Personal Finance Interview with Jon Stein on Automated Investing

Personal Finance Interview with Jon Stein on Automated Investing

Think the best investing technology and advice is only available to the uber-wealthy financial elite or that smart investing requires a lot of time and attention to the markets? Think again, says Jon Stein, CEO at automated investing service Betterment.

"People think to invest well you need millions of dollars and an expensive financial advisor, or that you must read the Wall Street Journal, watch CNBC and spend time researching. In reality, neither are true," he says. "Technology makes the best advice accessible, and the best investors are the people who leave their portfolios alone and don't act on what they see in the media."

We recently checked in with Jon to learn more about how Betterment makes smart investing accessible to everyone and get best practices and advice for first-time investors.

Hi, Jon! Tell us a little about Betterment. When and why did you start your business?

I started Betterment in 2008 after realizing how many people were getting hosed by the financial services industry. My goal was and still is to thoughtfully apply technology to help investors better pursue happiness: that includes a better investment return -- net of taxes, transaction costs, and behavior -- while saving time and maintaining liquidity.

What's the story behind the name?

It came out of the idea of making things better. I was a consultant to banks for many years. I saw a number of opportunities to use technology to make financial services more efficient and use design to make products more intuitive. I landed on "Betterment" -- it was about making life better, the pursuit of happiness, and improving upon "business as usual" in financial services. Betterment seemed to sum all that up.

What makes you so passionate about personal finance and investing?

Like it or not, money is fundamental to modern life. We work five days a week, possibly more, to earn money. With that money, we pay for shelter, food, some fun stuff, but the biggest thing we do is plan. If we're doing that well, then everything else in life moves along pretty nicely. Your marriage is good, your kids go to school and you comfortably cover emergencies. If you don't take care of that one thing - planning -- then things can be generally unpleasant.

I think consumers have been screwed by the "industry" for a long time -- they're screwed if they do invest, because the products are pretty bad, and they're screwed if they don't because they won't have any kind of safety net, retirement, or potential for growth. My goal is to provide a good choice that makes it easy and enjoyable to live a long and good life.

What sets your firm apart from other investment management companies?

Automation. Transparency. Efficiency. Delight. Accessibility. Those are our principles.

We automate everything, from rebalancing to smart reinvestment of dividends to tax optimization. The time you spend using Betterment is supposed to be far less than any other brokerage's website, making it ultra-efficient. We purposely minimize the number of choices an investor needs to make because on average, the more you interact with your investments, the more you hurt your average return. The Betterment app and our mobile apps are intuitive, and customers love the UX. And we provide top-tier investment advice and efficient execution for one of the lowest fees in the entire investment management industry.

For people who are new to investing and wary about jumping in especially when the economy has been so rocky, what advice can you offer on getting your feet wet without having a nervous breakdown?

Not advice as much as assurance that you don't have to do this on your own. And frankly, you shouldn't. There are tools, like Betterment, that take the guesswork out of investing the right way. Putting your money into Betterment and setting up auto-deposits are a great way to gain market exposure without paying outrageous fees or trying to time the market. If you accept that your money is best invested over the long-term, you can leave it in an efficiently managed account and not have to worry about external factors.

What are your favorite types of investments? What do you steer clear of?

Exchange-Traded Funds are the most efficient way to invest. They provide the broadest, most cost-effective access to the markets. I steer clear of whatever seems "hot" at the moment. If something is hot, it's generally already priced that way or something that is likely short-lived. Three years ago, gold was hot. Now, gold isn't looking that great.

What are some red flags that an investment opportunity might be too good to be true?

If your brother-in-law is talking about it. That's one way of putting it.

Here's another way: The market is quite efficient. The only way to beat the market is to have better information than someone else. So unless you have some truly secret information about an investment that nodiv else has, you shouldn't expect more than a market return. And a market return is in the range of 5 to 10 percent per year. If you are promised better than a 10 percent per year return, or better than 0 to 3 percent without risk, then that's cause for alarm.

What is behavioral finance and why should we care about it?

Behavioral finance attempts to figure out why people make irrational financial decisions. We should care about it because its findings can help make better investors. At Betterment, we establish behavioral guardrails in the app so our customers might experience better returns. For example, we don't show you the day's performance of your portfolio. Daily volatility has virtually no impact on long-term goals, so we don't give customers the opportunity to opine on and worry about it. This leads to measurably better returns.

What are your thoughts on the current investing climate? Predictions for the next few years?

I try not to think about the short-term future when investing. I don't speculate about the effects of future events, other companies' IPOs, or each move the Fed makes. If you're investing for long-term goals, market volatility as a result of news is simply noise.

Follow Betterment on Twitter, Facebook, Google+ and LinkedIn.