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.”
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.
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.
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.
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.
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.
More from Betterment:
Remembering Jack: Why There Is No Betterment without Bogle
Without Jack Bogle, Betterment probably wouldn’t have ever been. He leaves a legacy of customer-centricity to live up to.
Jon Stein on “How I Built This:” Reflecting on Our Story
Jon Stein joins NPR’s Guy Raz for an episode of “How I Built This” to look back at how Betterment started, what mistakes were made, and how they turned into learnings for the robo-advisor we are today.
CEO Jon Stein: How You Shape Betterment’s Vision for 2019
How you use Betterment and what you tell us shapes our future. Betterment CEO Jon Stein describes what he’s hearing from customers and how those ideas are changing what we’re building in 2019.
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