) are not currently required to make investment recommendations based on your best interests, and instead only need to pick “suitable” investments. They are allowed to consider whether a particular recommendation will result in a higher commission or kickbacks to them. As a result, you are likely to end up in a less-than-ideal portfolio—one that’s higher-cost and lower-return than it should be. This Is What Firms Are Allowed To Do. Is It Happening to You? Here’s the Way It Should Be We believe in low, transparent fees. We believe that when you give your money to a money manager, they should choose funds based on what’s best for you, the customer—not your money manager. A Defective Argument: The Fiduciary Rule “Limits Investors’ Choice” There have been various arguments opposing the fiduciary rule. The most recent came from Gary Cohn, the White House National Economic Council Director, who said that the rule would limit investors’ rights to choose their investments. He told The Wall Street Journal in an interview: “We think it is a bad rule. It is a bad rule for consumers…. This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” It’s an interesting analogy, but it’s flawed. The rule isn’t about limiting choice (all the choices are still there); it’s about empowering consumers with information to make better decisions and forcing advisors to give straightforward advice. The right analogy would be both options are still on the table—you want to eat a cheeseburger instead of a salad, you can still do that—but you’ll know exactly how many calories are in it and how much it’ll cost you. In the case of financial services, if you want to put your money in a worse investment product, you can still do that—and the advisor has to disclose all the fees associated with it, and can’t tell you it’s the best option for you (unless it truly is). The text of the rule itself is clear on this point; it simply requires advisors to make an investment recommendation that they can demonstrate is in an investor’s best interest. Sure, that may be the lowest-cost option, but not necessarily. If advisors are not able to defend the investment products they are recommending, including their cost, investors will not suffer from their absence. If you want a good analogy for what this rule could do for financial services, consider the medical industry. Doctors aren’t allowed to get paid by drug companies for pushing drugs on you. That would be ridiculous, right? Why should it be different in financial services? Why should so-called financial advisors be allowed to be compensated for pushing certain products on you? It’s ridiculous! They shouldn’t. And, if we have our way, they won’t. Former Rule Champions, Where Are You Now? We’ve been closely following which big financial firms are committed to the positive changes represented by the fiduciary rule. Last fall, when it was expected that the rule would go into effect this April, many firms publicly trumpeted their support. Merrill Lynch came out with an ad campaign that declared, “We’re committed to your best interest. Not the status quo.” Other firms, like J.P.Morgan and Commonwealth Financial Group, announced they’d be cutting commissions in their retirement accounts to comply with the rule. Now that the rule’s future is in doubt, Merrill Lynch is retreating from its support of the rule and has indicated it may not complete the changes it previously committed to making. Many other firms have likewise gone silent on their support for the rule and their intent to follow through on earlier commitments. Some firms are even gloating over the fact that they didn’t take a position on the rule or commit to changes. AdvisorHub.com quoted UBS Chief Financial Officer Kirt Gardner saying, “There is some indication that [the DOL Rule] will, at a minimum, be delayed and potentially not be implemented at all. And because we delayed our announcement…that’s proved to be very effective given some of the commitments that our competitors have made.” It’s become extremely difficult to get individual firms to commit to a clear public position on the fiduciary rule. In January, Sen. Elizabeth Warren, D-Mass., a longtime supporter of the rule, sent a letter to 33 financial institutions that had already begun making changes designed to satisfy the rule’s regulations. She warned them that the rule was under attack, while also questioning whether they supported it and would continue to work toward implementing changes. This was an opportunity for these firms to speak out in support of the rule. Twelve firms ignored the letter. Of the 21 that responded, many provided a general statement about the importance of the rule's objectives, but declined to make a clear commitment to its actual implementation. Make no mistake, though, the fiduciary rule is the only realistic hope for prompt action to improve the quality of retirement advice. If firms genuinely support the rule's objectives, they should also support the rule. In the coming weeks, we encourage you to watch closely to see which firms are willing to take a clear public stand on behalf of investors, and which are silent or hide behind trade groups. What You Can Do to Protect Your Right to Honest Financial Advice Today, I’m sad for retirement savers. I’m disappointed that so many of us have trusted people we’ve chosen to manage our money, to prepare us for the future, and yet we still can’t be sure if they’re doing the right thing for us. I’m angry that the one ruling that could make us feel confident again is under attack. Why would anyone want to get rid of something that could do so much good? We encourage you to advocate for yourself and your future by submitting a public comment in support of the fiduciary rule here. You can also contact your elected representative and/or financial provider to share your support for the rule. Then it might be time to ask your money manager these questions: Why are your services and investments right for me and my situation? Who makes money from my account—and how much? Do you make more money recommending some investments over others? Are you committed to acting in my best interests for all my accounts, at all times? We’re not giving up on this. We stand for our customers and their best interests, and we always will. We don’t take political sides, but we are fighting for this rule until all investors receive advice they can trust. Because if the rule dies, whether it’s quick or slow, it’s sure to be painful. A version of this article originally appeared on CNBC.
If We Aren’t Changing The System, We’re Perpetuating ItIf We Aren’t Changing The System, We’re Perpetuating It Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country.
Jon Stein: Thoughts on 2020's Volatile MarketJon Stein: Thoughts on 2020's Volatile Market Much of what Betterment has worked toward the past 10 years has been purpose-built to endure all the worst and the best the market has to throw at us. I started today like I imagine a lot of people around the world might have: Wondering about the latest news. Helping my wife come up with new ideas to entertain our two young daughters. Thinking about how fortunate we are to be together and healthy, and about those most vulnerable during these uncertain times. Connecting with coworkers remotely (and missing our in-person interactions). I’ve also been thinking about my family’s and our customers’ finances. I’ve been thinking about how we all can make smart decisions to make the most of our current situation. Relatives (who are also Betterment customers) have told me brokers are calling them, saying, “Now’s the time to buy,” and “Let’s transition your portfolio,” and, to all of them I reiterate the same thing I always say: “Invest appropriately for your goals. Invest regularly. Stay the course (aka, don’t try to time the market).” Betterment was born in the aftermath of the last financial crisis. Our vision, a smarter way to manage money for everyone, was based in no small part on what I saw during that time: Too many people making rash (often bad) financial decisions and struggling to make sense of the economic turmoil, because of a lack of good, outcome-oriented, fiduciary advice. Much of what Betterment has been working toward over the past ten years—the services we’ve built, the products we’ve launched, the customer-outcome-obsessed company we strive to be for you—has been purpose-built for times like these, to endure all the worst and the best the market has to throw at us. How we’re working for you in these challenging times. Betterment has migrated to fully remote operations, and our teams are all up and running. We are fortunate that we were well prepared for this; in 2019, we opened new offices in Philadelphia and Denver and onboarded a dozen remote employees living across the country. This experience has served us well in our current environment, and made it relatively easy for us to institute a mandatory work from home policy early on. Today, all of our team, all over the U.S., is working for you. Just like you, we have parents juggling meetings with at-home kids, and supportive teammates picking up extra work to allow those who need it to take time to care for loved ones. They’re answering your calls, building and launching our new checking account, or analyzing our trading, advice, and operations, and working hard to give you the service and advice you expect and deserve. That we’ve seen record call volumes might be no surprise. Our call hold times have been elevated: ~30 minutes in the recent, dramatic days of market volatility. For me, this was a positive surprise. It’s longer than I’d like it to be, but better than the busy signal I might have feared after hearing about it elsewhere. Our services have remained open and up through record trading volume. We’ve harvested billions of dollars of tax losses and rebalanced hundreds of thousands of customers smartly, and tax-efficiently, working to make the most of even down days. We’re also launching new ways to answer your questions and connect with you, including advice videos and live Q&A on platforms like Twitter and Reddit. We hear you, and we’re working as hard as we can to respond to your feedback and concerns. “Empower people to make the most of their money so they can live better.” That’s our mission at Betterment—the reason each of us joined and what brings us together. It’s our mission when the market is up and when it’s down. One of the things about working at Betterment is that every single one of us is a customer as well. It means that we’re working for you, and we’re working for our families. We celebrate with you when we reach our financial goals, and we hurt with you when the markets are in turmoil. We’re with you, working hard to help navigate spending, saving, investing, and retirement with confidence. We’ve known from the start that there will be good days and bad days in the market, as in life. We are invested in the world and with the world, in a global portfolio. As the world goes, so we go. Smart investing is the confidence to endure. On average and over time, being broadly and globally diversified is wise, today and every day. Historically, it has led to the most consistent returns, with the least amount of risk, of any widely available investment strategy that we have identified. Implementing it well requires discipline, smart automation, and appropriate identification of goals and time horizons. This approach and our advice are designed to help you make smart decisions today that help you reach your goals in the long-term. Everything we do is built with the intention of helping you achieve better results than you could without us, than anyone could without us. Just as importantly, everything we do is built to help you have peace of mind. But just because some may be better off, or more fortunate, doesn’t make anyone immune to the pain going on around us. As friends and loved ones are vulnerable or exposed and the worldwide economy goes through a rough patch, we feel it, too. Smart investing is not the absence of dark days, or the absence of fear, it’s the confidence to endure. We will get through this, and the economy will be stronger in the long run. Things will get better, for the world, our customers, our team—and you. Invest appropriately for your goals. Invest regularly. And stay the course. We’re here for you, should you want a hand to hold (or, better make that, a person to talk to), and we’ll get through it better, together.
