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Jo Ann Barefoot explores how to create fair and inclusive consumer financial services through innovative ideas for industry and regulators

Effortless Investing : Jon Stein of Betterment

Barefoot Innovation Podcast

Effortless Investing : Jon Stein of Betterment

Jo Ann Barefoot

Welcome to Barefoot Innovation and to a new dimension in the topics we explore. We've talked with many startups in lending, payments, and managing personal finance. Today, we're looking at the most exciting change underway in the investment space - "robo-investing." My guest is Jon Stein, the founder and CEO of Betterment.

We met in their fast-growing offices in New York, a converted warehouse steeped in industrial character and with mouth-watering aromas wafting from a very substantial food bar that lined one end of the busy open space, and offering the special charm unique to businesses where people bring their dogs to work.

In our conversations, Jon told me the story of his personal journey. He graduated from Harvard and - since, as he says, no one was recruiting for jobs with the description of "making people happy" - went into finance. Eventually he went on to Columbia Business School, gained Series 7, 24, 63 certifications, and become a CFA, Chartered Financial Analyst. He expresses respect for traditional financial businesses, but became frustrated by their transactional focus, and also by his own financial life - he had 7 brokerage accounts, invested in Enron, and finally concluded that the industry encourages the wrong investor behaviors, especially in trying to "beat the market." He'd studied both economics and human behavior in college (before behavioral economics caught on) and realized that his interests lie at the intersection of behavior, psychology, and economics. He remembers a professor saying "how crazy people can be, and how very often they would get in their own way, and how even when we wanted to do the right thing, we would do the wrong thing."

He also says he always knew he wanted to do "something big."

So in 2008, he founded Betterment.

Betterment is now the largest independent "robo-advisor," with $4.3 billion in assets under management and 150,000 customers. I've interviewed many founders of startups on Barefoot Innovation, but this is the first one that runs commercials on television.

Betterment aims to optimize investment through automation that produces sound advice for the long term, and that also makes the process both easy and more affordable. It builds around what Jon considers the MOST important advice -- which is too often overlooked, namely -- "How much to save?" The company has also taken on the "behavior gap" in financial advice - Betterment has the lowest in the industry and is trying to drive it to zero.

They are also constantly driving for efficiency gains (his colleagues say if you want to sell Jon on an idea just tell him it will increase efficiency), and for fee transparency. They think this combination of strengths - being advice-centric, transparent, and hyper-efficient -- will revolutionize the investment world. They also think their model, over time, can be applied to a much broader set of financial services. As Jon's biography puts it, "What excites him most about his work is making everyday activities and products more efficient, accessible, and easy to use."

One highlight of our conversation is his insights on the thorny questions of how these innovations should be regulated, including on the advice given, how data should be used to be sure it's helping customers, and how performance should be measured.

Note on upcoming podcasts

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Upcoming shows are going to be so interesting. Keying off Jon Stein's thinking on human behavior, we'll have an episode with one of America's top experts in how behavioral economics impacts investment and retirement savings, Harvard Professor Brigitte Madrian. I'm delighted to say Brigitte is also my faculty advisor on the book I'm writing on financial innovation and regulation for my Harvard fellowship this year.

We're also working on a fascinating show on innovation emerging in the insurance sector, dubbed, "insure-tech."

Other guests in the queue include some of the country's most thoughtful bank compliance officers, and the very thoughtful founders of Bee.

Note on Regulation Innovation Briefing Series

Meanwhile, click here to explore my Regulation Innovation briefings, while you still can for free!  The briefings are short monthly videos, each paired with a deep article about the twin and intertwined challenges of financial innovation and regulation. They are still free for a few more weeks, and then the series will be for subscribers, so please check it out.

As I said last time, these articles are the most important and valuable thing I've ever written. I hope you'll join the journey.