Betterment’s Jon Stein is a fintech entrepreneur who needs no introduction. The company he founded alongside Eli Broverman during the financial crisis is admired by many, watched closely by digital advice peers and viewed warily by the powerful financial services old guard. So where did Stein find the inspiration to take on a powerful status quo? Part of the answer lies in his (bad) experience in trying to manage his own money after college. But there’s something bigger at play when it comes to Stein. On the back of Betterment’s newly announced multi-tiered, human-digital hybrid offering, The FR’s Gregg Schoenberg sat down with Stein to find out what drives him and his company. The short answer: Stein’s company is obsessed with customer satisfaction and doing its part to address the savings and retirement challenges facing America. But in order to make a dent in these major issues, Stein believes his company has got to go big — really big. After getting to know him better, we think he and his firm are up to the challenge.

The Financial Revolutionist: Jon, it’s great to see you. Let's jump right in to your recent news. Was Betterment’s decision to move to a hybrid model always in the long-term plan or was it a response to the feedback you were getting from your clients?

Jon Stein: Thanks, Gregg. Advice has always been the core of Betterment's offering. From the beginning, we said that our mission is to empower customers to do what's best with their money, so they can live better lives. When we started the company, we realized that the industry was dominated by two types of players: mutual fund companies selling funds, and brokers selling you whatever they make commissions on, or whatever products pay them the most. No company was out there as an advisor first and foremost. So the idea of providing advice and managing people's money according to their best interest has always been at the core of what we do. As we scaled our business, the only way to stay true to our mission was to use a lot of technology.

“Our software is the best in the industry. There’s no match, really. We do more for our customers than anybody and will continue to maximize their money more efficiently.”

What we learned over time is that people who have a million dollars or more want a lot of the same things as people with a hundred thousand dollars. But as Betterment became more attractive to that segment, we started to hear anecdotally things like, 'Oh I came to your site and I checked it out and it looks great. It's compelling and I know that I'm going to get a better return from you guys than I will get from Vanguard or Schwab. But I’d like to be able to talk to a licensed professional first.'

FR: That’s when you realized you needed advisers on staff?

JS: Actually, we've had advisers at Betterment for as long as I can remember. It used to be me picking up the phone and talking to people, until we hired our first CFPs (Certified Financial Planners). But it wasn't obvious to people that they could call us. We ultimately came to the conclusion that we had to productize this offering and staff it up so that we weren't turning people away.

FR: You’re saying that Betterment was never a so-called “pure robo”?

JS: I've never really referred to us a “roboadviser.” I think it's a great handle and it speaks to the investment and innovation we've made in efficiency and maximizing people's money. But for us, it's always been about pairing the best people with the best technology. Launching our advice platform is simply allowing us to open the doors wider.

FR: Does your decision to productize advice signify that Betterment is now making a concerted effort to go after an older and wealthier client base?

JS: We have always offered advice through our platform and that will continue to improve. I do think being able to consult with experts absolutely puts us in direct competition with Vanguard, Fidelity and Schwab. We’re also going after the customers of Morgan Stanley and UBS. And we're going to get some of them, because some people will want to take advantage of the services Betterment offers, but still be able to talk to someone.

FR: To be clear, the private banks are now foursquare in your competitive landscape, whereas they weren’t before?

JS: Right.

FR: Speaking of competitors, what’s your reaction to Wealthfront’s recent announcement of Path?

JS: Our software is the best in the industry. There's no match, really. We do more for our customers than anybody and will continue to maximize their money more efficiently. We will continue to invest in having the best platform and make that available to all of our customers.

FR: Most of whom will be digital customers?

JS: Yes, most of our customers are still going to be digital customers. That's the most successful platform that we have. Advisers are more expensive, so more people are going to opt for that digital solution and we're going to continue to have the best one in the industry. This additional service by no means is a move away from being technology-driven.

FR: You've stated clearly that you want to take Betterment public one day. When you look at competitors like Vanguard, you know that firms like that have huge marketing budgets. Is there something that can be inferred about the timing of Betterment’s recent move?

JS: We're going to have to build a brand.

FR: Does that mean having a large war chest?