Introducing Betterment’s Cash Management ProductsIntroducing Betterment’s Cash Management Products Betterment helped redefine investing with automated guidance built for you. Now, we’re reshaping another part of your financial life: your cash management. When I started Betterment, the goal was to help people answer a basic, but universal, question: “What should I do with my money?” In my early career as a bank consultant, working for large banks across the United States, I noticed fundamental conflicts in the financial industry that made great financial advice inaccessible to most Americans. In creating Betterment, I sought to change the industry and to build the most customer-centric smart money manager. That desire for change evolved into our mission: To help you make the most of your money so that you can live better. And we focused all of Betterment’s efforts on that mission. We listened diligently to our customers. Developed personalized retirement guidance. Built our suite of Tax Smart tools. Incorporated personal choice into our investment options. Built and evolved our mobile app. Across our work, we listened and learned from you. We heard that while investing is a major challenge, it’s often not your first one—instead, it’s saving. For many of our customers (whose average age is 37), having more money tomorrow means managing your money better today. You want tools that make you confident you’re doing the smart thing: Increasing financial security for you and your family by setting savings goals and creating a plan to achieve them. To not worry about whether you are incurring unnecessary fees that might take advantage of you at inconvenient times. Ultimately, we believe that managing your everyday cash is essential to realizing your long-term goals. This is why we built cash management products: for your money today that can help you save and earn more for tomorrow, all in one place. Cash Management: A Solution That Helps You Save The problems we see in the banking industry today are the same fundamental flaws we saw in investing when we started Betterment: Companies aren’t customer-centric. Rather than suggesting what’s right for customers, they’re instead encouraged to do what makes the company the most money (which can often be a poor financial decision for the customer). Instead of investing for the long term, trade on the short term, some say. Instead of saving for your goals, spend what you make and borrow money later, others say. We’ve designed our cash management products to meet you where you are in your financial journey and to encourage saving that grows over time. Our first step is Cash Reserve, a high-yield cash account that can help you earn a variable rate of 0.10% *, is FDIC-insured for up to $1,000,000 once deposited at our program banks (or $2,000,000 if using a joint account)†, has no minimum balance, and only requires a $10 deposit to get started. Our second step is Checking—meant to help you manage the heartbeat of your financial life, your everyday cash flow. With this checking account, users will receive a Betterment Visa Debit Card and all ATM fees, worldwide, will be reimbursed; you won’t see any monthly maintenance fees or minimums and you’ll get access to advice on your full financial life. The same reason that we don’t put our own ETFs into portfolios is the same reason Betterment is not a bank—because we can offer you value and help you build a better life as your advisor and advocate. We want to help you make the most of your money, and a high yield cash account is an important part of that. With Checking, we’re taking a similar approach. No checking fees‡, and all ATM fees reimbursed worldwide. A partner that works for youーeveryday. We’re pushing the boundaries of how finance serves you, helping you save more with less hassle, so that ultimately, you can live better. We’re on the path to building your self-driving wallet. When I think about what the future holds for my two young daughters and children across the United States, I can’t imagine that they’ll ever have to spend time figuring out how to intelligently allocate their paychecks across various accounts—I want them to have easy access to the right answers, from a trusted advisor. I want them to know that they’re on-track to meet goals important to them—and if not, how to get on track. I believe that technology will help make smart money management accessible to all Americans. To get there, come join us. Tell us what you want to do with your money. We can make it easy, then help you automate the most frequent, distracting, and tedious (but nevertheless valuable) tasks—just as we have with investing. With our cash management products, we bring our role as your financial advisor into your everyday life, turning your daily choices and transactions into saving for the future. We’ve built the framework for where we believe the industry can (and should) move. We believe the future is smart money management, and we’re helping lead the way. Months ago, I described why the financial industry fails to help people save: We place the responsibility to save more money on the customer, rather than taking on that challenge as investment managers and banks. Ultimately, I believe institutions that survive into the future will be accountable for what real people struggle to do: Automate their savings. We are striving for a future of smarter financial behaviorーfor a stronger middle class, empowered to thrive and pursue happiness, with the true peace of mind that comes from having a smart money manager always working for you. This brings us a significant step closer to that goal.
How Banks Fail in Helping You Save MoneyHow Banks Fail in Helping You Save Money You may not realize it, but our financial lives are shaped by a great divide: banking vs. investment managers. In between lies most people’s pinnacle challenge: saving for the future. I have the good fortune of being able to question the institutions that shape my financial life. I studied economics in school. I earned a CFA credential while working in consulting. I started a financial tech company when I found problems that the industry seemed content to leave unsolved. But not everybody can afford to question the institutions they work with. To most Americans, the bank is the bank. It’s where you put your paycheck, who you talk to for a car loan, what form you look at when you file your taxes. Your 401(k) is your 401(k); who provides it, what the investments are, what fees are charged—these are questions that most people only get to ask on occasion, if they ask them at all. Today, I see millions of people tied to two kinds of institutions often misaligned to their needs. The first is banking. Neither banks nor credit unions have a fiduciary duty to put their clients’ interests first. Instead, they have a proclivity for charging extra fees and an unjust ability to earn profit on the rates loaned out by the Federal Reserve as their clients lose their savings to inflation. The second is investment managers. Whether a 401(k) plan, an advisor, or a broker, investments are still designed mostly for institutions and the wealthy, and the managers are often far too focused on asset allocation when Americans’ real financial outcomes are most determined by savings. While I have critiques for each group, the greatest problem to me is the fact that there are two. Somewhere in between their bank and their investment manager, Americans lose out on the most important element of finance: Saving their cash. Make no mistake; your savings is what matters. It’s what matters when paying down debt. It’s what matters for starting a business. It’s what matters for securing a healthy retirement. And yet, banks typically don’t help you become a better saver; they encourage holding cash at the ready for spending and sell you loans when you don’t have enough. Meanwhile, most investment managers pay little attention to your saving; they focus on larger deposits, like retirement money withheld from a paycheck. Between working with a bank and an investment manager, we, as a nation, fail to save enough for the things we need. The everyday American deserves a cash advisor. The truth about the future is that saving is all we have. Younger generations can’t count on Social Security the way Baby Boomers still do. And the pension plans of yesteryear are gone. Not only that, students today are graduating with more student loan debt than ever before, and no other part of life is becoming cheaper. Houses, cars, kids—they’re all becoming more expensive, not less. The average American aged 35-44 has $133,100 in debt according to Money. As a nation, we’re mostly deep in the red, not the black. To avoid debt, to save enough for retirement, to successfully navigate inevitable emergencies, Americans need a partner who has their best interests at heart not just in investment advice but for managing their cash. For helping you manage the day to day, so that, at the end of the month, you’ve actually saved more for the future. We need a cash advisor perhaps more than any other kind of financial advisor. For years, RIAs have encouraged their clients to outline their financial goals, to set a budget, and to save enough to fund each of their goals. But what have we been able to do to help ensure our clients’ success? Coaching, support, suggestions—yes, RIAs have led in this arena. But is it working? Americans today are saving less than they ever have. And even worse, they’ve seen limited wage growth and increasing inequality at the same time. Forget budgeting. Cash advice must automate the act of saving. What investment managers and banks silently have agreed on is that saving each month is the client’s responsibility. It’s the client’s money, and so, it’s theirs to set a budget. To me, the suggestion to “set a budget” is a failure of advice. It implies a lack of empathy for how a wallet really works or how human minds decide to spend. These are the facts: The world gives us many reasons to spend, and it offers far fewer reasons to save. Store sales. Credit card rewards. Low interest rates. The world creates many reasons to buy things. Meanwhile, no part of the industry solves saving. Banks and investment managers leave it to their customers to solve. The solution is having an advisor that puts the work in to do what real humans struggle with: Automating your savings. Helping to keep your spending in check. And nudging you toward your long-term goals. Ask any financial engineer and she’ll tell you that predicting the right level of cash you need each month is no great feat. As predictive modeling and advanced technology goes, your cashflow isn’t a big mystery. The choice to build that business so that everyday Americans can live better? Now, that is a different story. America’s future depends on how we save cash. Who will solve it? You can look at national debt, student debt, Social Security insolvency, or growing income inequality. As a country we need ways to help people save, and so far, the answer I see suggested most is Mint, a budgeting tool from Intuit that only helps if you’re already good at budgeting to begin with. And if you’re not, it mostly serves to sell you credit cards or investment apps. And I don’t blame Mint; it’s great for budgeting, just not for the reality of saving. Will you trust a bank to help? Maybe one of the new online banks or app-based banks? Banks have every opportunity to change how we save for our goals, and yet, they won’t. They thrive when you’re using your debit cards and taking out loans. They love it when your savings sit growing at less than 1% while they’re loaning your money at 4%. When we, as a nation, need every ounce of the risk-free rate we can get to save for our goals, banks prove again and again that they’re not problem-solving, they’re taking advantage. So, who would you rather work with? The solution I see is that we have to turn to those whose interests align with our own. I want to see fiduciaries get into the business of managing cash and savings. I want registered investment advisors and CFP® professionals to become true cash advisors. To use innovative technology at scale. Yes. To drive empirically better behavioral outcomes. Absolutely. To make a profit. It’s a must. But, at the core, we need advisors acting in their customers’ best interests; not just for already-wealthy individuals, but for everyday Americans looking to save their way to wealth.
