Jon Stein on The Digital Future of Finance and Banking

Session Description
Betterment CEO Jon Stein sits down with Tom Glocer of Angelic Ventures to talk about how artificial intelligence is the next step of wealth management - but that getting people to trust in a financial "roboadvisor" isn't always easy.
 
Glocer: This is Jon Stein, who’s the CEO and founder of Betterment and we’re going to have a chat—this is the first part of a two-part conversation we’re going to have.  First, for lack of a better term—robo-investing. And then we’re going to talk a little bit about blockchain, bitcoin, etcetera.
So Jon, with that as a start, tell us about Betterment. What’s it about and why did you decide it was a good idea to bring more technology, greater smarts into the very traditional area of investment?
Stein: Well you said it, Betterment is the world’s largest and fastest growing robo-advisor, by which we mean we manage your money for you. It’s something like a self-driving car for your money. And we manage $4.5 billion for 160,000 customers today, which makes us actually just the largest and fastest growing investment advisor full stop. So I got into this business because I was frustrated personally, and kind of in keeping with the theme of today about artificial intelligence, I found that most financial services weren’t intelligent. I was giving my money to people, or to websites, and it took a lot of effort on my part to make anything good happen. And generally, when people spend too much effort on their finances, bad things happen rather than really good things. It’s sometimes better just to let it go. And I thought there really ought to be a service that just does all the right things for you automatically and gets you to your goals more safely, more securely, more quickly than you could if you just did it on your own. And I couldn’t believe that somebody else hadn’t already done that. And I think it was a matter of timing and the place, and we launched back in May of 2010. And everyone kind of thought we were crazy.  We just watched—it was just our 6-year anniversary. We just watched the launch video in the office a couple days ago and the judges—we launched it at a conference called TechCrunch. The judges on the panel said, “This will never work. It’s just too easy.”
Glocer: Sort of like iTunes, right?
Stein: Yeah, right. It was too simple.
Glocer: So I should disclose, I’m on the board at Morgan Stanley, I chair the technology committee of that board. We have 17,000 old line brokers. But I’m quite open to the idea that you can and should disrupt the industry. Why should someone, with their money, trust an algorithm more than their three-martini broker?
Stein: Right, I guess you said it yourself. We were chatting last night at dinner about some of the amazing stuff that’s going on in surgeries, where, you know, robots can do that better, and I think a lot of people imagine there’s a day when the car the might get you there safer than if you drove yourself, right? Like it’s not too hard to predict that. In our space, in financial services, there are lots of conflicts of interest out there. You know, your broker might have a bad day, might have an interest in some stock that they’re promoting, might have a financial interest in selling you one thing over another. When you trust software to make these decisions for you, it’s a lot harder to have conflicts because you have to hard code them into the software, right? And that’s auditable, it’s not just in someone’s mind and they’re doing it without anyone knowing. You can go back and trace and see exactly what the algorithm said and why. And that makes it easier to regulate, it makes it easier to design something that’s better aligned with customers, makes it more efficient, repeatable, reliable for the consumer who wants that experience.
Glocer: Now, in the old days, corporations ran big, defined benefit plans, chose in advance at least the range of investment options their employees could have. But for the last 20 years, people have terminated, closed their old plans, put everyone into 401Ks, and sort of thrown the ball back at employees and at citizens generally. So tell me about the way in which you can help the average individual who is not financially sophisticated, who doesn’t have a Series 7 or whatever, how do you go about, in an environment where interest rates are also really low, so the simple investment routes that might have existed before aren’t there? I come, you know, I sign up for Betterment, let’s say I’m nearing retirement—although I don’t think I’ll do that for a while. What do I do? How do you recommend stuff?
Stein: You’re right. You said there’s been this long trend of putting more responsibility on the consumer and we’ve seen that over a long cycle, since the mid-’70s and certainly in the ’80s, lots of responsibility put on individual savers—for well-intentioned reasons, right? We wanted to move liabilities off of corporate balance sheets. We wanted to move them off of the government’s balance sheet. The problem is we as individuals aren’t really great at thinking about what’s going to happen 40 years from now. We didn’t evolve in a state where we had to think about those kinds of long-term decisions. It was enough if we could eat tomorrow. And so we aren’t very good at that, and the record has shown over the last 40 years that we as a society have significantly under saved. Only 11% of retirement spending comes from personal savings. That’s a shocking number to me, because you think, well, everyone is saving for themselves, but it’s only 11% of—because people have so significantly under saved for their retirement.
And in the future, we believe things are going to be a lot more advised. The financial system that we’ve designed to date is a little bit like a healthcare system, where there’s a shelf and it’s full of drugs and you can get all the drugs and you can get as much of anything as you want, but there’s no doctors. And we think that’s just a crazy way to design a system. You would never design a healthcare system like that. And our financial system is like that, you can come invest in whatever, but there’s no advice. So the future is a lot more advised. We provide advice about how much to save, what types of accounts to open, we tax manage it for you, we behaviorally manage it for you. We respond to your own behavior in the site to give you personalized advice back. And that’s a basic right, in our view, that everyone should have access to that kind of advice about their money.
Glocer: And so in the couple of minutes we have remaining, tell us a bit about your vision for the future. How big can this get? How much money will move from, you know, traditional, purely human-based big companies producing the products in close to factory form to online world?
Stein: So the first thing I’ll say is it’s not about humans versus robots. It’s never been that kind of a competition in any industry, and certainly not in this one. Some financial advisors do worry, “Am I being replaced by the technology?” And we say absolutely not. You’re going to be able to serve more customers than you ever have been before and you’ll be able to serve them better, because you’ll be able to have a more reliable process, you’ll be able to spend more time understanding their needs. We provide a technology that, yes, we have a direct-to-consumer offering that’s extremely efficient if you don’t need the handholding of an advisor, but we also have an advisor offering that partners with advisors. And ultimately, this technology is going to be used by everyone, whether you’re investing on your own directly or you have an advisor, because it’s just that much better than not using technology. It’s like saying, you know, well how many advisors or how many people will ultimately adopt the telephone or how many will ultimately use spreadsheets? This is just totally transforming the industry. It’s something that everyone will use.
Glocer: So in keeping with the theme of this conference, will there be an Alexa hack for Betterment? I mean, on my Alexa, if I want a stock price, I have to say, “Alexa, ask Fidelity for the closing price of Morgan Stanley.” And if I ask her a stock that’s not in the S&P 500, I don’t get an answer.
Stein: Right. I’m already thinking about it. My team’s going to be upset that I was here, because they’re going to have to start working on it when they get back to the office.