JS: This is a mass retail company and we have the advantage of having customer referrals being our number one source of new customer acquisitions. That lowers our cost of acquisition and means that we're always growing faster all the time, because as we add customers, they refer more. But to get really big, you need a war chest, as you say, to invest in brand building. I’ve always said from our earliest pitches that this was going to be a capital intensive business to build.

FR: To get really big?

JS: Yes, we want to build a massive business. This is not something that we're building to sell or to be some sort of lifestyle business.

FR: In observing the people around your office, I think it’s very clear that Betterment is not a lifestyle business. But let’s discuss the new service offerings. Why not start with one new tier as opposed to a couple?

JS: We wanted to provide a way for our customers to get advice any way they want it. So, if you're the sort of person who wants a digital solution, we've got the best one in the market. If you just want an annual check-up, and you've got a few questions here and there, we've got that. If you want a certified financial planner that you can call whenever you want, and you've got a more complicated financial life, we've got an answer to that. And if you want a dedicated person where you can always speak to the same individual, we’ll connect you to a fiduciary fee-only financial adviser to manage assets on the Betterment platform.

FR: I assume that these external advisors have been picked with care?

JS: Yes, we’ve vetted the advisors very carefully before they can be part of our network.

FR: So the new plans are about choice?

JS: Yes, absolutely.

FR: Within the new tiers of service, the most interesting aspect to me is the difference between Betterment Plus at 40 basis points per year and Betterment Premium at 50 basis points per year. With Plus, you get one consultation, and with Premium, for just 10 basis points more, you can go to the all-you-can-eat buffet. If someone were to come to you, let’s say your 28 year-old cousin, and say, ‘Jon, I just inherited $300,000. Which tier should I choose?’ Wouldn’t you be inclined to say Premium?

JS: I have different cousins who would want different things, but I view this more in psychographic than demographic terms.

FR: Could you explain that?

JS: Sure. I think in terms of how much advice a customer needs more than age or income. We have customers on the digital platform who are in their 90s, and they're very comfortable managing a million dollars on the Betterment digital platform and have told their grandkids about it. We also have customers in Premium, who are just out of college, and have a certain amount of inherited money and just want a little help.

FR: Ahead of your rollout, you obviously staffed up. How did you go about that?

JS: We have been ramping it slowly and quietly to the point where we now have around a dozen licensed experts on the team.

FR: And where are they coming from?

JS: From Schwab, Fidelity and Vanguard. Now that we have gone live with our offerings, we’ll have to grow that team even more.

FR: I read somewhere that you had taken some folks from USAA as well.

JS: I think we've hired people from there, too.

FR: I’m a big fan.

JS: Yes, it’s a great company.

FR: So, with your in-house advisors, how will you address the challenges associated with making a service level recommendation?

JS: I don't expect us to be calling customers and recommending different levels of advice. We're really agnostic and it's not like we make more money on one than the other. We priced these tiers as close to cost as we could.

FR: Sure, but you'll have marketing initiatives that will be segmenting to some extent, right?

JS: It’s not an initial focus. When I think about the offering today, we've got this torrent of customers coming to us. I'm making up a number here, but let’s say we get 300,000 visitors this month. Some percentage of those people are converting to be customers — let’s call it 12,000. I think just as many people out there who were converting on the pure digital offering are interested in having a human component. I don't know if we'll get another 12,000, but it seems to me that there are many more people interested in hybrid solutions. So, I think that market is huge, and over time, we might find ways to specifically target those people.

FR: Here’s a quote from your website: "Our team of licensed financial experts will be obligated to give the best advice for you, period. Sometimes that might mean adding assets to another service."

JS: Yep.

FR: What are you saying?

JS: If you have a 401(k), we offer a 401(k) for employers through Betterment, but we may not manage your company's 401(k). We're always going to recommend that you max out your 401(k) first. If you have an IRA somewhere else, in most situations we're probably going to recommend that you bring that to Betterment.

FR: With respect to your Betterment advisers program, I assume you charge a platform fee for anyone who uses an external advisor?

JS: We charge 25 basis points, which is the same that we charge for digital customers. We don't charge anything for the referral, which again demonstrates that we're indifferent about how you get advice.