The Senate Is Planning a Tax Hike on Retail Investors. It Should Be Removed.The Senate Is Planning a Tax Hike on Retail Investors. It Should Be Removed. The Senate’s current tax bill includes a mandate that would be punitive for everyday investors. Without a doubt, the FIFO mandate should be removed from consideration. Congress is currently working on a massive overhaul to our tax code, and the Republican-led majority appears committed to signing a bill into law before the end of the year. While the proposals have far-reaching impact, one provision proposed by the Senate would be particularly punitive for retail investors: the so-called “first in first out” (FIFO) mandate. This provision mandates that when retail investors sell a portion of an investment, they must sell their oldest shares first—that is, the first shares “in” must be the first shares “out.” While this technical change may sound innocuous, the FIFO mandate would dramatically harm millions of retail investors. It would raise taxes in unintuitive ways, distort investment behavior, and deprive investors of the opportunity to plan efficiently for retirement. Investing would become more complex and more time consuming—disempowering and disenfranchising everyday people who need to invest for their future. The Senate has already recognized that the FIFO mandate is bad news. In the first draft of the bill, the FIFO mandate applied to investments made by investment funds, but the Senate exempted them after an intense lobbying effort. As a result, investment companies will continue to have the freedom to decide which shares they want to sell. Retail investors unequivocally deserve the same opportunity. What a FIFO future could look like Imagine an investor who, for the last 20 years, has been putting $100 each month into an hypothetical index fund that has returned 10% on average. After 20 years, her deposits from the first year are now up approximately 600%. Say the market has been down this year, but she smartly continues her monthly investments, knowing that in the long term, consistency is the best strategy. Now assume that, before the index fund has recovered its value, our investor has an unforeseen expense of $600. She covers it by withdrawing from her portfolio. Under current tax law, she would be able get the $600 she needs by selling the shares that she purchased earlier in the year. Since these shares are currently trading at less than what she paid for them, she wouldn’t owe any taxes because she actually lost money on those shares. In fact, she could use her losses on the shares to offset other income, reducing her overall tax burden. In contrast, under the proposed FIFO mandate, she would not be able to sell her most recently purchased shares. Instead, she would be forced to first sell the shares that she purchased 20 years ago, which would mean that $500 of the appreciated value would be considered taxable gains. Assuming a combined federal/state long-term capital gains rate of 25%, she will owe $125 in taxes. In trying to withdraw $600, she will be left with $475, net of the tax she owes. To get the full $600 out of her portfolio, she would have to sell about $760 worth of shares, even though the most recent $600 she invested has actually lost value.1 The FIFO mandate might cause her to attempt complex and burdensome strategies to avoid this harsh result. Or, more likely, she would simply decrease her investments in the market, impairing her own investment goals and the growth of the overall economy. FIFO triple-taxes investment income and distorts investor behavior According to the GOP Tax Reform Framework released earlier this fall, tax reform seeks to establish a “simpler, fairer” tax code “built for growth.” The FIFO mandate will actually undermine these goals by distorting investing behavior as investors take extraordinary measures to avoid taxes or avoid investing altogether. Middle-class savers and retirees will fare the worst. By depriving investors of the freedom to choose which shares they want to sell, the FIFO mandate effectively raises taxes on investment income, resulting in a new era of triple taxation for retail investors. Under current law, retail investors already pay personal taxes on investment returns, and the companies they invest in pay corporate taxes. By greatly increasing the impact of the capital gains tax, which could otherwise be deferred (or possibly avoided) under current law, the FIFO mandate essentially imposes a third layer of taxation. Under the FIFO mandate, investors would have to take extraordinary measures, divorced from economic reality, to avoid a large tax bill. Decisions made decades earlier could lead to potential tax consequences that would prevent investors from making what would otherwise be the best investment decisions. Investors would have to maniacally focus on the tax lots they purchase and sell. They might be encouraged to purchase countless versions of similar funds to preserve the ability to access their money in response to unplanned needs. They could seek to open a multitude of accounts at different financial institutions to avoid the FIFO mandate. But, these complicated strategies are likely to be impractical for ordinary retail investors, many of whom already struggle to find the time to properly manage their finances. Only wealthy investors are likely to successfully avoid the FIFO mandate; others are more likely to pay higher taxes—or worse, invest less. Thus, the FIFO mandate will be particularly punitive precisely for middle class savers who have done everything right: picking an investment strategy and sticking to it consistently. They are the ones who would find themselves with fewer and more expensive options when they need to access their savings, including in the face of an unplanned emergency. This is plainly unfair. Retirees would suffer disproportionately. In a world where corporate pension plans have largely disappeared and Social Security benefits are set to be increasingly uncertain (the Social Security Administration says it is “three quarters funded for the long term”), saving for retirement is already a challenge for most Americans. FIFO further complicates retirement savings because older investors will disproportionately face higher taxes early in retirement, as the first shares they will be required to sell will likely have the largest gains. In a future where retirees are personally responsible for their retirement, every penny matters and depleting retirement savings is counterproductive. Furthermore, the many unanswered questions about the mandate could have major consequences for investors. For example, would the FIFO mandate apply across spouses, meaning there might be a marriage penalty? Would it apply across different brokerage accounts, leading to complex accounting or gaming by opening multiple accounts? Would the FIFO mandate apply to charitable giving? Depending on how these questions are answered, the FIFO mandate could inflict additional harm. FIFO clearly hurts investors. But it doesn’t really help Congress either. So, given all the consequences of a FIFO mandate, why is it in the Senate’s tax plan today? The probable answer is, of course, the mandate’s potential to raise revenue—$2.7 billion over 10 years, according to the Joint Committee on Taxation. That $2.7 billion will come primarily from middle-class investors early in retirement. Yet, the revenue generated from the FIFO mandate is miniscule compared to the Senate tax plan of $1.5 trillion in overall deficit spending. The FIFO mandate’s paltry revenue generation is hardly a solution to Congress’ larger budgetary problem. It would cause collateral harm and create unfairness that is not nearly justified by the additional revenue. If Senate Republicans are truly looking to establish a “simpler, fairer” tax code “built for growth” they should eliminate the FIFO mandate. Given that it adds relatively little revenue in the overall scheme of the tax plan, and is extremely punitive to individual investors, removing FIFO should be a straightforward fix everyone can agree on. Citations 1 The tax rate on the capital gains could end up being much higher due to the capital gain being a component of AGI (Adjusted Gross Income). A higher AGI may reduce tax credits, limit tax deductions, and increase the portion of Social Security subject to income tax. This editorial was originally published on Investment News.
The Fiduciary Rule Should Be Fully ImplementedThe Fiduciary Rule Should Be Fully Implemented Major provisions of the DOL’s fiduciary rule are going into effect this month, but the provisions that enforce the rule are under attack. It’s up to all of us to make sure the fiduciary rule stays a rule, not a loose guideline. After years of research, deliberation, commentary, and delay, the Department of Labor’s fiduciary rule raising the standards for retirement savings advice is finally starting to go into effect. Tomorrow, two key provisions of the rule finally become applicable: One governs who qualifies as a fiduciary for retirement accounts, and the other requires fiduciaries to adhere to what are called impartial conduct standards. At Betterment, we were delighted by the news that implementation is starting. For more than a year, we’ve been pressing lawmakers to make good on the promise of the fiduciary rule. When it comes to advice on retirement saving, we think much of the financial industry is just plain backward. Too many financial companies today profit by putting their financial interests ahead of their customers, and that’s a problem not just for their customers’ accounts but for how we, as a nation, manage retirement. The Financial Industry Faces a Pivotal Moment If part of the American Dream is to be able to retire without worry, the United States needs the financial industry to look out for future retirees—not just for maximum profit. By implementing the fiduciary rule in full, the Department of Labor can help the industry reorient itself toward aligning with customers’ needs. Instead of profiting from commissions and kickbacks that have very little to do with customer needs, investment managers under the fiduciary rule will be paid more directly for their service to clients. In effect, the DOL has the opportunity to chart a new vision for how our nation manages retirement. But in order for us to achieve a new era in the way retirement is managed in America, It’s going to take some muscle to bring the product-pushers of the industry into alignment. The DOL provisions going into effect this week don’t yet include the legal enforcement mechanisms designed to make sure companies who provide retirement advice comply with the law. And without that accountability, improved standards for fiduciary advice may not mean much for actual investors. The Fiduciary Rule Needs Muscle The primary enforcement mechanism in the fiduciary rule, as it was initially drafted, is termed the “best interest contract” (BIC). This contract, which is supposed to be a requirement for money managers that give conflicted advice, would allow IRA holders to sue providers that take advantage of them. Without the requirement for a BIC, the rule provisions going into effect this week may have limited effect on how many financial firms actually behave. Just imagine hiring a broker (or money manager) who is effectively able to say that they're acting in your best interest, but there is no actual threat of consequences if they don’t deliver. It would be akin to letting food brands advertise being “FDA approved” without actually being analyzed by the FDA. If—as an industry—brokers, fund companies, banks, and financial advisors are all going to be called retirement fiduciaries under the new rule, then we should have well-enforced provisions for making sure fiduciaries act as fiduciaries. If the DOL chooses not to fully implement the rule, including the BIC requirement, come January 1, 2018, then there’s a chance that the already frequently confused distinction of being a fiduciary becomes even more misunderstood over time. Americans deserve a crystal clear distinction between advisors who actually follow a fiduciary standard and those who do not. A fiduciary rule without the BIC would result in an empty and unenforceable legal standard. To make the gains of the day still more tenuous, it’s clear that even as financial incumbents fight against the fiduciary rule’s enforcement, they’re also trying to roll back the provisions going into effect tomorrow. Just this week, newly appointed Secretary of Labor Alexander Acosta said that the financial industry’s concerns were ignored when the rule was drafted and explained that the DOL is reviewing the rule in its entirety. If that process leads to a rollback of the provisions going into effect tomorrow, the positive progress represented by the fiduciary rule will be lost. Fiduciary Rule Progress Is Good, But Americans Need to Be Diligent With the fiduciary rule’s enforceability in question, Americans have to continue to be diligent about their relationship with financial advisors. It’s important to understand how your advisor is paid, what their underlying conflicts of interest might be, and why they advise you the way they do. Think of your advisor like you might a doctor. When you see a physician, you trust them to be an expert in their field and to do what’s best for your well-being. Yet, that trust is also earned: It emerges from how they answer your questions, provide various treatments, and explain what outcomes you can expect next. The same form of trust-building should happen with your financial advisor, regardless of how the fiduciary rule shakes out in the end. Whether you work with an online investment advisor, like Betterment, or an in-person advisor, focus on being diligent: learn to ask the right questions, don’t settle for surface-level answers, and stay active in your financial future. You don’t have to be a financial expert to be a good financial services customer.
