MIB: Using Technology to Help Investors – The Big Picture

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How can technology solve some common investing issues?

That was the question Jonathan Stein had been mulling over. We spoke with the founder and CEO of Betterment, about how the idea for an online automated firm was created. He headed to grad school with the concept – and even the name “Betterment” – already in his head.

Today, the firm has $16.4 billion dollars under management.

His academic work, both at Harvard under Martin Feldstein (former chief economic advisor to President Ronald Reagan) and then at Columbia Business School, focused on the distinctions between academic theories of economics and how investors behaved in the real world. He recognized this was creating opportunities for technology driven improvements was being overlooked by Wall Street. In. particular, the ability of software to measure risk tolerances, figure out an appropriate asset allocation, and deploy cash from within a portfolio. In his class in Entrepreneurial Finance, Stein used the idea of an online automated investment advisor as his case study. The feedback allowed him to enhance many of the financial services currently offered by Betterment.

In our conversation, he explains how the industry has changed since the firm launched, notably the acquisition costs of finding new customers. We also discuss some of the foibles of betterment’s online competitors, ranging from Wealthfront’s “Risk Parity” issues to Schwab’s automated investing platform, Intelligent Portfolios issue with an outsized cash allocation, to Vanguard’s Personal Advisor product. Stein’s position is that online advice was core in his firm’s DNA while it is merely an add-on for all of these other firms.

His favorite books are here; A transcript of our conversation is available here.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Bloomberg, Overcast, and Stitcher. All of our earlier podcasts on your favorite host sites can be found here.

Next week we speak with Chris J. Brightman, Chief Investment Officer of Research Affiliates.