What We’ve Heard From Our Customers About Our New Pricing PlansWhat We’ve Heard From Our Customers About Our New Pricing Plans Your comments to us were thoughtful, heartfelt, and moving; they reaffirmed your high expectations of Betterment as a brand and partner to you. Earlier this week, we announced that, along with launching two new packages with different amounts of human advice, we were flattening our prices for our digital offering from three tiers (0.35%, 0.25%, or 0.15%) to one: 0.25%. This meant that prices went down (immediately) for the majority of our customers, and would go up (in June) for those in the 0.15% tier. When we made the announcement, we heard a lot of feedback from our customers, much of it expected. What we didn’t expect was that some customers would criticize us for not being transparent about the pricing change. This affected me personally, deeply. What bothered me most was that these customers who said we should have been more transparent were… right. The pricing change was not as clearly called out in the email we sent as it should have been. The email just said, “Your Digital plan will be 0.25% per year.” It should have said, “Your fee was 0.15%, and is going up to 0.25%.” And it should have continued to explain why we’re doing this and how we feel about it. Customers are right to demand the highest level of transparency from us. We are a company that is all about transparency in everything—in fees, in how we work and give feedback internally, in our investment process, and in working in the best interests of our customers, always. I said the same to our team—and I take personal responsibility for this mistake. The email was from me. I am so excited about the plan changes that I buried the lede for these customers. We’ll send a clearer email about the fee change to those customers who will see an increase, well before the change goes into effect. We've also prepared FAQs that clearly outline how our service plans and pricing have changed. Thank you for reminding me what you expect of us—and I assure you we expect that same exceptionally high level of transparency of ourselves. Back to your feedback: I responded to as many of you personally as I could—and read through far more emails than I could respond to myself. I heard a few common themes. Some were ecstatic, thanked us for lowering their fees, and shared their aspirations for what’s next. Some were excited about the new human advice plans we’re offering. And some of the customers for whom this will represent a price increase were, understandably, angry. Even if they felt 0.25% was a fair price to pay for Betterment’s services, they wondered what our motives were, and what they could expect from us going forward. Some asked whether they should now anticipate frequent changes to our pricing plans: No. We've been in business long enough now to know at what price we can appropriately service customers, and it was hard to provide all the services we provide today for our customers at 0.15%. When we introduced that tier, five years ago, we did very little of what we do today, and our offering was simple. For instance, our trading costs were much lower, because we didn't yet do automated asset location or tax loss harvesting. Customer service costs were lower, too, as people had fewer questions about simpler offerings. We've negotiated our trading costs down as we've scaled, of course, and improved explanations on the site to make servicing more efficient, and we are sure to find further efficiency over time. As we do, my hope is that we can drive fees down, not up. I'm certain that we'll drive value up—we’re working all the time to increase your net returns, and the new plans allow us to do even more for you. Our model—transforming the financial services industry for the better—is a shared experiment we are working on, together, with you. And when you are doing something new, you sometimes don’t get it exactly right the first time. You then have a choice of making adjustments, or not succeeding. So we are making an adjustment. Some customers thought that we’re raising prices to cover the cost of that human advice. Far from it—those customers who want human advice pay for that separately from the 0.25% for digital advice (0.15% extra with our Premium plan, or another amount for a dedicated advisor, depending on how they prefer to get advice). We’re using the digital plan revenue (and at least a like amount from all plans) to continue to invest in more automated services that will be accessible to everyone on our platform. That’s the core of our business, where most of our customers will always be, and our competitive advantage over the old way of investing. Of course we’ll continue to build that out. I’m convinced, beyond a doubt, that we offer the best investment value in the industry for most investors, and that we are working harder than anyone to maximize our customers’ money, net of fees. Some wondered why we would raise our prices on our highest-balance customers. Because all of our customers are smart, it’s not lost on them that for a majority of our customers, this move amounted to a fee reduction. Knowing that those who were getting a fee cut were not our highest-balance customers, and that we'd be raising prices on those with more invested at Betterment, tortured us as we discussed and evaluated the new plans. But the reality is that our lower-balance customers call us much less than higher-balance customers, their trading costs are less, and so on. So they're less expensive to serve. We want to be open to everyone—it's part of the promise of our company. And, while we knew some would be unhappy, this move, flattening the fee, felt most fair, while allowing us to invest in more return-enhancing services, for all of our customers. Some asked whether we changed prices because we’re preparing to sell: No. We're preparing for the long haul—as always—and we aim to make this a public company. The first large, public financial services company with fiduciary advice at its core—not a mutual fund manufacturer trying to sell its own funds, not a broker trying to sell whatever pays the highest commissions, but an advisor, doing everything in our power to maximize the money of our customers. That vision remains core and is the driver behind this move, which sets us up to better execute and achieve our long-term vision. We are grateful that so many of you cared enough to reach out, to share your support, your thanks, your frustration, your hopes for the future, and what you want to see us do next. We’ve never been more excited to be on this journey with you.
The Best of Both Worlds: Smart Technology + Financial ExpertsThe Best of Both Worlds: Smart Technology + Financial Experts We’re confident we’ve long had the best way to invest for those in the know. Now, our financial experts are going to play an even bigger role in our story, giving our customers the best of both worlds. I’m going to let you in on a Betterment secret. People are always asking me for our secret sauce—read on and you’ll learn about a key ingredient. From the beginning, technology has been a big part of the story behind our mission. It’s a critical part of how we’ve built our company—to do the things we do for customers requires better technology than what the incumbents can offer. Our technology is why the term “robo-advisor” has pervaded the space we created, and why stock photos of literal robots appear in just about every article that mentions our name. Unbeknownst to those who would portray us as robots (often disparagingly), we’ve always had a secret powering our success, the less-talked-about reason for our recognized, industry-leading service: our people. (Shhh, don’t share it, everyone will want them.) Yes, our living, breathing human experts. While our shiny tech pleases crowds and wins awards, over the years, our human Investment Committee has carefully personalized our investment portfolios, our Investment and Advice teams have written algorithms and moonlighted by counseling tens of thousands of customers, and our Customer Support team is available to talk. Real people, real talk. Now you know. Starting Jan. 31, we’ll be offering access to our team of CFP ® professionals and licensed financial experts to help customers monitor their accounts, answer their financial questions, and give them advice. Now, our financial experts are going to play an even bigger role in our service for customers. Starting Jan. 31, we’ll be offering access to our team of CFP ® professionals and licensed financial experts to help customers monitor their accounts, answer their financial questions, and give them advice. For all of us who work here, Betterment has always been a no-brainer. We believe, and vote with our livelihoods, that Betterment is the right place to invest your money if you care most about long-term returns. Our digital advice has made us the largest independent automated advisor—and now we are proud to launch our digital advice with access to our advisors, who have always been the driving force behind Betterment. There has never been anything like this in financial services. There have been brokers, who have wanted to sell something. There have been advisors, who haven’t always had the best technology or capabilities (and were often expensive, given these limited capabilities). We believe we are the only company you can be sure is constantly working to make the most of your money. Now, we’ve brought together the best technology and unbiased human advice, because sophisticated investors require both high-tech and high-touch forms of advice to satisfy their increasingly complex financial needs. We believe we are the only company you can be sure is constantly working to make the most of your money. Betterment gives customers the best of both worlds: the best investment technology on the market, plus the reassurance of a trusted financial expert who can help them plan and keep an eye on their money. Now, our customers can have peace of mind knowing there’s a financial expert who is looking out for them—monitoring their money and ready to talk about it. Read about all of the offerings. Customer-First, Always: A Brief History We’ve always built what our customers have asked us to prioritize, and what would have the biggest impact for them. Since the beginning, that’s meant focusing on delivering the best possible after-tax returns. We believe we’ve crushed that, and then some—every feature we've built has been designed to put even more money back in your pocket. We built Tax Loss Harvesting+™, which could add an estimated +0.77% in after-tax returns annually in your taxable account. Then tools, which advise you on your family’s holistic retirement picture, including how much to invest and what types of accounts to open. We started to hear that our customers wanted to see their wealth in one place, so we gave them the ability to sync their non-Betterment financial accounts. This enabled us to give our customers even better advice, because we were able to identify high fees and idle cash that was losing the long-term potential of being invested in the market. Then, most recently, came Tax Coordination— the most important breakthrough in investing since the index fund. We built this to be the most advanced money management system available on the market. It automatically shields your dividends from taxes. Experts have called it the “closest thing to a free lunch” in investing; it can grow your portfolio by an estimated additional 15% over 30 years. As we’ve improved our customers’ net returns with these new features, we’ve started to attract a more diverse set of customers, who have financial situations in all shapes and sizes, with varying levels of complexity. We’ve learned that many customers want to talk to an advisor. At first, we let them call us ad-hoc, and we allowed our advisor partners to add their clients to the Betterment for Advisors platform. We heard from some customers that they wanted more, and we want to give them the flexibility to manage their money as they want. We Can Manage Your Money How You Want It To Be Managed For many customers, that means continuing to use our digital-only platform, which will now be called Betterment Digital. It’s for customers who want to continue connecting with Betterment primarily through our website and mobile apps. Betterment Digital includes all of the proven investing strategies and account services that make Betterment the better way to invest today: our intelligent investment portfolio, automatic rebalancing, Tax-Loss Harvesting+, Tax Coordination, retirement planning tools, the ability to sync external financial accounts, and excellent customer service. For other customers, who want a partner to help proactively review their accounts, help answer their questions, and act as another set of eyes to make sure their money is in order, we’ll have a new offering: Betterment Premium will include unlimited access to our team of CFP® professionals and licensed financial experts. Of course, each of the new options will be rooted in our self-service, personalized advice, available 24/7 through our digital tools. See more details about each of the offerings. Your Satisfaction—Guaranteed Everything we do is for you, our customers, so it’s important to us that you’re happy with our service. If for any reason you are not completely satisfied with your Betterment account, we will do everything we can to make it right, up to and including waiving Betterment’s management fees for the next 90 days. I’ve never been more excited about the future of Betterment. As we look to the next five, 10, or even 50 years, we’ll always continue working for you. We’ll evolve as you evolve. We’ll grow as you grow. And we’ll always empower you to do what’s best for your money, so you can live better.
Why The Fiduciary Rule MattersWhy The Fiduciary Rule Matters The fiduciary rule will help to ensure that financial institutions act in investors’ best interests when providing retirement advice. The U.S. Department of Labor (DOL) has now finalized its “fiduciary rule,” which is a positive development for anyone saving in a 401(k) or Individual Retirement Account (IRA). Under the new rule, anyone who provides retirement investment advice for a fee will be considered a fiduciary. Fiduciaries are required to act in the best interests of the investors they serve. Betterment has long been a supporter of the DOL fiduciary rule. We believe it is a step toward improving retirement outcomes for millions of Americans, because it will help eliminate problematic practices in the retirement advice industry. The rule is part of the industry’s shift toward ensuring that everyone receives unconflicted fiduciary advice. How the Rule Impacts Investors Many investors are unaware that their retirement account managers and advisors are currently under no obligation to act in their best interest. Investors are also often unaware of the fees they are charged, because those fees may be hidden in the fine print. Once the new rule is implemented, investors will receive additional disclosures regarding fees, compensation, and potential conflicts of interest when they receive investment recommendations concerning their retirement accounts. The fiduciary rule should also help prevent instances of product steering, which occurs when brokers and advisors direct clients to invest in more expensive investment products—including their own branded products—over others. How the Rule Impacts Advisors, Brokers, and Account Managers Opponents of the rule cited implementation costs, such as the costs to retrain advisors or update legal procedures and technologies, as a reason to not support it. They also argued that, if forced to abide by the fiduciary rule, they would no longer find it economically feasible to provide services to lower-balance accounts. But we believe the rule’s opponents actually pushed back because they wanted to preserve an outdated status quo—one that did not always put customers first, or prioritize transparency, innovation, and unconflicted advice. In plain speak, opponents were focused on the potential impact that the fiduciary rule would have on their bottom lines. In our open letter to the Department of Labor, we addressed these arguments. We explained that technology allows modern, independent advisors like Betterment to provide affordable fiduciary advice to customers at every level of wealth. The fiduciary rule does not affect how Betterment manages customer assets, because we have long been committed to acting in our customers’ best interests. Our transparent pricing is our only source of revenue, which is not affected by the ETFs that we recommend in our investment portfolios. Betterment is hard at work bringing our unconflicted, next-generation service to millions of customers. Our aim is to help investors reach their short- and long-term financial goals, and our customers can easily navigate their accounts to see if they’re on track to do so. They know where they stand, and in which accounts they’re invested, at all times. We’re optimistic about the DOL’s rule-making and what it represents. We built Betterment as an alternative to the conflicted, sales-driven business models that previously dominated the market for retirement advice. We applaud the DOL for finalizing the fiduciary rule, and for recognizing that an unconflicted approach will create better outcomes for investors.
DOL Public Comment: No More Conflicted AdviceDOL Public Comment: No More Conflicted Advice In support of the DOL proposal to extend the fiduciary standard, we submitted an official comment this week. We support the DOL’s proposal because we believe it will accelerate this shift toward an unambiguous public good. Over the last several weeks, we at Betterment have been vocal about our decision to support the Department of Labor’s (DOL) proposal to extend the fiduciary standard to anyone offering advisory services for retirement accounts. We submitted the below official comment, and I wanted to share it with our customers and others interested in the conversation. Everyone is entitled to unconflicted fiduciary advice, and at Betterment, we are hard at work building the next-generation service that is making this possible. We support the DOL’s proposal because we believe it will accelerate a shift toward an unambiguous public good. Betterment’s Letter to the Department of Labor Ladies and Gentlemen, We are writing on behalf of Betterment LLC, an SEC-registered investment advisor, in support of RIN 1210-AB32. Much commentary has already been publicly submitted in response to Department of Labor’s proposed rulemaking change published in the Federal Register on April 20, 2015 (“Proposed Rules”). As an automated investment service that provides fiduciary advice to more than 110,000 clients, we have closely followed the debate. The main argument against the proposal seems to be that forcing those who provide services to retirement accounts to abide by the fiduciary standard will make servicing lower-balance accounts economically unappealing. As a result, given that such investors do not meet the minimums of traditional fee-only fiduciary advisors, they will have no access to “advice” at all. We take issue with this misleading characterization of the status quo. The implication that “suitability”-governed salespeople are giving investors “advice” deserves forceful and repeated debunking. Conflicts of interest should be prominently disclosed, and investors should be made fully aware of how their service providers are actually compensated. Meanwhile, the rapidly growing category of automated investment advice is emerging as a clear rebuttal to those who worry that small accounts will be left unserved. Modern technology allows for fiduciary advice to be delivered at unprecedented scale, with the expected quantum leap in affordability. We believe that these services, offering lower, transparent prices, fiduciary advice, and superior experiences, will prevail in the market against heavily conflicted, legacy business models. Behind all the rhetoric is an age-old dynamic; there are those who are busy building innovative services to better serve consumers, and then there are the rent-seeking incumbents who are busy deploying their formidable resources lobbying to preserve the status quo. On a recent visit to Washington, D.C., a team from Betterment had the opportunity to witness this propaganda offensive. We were struck by the deep cynicism of these efforts, and we feel compelled to weigh in, for the public record. We join the chorus of voices in support of expanding and strengthening the fiduciary standard. More specifically, services such as ours have been pulled into the conversation, and we want to take the opportunity to address some misrepresentations being leveled at automated advice. Fiduciary Advisor Is to Doctor as Stockbroker Is to Pharmaceutical Rep One opposition talking point that has gotten traction is that the DOL’s proposal is akin to Obamacare for retirement savings. Rep. Sean Duffy, R-Wis., who ran a recent House subcommittee hearing on the proposal, made the explicit comparison, arguing that the proposal “is yet another attempt by the administration to perpetuate a 'government-knows-best' regime,” adding that “Americans should be able to make the investment choice that is right for them.” Leaving aside the merits of the Affordable Care Act, we happen to agree that when it comes to the modern retirement landscape, the health care comparison is apt. By relegating the majority of Americans over to a defined contribution model for saving for retirement, we’ve given them full responsibility for determining how much to save, and how to invest their savings. This is not unlike telling them: “Here is every medicine ever made. You decide which ones to take, and how much.” No doctors included. What’s worse, we’ve allowed the securities industry to fill the void, by essentially letting pharmaceutical representatives to masquerade as doctors. Over the decades, stockbrokers (i.e., salespeople) have increasingly adopted the “advice” label, and consumers simply do not understand that there exists a higher standard for fiduciary advisors. Most consumers cannot rationally choose a fiduciary advisor over a salesperson because they do not know there is even a choice to be made. Research shows that more than 75% of investors are not aware that two different standards exist for those recommending investments. They often assume that all service providers (including those under the “suitability” standard) have their best interests at heart. A recent report issued by the PIABA demonstrates this point succinctly. The authors contrast the language used by major national brokerages in their marketing, with the positions these brokers take in arbitration proceedings when sued for losses caused by their misconduct. Broker A’s marketing: “Until my client knows she comes first. Until I understand what drives her. And what slows her down. Until I know what makes her leap out of bed in the morning. And what keeps her awake at night. Until she understands that I’m always thinking about her investment. (Even if she isn’t.) Not at the office. But at the opera. At a barbecue. In a traffic jam. Until her ambitions feel like my ambitions. Until then. We will not rest.” Broker A’s position in arbitration proceedings: “[A] broker does not owe a fiduciary duty to his customer in a non-discretionary account.” Broker B’s marketing: “It’s time for a financial strategy that puts your needs and priorities front and center.” Broker B’s position in arbitration proceedings: “Respondents did not stand in a fiduciary relationship with Claimants.” These brokers are household names: institutions that radiate trust and security through decades of shrewd marketing. The DOL’s proposal has already done a tremendous service to the public interest, simply by elevating this issue to prominence. In our experience, many observers have only become aware of the distinction between the “suitability” and “fiduciary” standards because of this debate. Services to Qualified Plans Are Uniquely Broken Those saving in employer-sponsored retirement plans are especially vulnerable, because a principal-agent problem prevents better outcomes. The decision makers (e.g., plan sponsors’ human resources executives) are not the ones bearing the full cost of suboptimal choices. Accordingly, brokers structure their offerings to target the incentives of the decision makers—lower upfront cost to the company—while making money in less apparent ways off the participants. That often leaves participants captive to a limited selection of overpriced (but still “suitable”) funds that charge several times what a comparable index fund should cost in the open market. This is classic market failure, potentially costing investors hundreds of thousands in excessive fees over their lifetimes. Smaller plans are particularly affected. While Betterment has offered automated investment advice to individual IRAs under the fiduciary standard for more than three years, we always intended to tackle the unique challenges of qualified plans. Accordingly, we recently launched Betterment for Business, a turnkey 401(k) offering, extending Betterment’s fiduciary advice to employer-sponsored plans of all sizes, at industry-leading low fees. This makes Betterment the first automated investment service to offer its services to the full range of accounts used by most Americans to save for retirement. It is also the first affordable 401(k) plan that includes personalized fiduciary advice for all participants. What “Robo-Advice” Is, and Isn’t These developments have been noted by policymakers at the DOL, who have rightfully pointed to offerings such as ours to rebut arguments against the proposal. This recognition has given entrenched industry opposition an opening to launch a concerted effort to spread misinformation about the nature of automated fiduciary advice. Until automated investment services were pulled into the discourse, lobbyists largely resorted to vague protestations, calling the proposal “unworkable.” The term “robo-advisor,” often used by the press to describe services such as ours, has given opponents an easy path to mischaracterize the nature of the rapid innovation taking place in the industry. Bereft of intellectually compelling arguments, and given a clear target, lobbyists have jumped at the opportunity to play on the fears of the public. The reassuringly named lobbying organization Americans To Protect Family Security, Inc. has been running a television campaign featuring a couple lamenting that “these new regulations they’re pushing in Washington” will make it hard to get help from “Anne,” their “financial advisor.” The alternative will be “to pay a lot more,” or alternatively, “we’ll be talking to a robot on the phone.” The juxtaposition of the familiar and human “Anne” (who is not obligated to put her clients’ interests first) and the unmistakable reference to cold and impersonal “robo-advice” is effective. But what’s striking is how little resemblance the allusion bears to the automated advice offerings actually serving clients today. Casual observers can be forgiven for assuming that algorithmic advice cannot possibly involve interaction with a human being. At Betterment, precise, consistent and unconflicted algorithms make recommendations to clients on how to reach their goals, tailored to each client’s personal circumstances. Incorporating insights from behavioral finance, our award-winning user interface surfaces only the most relevant data to clients, mitigating human tendencies to make poor decisions. Yet from its inception over five years ago, Betterment has always featured live, human customer support. In 2015, Consumer Reports named Betterment in its top five for customer service, alongside industry giants that have been around for decades. Far from being mutually exclusive, technology and customer experience go hand-in-hand. The algorithmic advice is efficient, scalable, and unbiased, but should they choose to call, our clients will speak only with a human. Observers have also speculated that automated investment services are for the young, and therefore cannot serve as the panacea for retirement savers at large. This has not squared with our experience; more than 25% of Betterment’s business comes from customers over the age of 50, and the segment is growing fast. While younger investors tend to be earlier adopters of new products, we have observed no generational preference for the convenience and value of better technology. How Clients of Automated Investment Services React to Volatility A related anti-robo shibboleth has opponents bemoaning the inevitable demise of “hand-holding” during market downturns, ostensibly available to clients to “suitability”-governed brokers. This benefit is sure to be lost as clients migrate over to automated fiduciary advisers, the argument goes. Color us skeptical as to the extent and value of any “hand-holding” actually offered by commission-driven salespeople. These professionals are not inherently bad people, but they are incentivized to encourage you to “do something” as often as possible. One should expect their “advice” during a downturn to result in unnecessary trading, rather than doing absolutely nothing, which is what long-term investors should be doing. What we can offer to the debate is empirical data on how 110,000 clients of an automated investment service actually react to volatility. On Monday, Aug. 24, markets opened 5% down from their Friday close, and over 10% down from recent peaks. While this is far from the worst drawdown investors have, or eventually will experience, it was significant nonetheless, and press coverage through the day was pervasive. The markets recovered somewhat by Friday, but the week continued to see substantial volatility. The chart below shows movement of the S&P 500 spanning these seven days. S&P 500 Movement During Market Volatility We did experience a small increase in customer logins during the market volatility. Betterment’s approach during periods of volatility is to proactively communicate only with clients who log in, rather than to contact all clients indiscriminately.1 Those who did log in were presented with advice which put the volatility into context, and encouraged them to focus on their long-term goals. The data show that less than 1% of our customers reacted to the market activity with an allocation change or withdrawal. As discussed above, Betterment clients can contact customer service by phone or email, each of which results in the creation of a case in our CRM system. Betterment’s customer service saw a pretty typical Monday, with just 5.58% more cases than usual. Tuesday was actually considerably slower, 25.6% below normal volume. Betterment Customer Service Activity During Market Volatility Everyone Deserves Unconflicted Retirement Advice We do not blindly support regulatory changes that are certain to have a disruptive impact on the industry. But the opponents of the proposal have an intellectually weak position. And there is so much badly in need of disruption when it comes to helping Americans reach their financial goals. Everyone is entitled to unconflicted fiduciary advice, and at Betterment, we are hard at work building the next-generation service that is making this possible. We support the DOL’s proposal because we believe it will accelerate this shift toward an unambiguous public good. Sincerely, Jon Stein, Founder and CEO Eli Broverman, Co-Founder and COO 1 Behavioral research shows that bringing anxiety-inducing events to the attention of those who might otherwise ignore them is expected to lead to worse decisions.
The Future of Financial AdviceThe Future of Financial Advice The comfort of pensions once provided by blue-chip companies may be replaced by the promise of smarter technology. In January 2006, IBM froze its defined benefit pension plan for new employees. Exactly a year later, Apple announced the first iPhone. Both events are important milestones. IBM was once synonymous with stable, lifetime employment. A life-long career was rewarded with the kind of retirement security that is virtually unattainable today. The iPhone was a milestone in a revolution: hyper-connected, consumer-centric technology that is accessible, powerful, and infinitely customizable to our personal needs. I believe that personalized technology, like the kind we are pioneering at Betterment, will resurrect the feeling of ‘defined benefit’ in a defined contribution world. The comfort once provided by blue-chip companies has now been replaced by the promise of smarter technology. I believe that personalized technology, like the kind we are pioneering at Betterment, will resurrect the feeling of ‘defined benefit’ in a defined contribution world. How We Got Here A New York Times article earlier this year captured the common angst of modern retirement planning. It’s the story of a well-compensated professional who has lived a frugal life, has diligently contributed to his 401(k), and, still, thoughts of retirement fill him with dread. His pile of account statements offers him no comfort. It wasn’t always like this. Defined benefit plans, also known as pensions, were once the predominant form of retirement security. They were simple and predictable. Employers were responsible for managing the investments, and employees, once retired, could expect set monthly payments for as long as they lived. In 1979, 67% of the private sector workers who had a retirement plan available to them participated in a defined benefit plan. Today, that world is nearly gone. By 2012, just 30% of workers participated in a defined benefit plan and many surviving plans are frozen and do not accept new employees. Instead, 70% of workers participate in defined contribution plans—primarily 401(k)s. With these plans, employees have nearly full control, and there is no guarantee that their savings will last. Private Sector Participants by Plan Type A string of legislative changes has contributed to this tectonic shift, underscored by cultural and market forces as well. Gone are the days of lifelong tenure with one employer, as Americans increasingly change jobs and geographic locations, and pursue career opportunities with greater freedom than ever. IBM’s announcement was as much a concession to employee preference for portable benefits, as an acknowledgement that administering such a plan was no longer practical. Masters of Our Own Retirement Destiny And so, most of us are now responsible for not only contributing to a plan, but also for choosing how to invest the funds. In many ways, the freedom and flexibility we gained from these changes are worth it. Yet few can deny what was lost, because it is so apparent on an emotional level. There is no amount of projections, expected returns, or glide paths can make us feel secure like a guaranteed pension did. Sure, even pensions were never fully guaranteed. Pension plans have failed for almost as long as they’ve existed, typically due to mismanagement: inadequate funding and/or poor investment decisions. Still, they’ve always been a surer thing than self-directed management. Professionals make mistakes too but, on average, you’ll surely get a better outcome than when everyone is driving themselves. Indeed, as the trickle of assets into 401(k)s in the 1980s became a flood in the 1990s, it became increasingly clear that giving the average American full responsibility for managing their own investments set off a slow-motion catastrophe. For every investor who is able to (1) have the discipline to max out each contribution, (2) avoid the siren call of stock picking and choose low-fee index funds, and (3) stay the course in the rockiest markets, there are likely dozens who fail at one or more of these behaviors. Recent findings from Financial Engines, an investment advisor to 401(k) plans, dramatically demonstrate the advantage of receiving some sort of guidance (defined as either the use of a managed account, a target-date fund, or online advice). From 2006 to 2012, on average, 401(k) investors who used some kind of help outperformed those who did not by 3.32% annually, net of fees. Median 401(k) Returns, 2006-2012 Meanwhile, a new academic field gained prominence, helping explain this phenomenon. Behavioral economics unleashed a relentless stream of evidence that when it comes to money, our decision-making apparatus is thoroughly riddled with biases. Traditional economic models tended to cast individuals as cool, calculating beings—but new research from behavioral sciences increasingly showed us to be deeply irrational. The deck is stacked against us humans as effective long-term financial planners. But most of us are now managing our own, personal pension fund. It’s a troubling combination. The Next Chapter In the 1990s, technology began a frenetic transformation of every aspect our economy. For two decades, however, it was hard to argue that technological advances in finance were actually producing a net benefit to the average American. Online discount brokers made it vastly easier and cheaper to trade stocks, but most people have no business trading stocks—it was like handing them a sharper knife with which to cut off their own fingers. Vast amounts of engineering effort were poured into proprietary technology used by hedge funds, and later, high-frequency traders. As other sectors of the economy saw tremendous advances in productivity and convenience, financial technology benefited only the few. These developments, however, were essential in driving down transaction costs, setting the stage for the 21st century financial services which are now emerging. Now, three trends are converging to create a new generation of financial services that are benefitting the individual investor at last: mature internet technology, intuitive interaction design, and a keen awareness of our behavioral biases. My company, Betterment, launched in 2010, was the first to apply these concepts to personal investing at scale and our product created the category of automated investing, or so-called ‘robo advisors.’ We ask for your financial goals and then make recommendations to help you achieve them. We then construct diversified investment portfolios online, automating strategies that used to be manual, expensive, and available only to the wealthy. Sophisticated rebalancing, tax loss harvesting, dynamic retirement income—these are now available at scale to over a hundred thousand customers. No account is too small when software is doing the work. Unlike with the discount brokers, the new business model is aligned with the customers’ interests: it is low fee, calculated as a percentage of assets under management. Companies that earn their revenue this way are incentivized to encourage customer saving, not constant trading. And our algorithms are constantly monitoring and checking the portfolios we recommend, providing automated services and advice when things get off-kilter—this is more than a simple buy-and-hold strategy. But these are still early days for platforms such as ours. Automated tax efficiency, a delightful interface, mobile convenience, truly paperless accounts—we are just scratching the surface. The big picture has always been to give customers peace of mind—to get people on track to meet their financial goals, and to keep them on track. In other words, to stack the deck for success. “Any Sufficiently Advanced Technology Is Indistinguishable from Magic” - Arthur C. Clarke How will this look? More integration, more automation, more personalization. No one iteration will be earth-shattering, but in the aggregate, it will feel like magic. All of your accounts will not just be aggregated, but seamlessly integrated, from your bank, to your Roth IRA, to your 529 plan, to your HSA. We’ll know about your assets, but also about your liabilities: mortgage, student loans, credit cards. Algorithms will ensure that you are making the optimal decision at every point (and where appropriate, they’ll make the decision for you). Every rate will be crunched, and every dollar will be routed where it’s expected to maximize your wealth and help you reach your goals. Forward-thinking, tech-savvy policy makers recognize that government can play a crucial role as an enabler of progress. They are already working on a framework that will allow us to build seamless, ‘magical’ experiences. Your accrued Social Security benefits will be downloadable directly from the government. Algorithms will integrate this data into projections, and will give you automated advice on how to maximize your eventual benefits. Likewise, you’ll authorize for your tax returns to be securely downloaded directly from the IRS, and your personal tax rates will be used to optimize every transaction. Once in retirement, each income payment will be funded from the most tax-efficient source (taxable, tax-deferred or Roth), factoring in required minimum distributions, along with your evolving lifestyle needs. Our Retirement Income service already advises you on how much you can safely take as income, and automates that cash flow, but this is only the beginning. And what about behavior? To date, the nascent field of machine learning as applied to finance has largely been limited to detecting patterns in large datasets (e.g. fraud). In the not-so-distant future, algorithms will learn about you directly from your actions, goals, and circumstances. They’ll automatically customize your advice, dashboards, design and alerts to put the levers that matter most to you and your situation front and center. They’ll answer questions before you even ask them. The interface will be about your future, not the past. Some version of the things described above is currently done manually (i.e., less efficiently) by financial advisors for wealthy clients. Many industry observers are fixated on whether digital financial advice will 'replace' human advisors. This misses the point. Technology always has been, and always will be, a tool. The same tools that empower an individual to build and maintain her own financial plan, will give a skilled professional the leverage to simultaneously service 100 complex clients instead of 10. Advisors flocking to our advisor platform recognize this immediately. Good advisors will flourish, and more clients will benefit. The New Infrastructure Transportation offers an irresistible analogy for how this revolution will play out. The automobile ushered in an era of unprecedented freedom for us to live and work in entirely new configurations, suited to our personal preferences. However, it came at a cost—safety, environmental impact, and free time were all implicated in the trade-off. With the ability to move around exactly where and when we wanted, came the responsibility of operating and maintaining an expensive and complex machine, with very high stakes. These days, you don’t have to be a techno-futurist to see that companies like Google, Tesla, Uber, and Lyft will eventually give us the best of both worlds. Self-driving, self-charging electric cars on demand will combine the hands-off ease, safety and efficiency of mass transit with the freedom, convenience and infinite customization of driving your own car. A fully automated network of personalized transport will be the new normal, and science fiction will become just another layer of infrastructure we take for granted. The great financial services companies of the 21st century are on the cusp of becoming household names. Expect a similar revolution—you will have your peace of mind, designed just for you, and everything will just work.
Betterment Raises Another $60 Million for Smarter InvestingBetterment Raises Another $60 Million for Smarter Investing We are quadrupling the cash we have on hand with the addition of $60 million in new funding, bringing our total funding to $105 million in company history. To our customers: Thank you. You amazing pioneers. You sent us 160 million of your hard-earned dollars last month, and it looks like you’ll send us even more this month. Don’t you know we’re just a bunch of data nerds and coding geeks? Yes, and a few cool designers, some of the country’s most impressive PhDs, CFA® charterholders, and CFP® professionals, and maybe a couple of Kanban masters and growth hackers. But why do you have so much faith in us? Oh, you trust our transparency and algorithms, you say? Do you really trust a computer to manage your money for you? Will the computer hold your hand when the market drops? Well, not literally, but it’ll give me useful feedback and help me make better objective decisions, you say. And it might harvest some choice tax lots. Oh, you Betterment customers. You’re so smart. Have you read the investment industry press lately? In case you don’t follow it closely, I’ll tell you: They’re either loudly dismissing us as irrelevant and destined to fail, or they’re praising us as the future, the inevitable, the what-we’ve-been-waiting-for technology. But they’re all talking about us. The attention is flattering, whatever they say, even when they deride us as “robo-advisors.” We’ve created a whole new way to invest and a derogatory nickname! Every inventor faces this. I believe our automated investing service will someday be as ubiquitous as automobiles are today—and calling us “robo-advisors” will sound as antiquated as calling cars “horseless carriages.” Today, we manage nearly $1.5 billion for almost 70,000 of you. I love you—I hardly know you, and I love you. I think about you every waking minute of every day. I answer all your emails personally, still (with help). Thank you for having confidence in me and my team to better manage, grow, and protect your wealth. I promise that we are doing the hardest and highest-quality work of our lives, building the best team ever assembled, and engineering the smartest and most secure financial technology imaginable to keep delivering more value to you. Why? Because we want this awesome service for ourselves, for our families, for our loved ones. Because it feels good to build something good for the world. Because from those to whom much is given, much is expected. It’s our privilege to serve you. I started Betterment to better align with customers. In my prior career working with the largest banks in the country, I saw generic and thoughtless products being cranked out by aging financial institutions that had lost touch with their customers. They encouraged complexity when it led to higher fees because customers made mistakes. The best strategies were only accessible to a few, and they weren’t scalable. The legacy platforms make money when you generate a lot of trading commissions or simply buy and hold their funds, even when neither of those strategies is optimal for you. They are doing that today even though we live in a world of zero trading costs and cheap, personalized diversification. They play games with fees, making money on you in ways you don’t understand. They’re no longer aligned with you. The old-guard behemoths are full of bright and well-meaning people, but their innovative years are behind them. Now, it’s our turn and responsibility to press forward, to apply smart technology, for the good of you, our customers. Seven years ago, virtually everyone I told about Betterment advised me to try something less ambitious. Today, we are the leader in a category. As I like to say to the team, “Clear eyes, hot space, can’t lose.” Today, we are the leader in a category. As I like to say to the team, “Clear eyes, hot space, can’t lose.” What’s next? The question I hear most often from the press today is, “Congratulations, now what are you doing with the money you raised?” This is what we’re doing: Saving you time: Give us five minutes and we’ll give you complete financial peace of mind. That’s our promise. The hard part is engineering everything faster and with more automation. And now doing all that on mobile, because that’s where so many of you are. Personalizing your investment strategy: Each Betterment customer has a unique portfolio that is personalized and optimized for maximum expected returns, net of tax, net of costs, net of risk, and dynamically adjusted for your situation. We are building more ways to personalize your strategy as you tell us more about your assets and life. Saving you taxes: We have one of the most tax-efficient portfolios and trading platforms ever created. We’re making the tax-reduction strategies once only available to the wealthiest available to all. Creating more financial security: We are bringing back the comfortable feeling of defined benefits, in a dog-eat-defined-contribution world. You can rely on evidence-based investment strategies to grow your money—and when it’s time, provide you with income—and eliminate any doubt about whether you’re on track. Expanding Betterment for Advisors: We’ve seen great early results from enabling registered investment advisors (RIAs) to make Betterment’s smarter technology accessible to millions of additional clients. It’s time to double-down. To our financial advisor partners: Welcome aboard. For those who are unsure of what we do: We’re not replacing advisors; we often work with advisors. We are enabling financial advisors to make Betterment’s smarter technology accessible to millions of additional clients with Betterment for Advisors. What we are replacing is the old way of individuals doing lots of frustrating, expensive busy work to manage investments. We replace the do-it-yourself “discount” brokerages that cost more and don’t let you implement all the clever trading techniques and tax-reduction strategies we do automatically for our customers. We compete with Schwab, E*TRADE, and the like, as well as some of the business-side platforms that advisors use to perform the same tasks on your behalf. An advisor is useful for when your financial situation becomes complex—for estate planning, alternative investments, and more. You simply don’t need to hire an advisor for portfolio management—savvy advisors and investors use Betterment for that. The Big Picture These days, we’re all living a lot longer than we did a few decades ago. But, as humans, we aren’t well equipped evolutionarily to think long-term and save for our old age. And yet, because it’s extremely expensive for governments or companies to provide for our future comfort and if we want to have comfortable, long lives, with time for family and friends and money for schools and travel—we have to save. A lot. Investing is something we’re all required to do, in the absence of good public or private pensions, and yet there hadn’t been an obvious best way to do it. There was no great product that would tell you how much to save, in what accounts, and whether you’re on track. It’s as if there’s no public transit, and we all have to walk farther and farther to get to work, because no one has built cars. Until Betterment. Betterment is the more comfortable, more efficient, increasingly self-driving car. That’s how I see it. You’re going to love the ride. If you haven’t already, join us. P.S. Some members of the Betterment team encouraged me to share the email I sent to the office last night, after we closed our recent round of funding: Today didn't feel different from any other day, for most of us. Big (record?) day for net deposits, solid day for signups, meetings meetings meetings, little bit of work, tasty team lunch, trivia night @ Storehouse. But something big happened today, something great for our company. There was the material impact: Our bank account grew 4x in a day. $60mm is a big score - even for a professional crew. Although it's almost impossibly large in human terms, difficult to fathom ($3mm seemed like a lot when we raised our first round in 2010... $60mm doesn't seem 20x more significant), and more than I imagine I could spend in 3 lifetimes - I do have some means by which to measure it - my own recent past - the best 5 years of my life. To those remaining on the 3rd floor after dinner this evening, I joked, "We now have 4x more money in the bank than we have spent building this company over the past 5 years... Should we start 4 new companies?" But the bigger deal than the new funds in our account is that we're now poised to build a transformative and influential company, to give form to our visions and dreams, and to improve millions of lives. We've long thought that we were up to the task, and reveled in the challenge - why else do we work long nights and weekends to make this company grow faster - but now we have validation, support, and materiel to make the world as we want it to be. We don't make a big deal out of fundraising at Betterment, because fundraising is not an end in itself, but a means to an end. Raising money is never our goal. But raising money is necessary work to attain our goal: to help present and future generations of our families, peers, and compatriots live happier lives. To align with our hard-working, smart customers and give them the kinds of advantages previously only afforded to the privileged. To give peace of mind and financial security via providing an all-encompassing, best answer to the question, "What should I do with my money?" I believe it is important to mark occasions, to recognize the milestones we pass, to take a look back as we travel and see how far we've come. So we will celebrate this milestone next Friday. Remember that what we are celebrating is the opportunity to do more, to work harder, to push faster, to build a better company. As I said to you in team meeting last week - now we have to EARN IT. ... It is such an enormous privilege, building this fine company with all of you fine folks for five years, and we're just getting started.
With Market Timing, Even If You Win, You May Lose (Hint: Taxes)With Market Timing, Even If You Win, You May Lose (Hint: Taxes) When you’re actively trading, short-term capital gains taxes will cripple your take-home returns. Let’s take Joe, a hypothetical investor, who thinks he is really good at trading. In the past year, he has been fiddling with his portfolio on a quarterly basis, buying low, selling high, usually after reading something online. And he’s doing well—the market is up, so he is making money. Then let’s take another investor, who strives to be like The Dude in The Big Lebowski. He dumped some money into his investments in January and has since ignored them. And knowing him, he won’t do a thing with it for at least another decade. Who’s the better investor? Year over year, after all is said and done, it’s likely The Dude. You can probably guess that this is not really a story about personality types—but about the invisible cost of active trading. When you market time, no matter how well you do, you’re probably going to get stung on taxes. If you’re moving between securities quickly, chances are, you never hold them for longer than a year, so even if you’re successful (a big if!), you will owe short-term capital gains tax on your gains. This one is a killer—siphoning up to nearly 45% of your returns to Uncle Sam, when including state tax. Outperforming an index is hard, and doing it year after year is even harder, but that’s not enough. You actually need to substantially outperform the index to wind up with better returns, because the tax code is set up to discourage speculative trading. To observe this effect, you need to focus on after-tax returns. A Quick Review on Tax Rates You incur taxes on short-term capital gains when you sell an appreciated security that you’ve held for a year or less. Any longer, and the gain will be long-term. When you pay the short-term rate, instead of waiting for the long-term rate, you effectively reduce your own investor rate of return. At the time of this article’s publication, the federal tax rate on long-term capital gains goes up to as much as 23.8%, while short-term capital gains get taxed up to 43.4%. Rates are subject to change. See the current short-term and long-term capital gain tax rates. The $100,000 Case Study To get a sense of how taxes from active trading can drag down a portfolio’s returns, we backtested the performance of two $100,000 investments, from Jan. 1, 2000, to Oct. 31, 2014. Both initially started with a Betterment portfolio allocated to 50% stocks. Portfolio A remained passive for the term, maintaining the target 50% stock allocation. Automated rebalancing kicked in any time the allocation drift exceeded 5%. After 14 years, the portfolio was worth $282,000 upon full withdrawal, after all taxes. Portfolio B began at 50% stocks, but every quarter it rebalanced to a different (random) stock allocation. This means that every time the allocation was reduced, stocks were sold. This simulation mimics investors who attempt to anticipate market movements, or chase trends. The portfolio was worth $240,000 upon full withdrawal, after all taxes. How to explain the difference? Even though the average stock allocation of Portfolio B was 50%, constantly altering the allocation will, of course, result in different exposures over the period, making meaningful comparisons difficult. But there is one distinction which likely had a massive effect: not including the ultimate liquidation, Portfolio B paid nearly $30,000 in short-term capital gains taxes over the period—on average more than $2,100 per year. Meanwhile Portfolio A paid about $3 in short-term capital gains tax, as part of a rebalance in 2000, and never after that (subsequent to Year 1, long-term lots were always available when rebalancing kicked in.) The Hidden Taxes in Actively Managed Funds This effect can be particularly costly inside mutual funds, which can obfuscate their tax-inefficiency by parading their pre-tax returns. Meanwhile, the after-tax adjustment can be dramatic. Inside every actively managed fund is a professional Joe—making stock picks, and realizing short-term gains on your behalf. You have to dig a little to appreciate the capital gains problem inside an actively managed mutual fund. All funds are obligated to distribute any realized capital gains to their investors at the end of the year. Here is a list of mutual funds that are expected to distribute lots of such gains this year. At the top of the list is Eaton Vance Large-Cap Value. Let’s look at its performance compared to the large-cap value index fund VTV, that we use in the Betterment portfolio: Taking a look at the chart, where the Eaton ETF is represented by the blue line and VTV is represented by the red line. They’re both up about the same, year-to-date, and seem to track very closely. So seemingly no difference, right? But when it comes to investing, you should care about your investor returns—not the fund’s returns. Let’s look at more detailed info at Morningstar for both. Eaton’s Pre-Tax YTD return: 9.48%. After-tax: 2.76% VTV's Pre-Tax YTD return: 10.16%. After-tax 9.36% Eaton’s capital gains exposure is 3x that of VTV. In investor take-home returns, that is ~6.5% negative alpha. That stinks. Note that the figure above is year-to-date (YTD) as of Nov. 13, 2014, which means the data represents Jan. 1, 2014 through Nov. 13, 2014. Viewing Morningstar for the Eaton ETF or VTV will be YTD as of the current year in which the data is being viewed. The Bottom Line Unless you plan to never liquidate your assets, taxes on gains are inevitable, and you should not have an irrational aversion to them. But you should have healthy aversion to the most costly of them—the short-term capital gains tax. In all but a few rare situations, you can and should avoid it. Tax Impact Preview shows you the amount and type of capital gains you may be about to incur, before you commit to a trade. Surfacing the hidden cost of active trading in this way makes you think twice about impulsive decisions, and encourages you to stick to your long-term plan. It’s no accident that a Fidelity study actually found that investors who forgot they had accounts did best. This is one of the beauties of being a buy-and-hold investor—you do less, and as a reward, you also hand over less of your money to the government. This article originally appeared on Forbes.com.
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