FR: Despite your new hybrid offering and the pressures you feel as a fast-growing, highly visible start-up, you're saying that Betterment is totally “Swiss”?

JS: That's our goal. Now, that's a high aspiration, right? As the company grows, it's a hard thing to do, but that’s absolutely our goal.

FR: I’m sure you’re aware that several of your peers are pursuing an enterprise model. Does moving to a hybrid consumer model reaffirm that the center of gravity of Betterment is going to remain consumer-focused?

JS: It's always been our biggest business, but the Betterment for Advisers business is growing nicely as well.

FR: Right, but with your recent announcement, Betterment has reaffirmed that it’s confident that it can go and get customers for itself.

JS: Yes, but this move aligns our retail business more closely with Betterment for Advisers because now we're referring customers. It's not only advisers bringing their clients on to our platform. The right kind of advisers now have a reason to join us too because we can refer clients to them and they love that.

FR: If there is an underappreciated aspect to the Betterment story, it's the fact that Betterment is a full-blown broker dealer, which enables you to offer an end-to-end solution. That suggests to me that you could do some great enterprise partnerships.

JS: Very few people understand that, which is why it gets little attention. It's only people who really understand technology and financial services that can see that.

FR: But having an end-to-end solution is a differentiator because you can integrate partnerships more easily, right?

JS: Yes, and we can build new tools for partners more quickly. We've actually innovated in record-keeping, which is why somebody in one of the benefits magazines called us the “robo record-keeper.”

FR: Wow, that’s quite a characterization. I’ve heard you delayed your initial launch because you wanted to go to market with all of that back-end built. Weren’t you getting a lot of pressure in those early days to go live as soon as you could?

JS: Yes, but mostly from myself. We were bootstrapping, going without salaries and coding ourselves. We had a plan to get the thing out in three months, and it ended up taking us another year before we could launch.

FR: Have you tried to get the message out there about your record-keeping prowess?

JS: I don't know if it's as much of a consumer-appealing message. We talk about it, but it's kind of like show, don't tell.

FR: How do you convey its importance?

JS: By showing how it benefits customers. It means we can do fractional shares and do tax coordination across IRAs and different account types. Other platforms just aren't built to do those things. You're dealing with different systems at other places. IRAs are over here, taxable accounts are over there. So it gives us capabilities.

FR: Let’s turn to the highly contentious issue of the DOL fiduciary standard, which as you know, is now going to be reviewed by the Department of Labor. It strikes me that even if the rule is delayed, diluted or rescinded, Betterment is going to benefit here.

JS: I agree with that. Whatever happens to it, we're still going to be a fiduciary. I also think that consumer demand is moving towards more aligned, transparent fiduciary advice. It's how things work in the law. It’s how things work in medicine. It should be how things work in financial services.

FR: Have you been trying to communicate your very well known perspective to the policymakers that could potentially have influence over how this saga plays out?

JS: We have. We are regularly in touch with policymakers on both sides of the aisle. We make regular trips to Washington. We’re in touch with people at the SEC, people at the CFPB, the DOL and so on. We're talking to all of these agencies.

FR: What’s driving your passion on this issue?

JS: I think everyone on both sides of the aisle acknowledges that we have a retirement crisis in America. People have under-saved, and although the 401(k) was well-intentioned, it hasn't set people up well enough for retirement. It was designed a long time ago and it didn’t actually give people the tools that they needed to make good decisions about how much to save or whether they were on track for retirement.

FR: So you don't buy the argument by Cliff Asness or others that the fiduciary rule will squelch innovation or creativity in our financial system?

“We’ve always been a technology company that happens to be in financial services. We have a bunch of employees with significant financial services experience, but we are a tech company.”

JS: I don't. I think Cliff Asness is a really smart guy and I'm positive that there are complexities in complying with this law that make it hard for certain businesses. Unfortunately, there's not a perfect way to regulate, but regulation is required. We should always be trying to make our regulations better and make our products better. Those things should evolve together as technology and societal demographics shift. But you cannot just roll things back to a previous time. You have to move forward.

FR: After Trump got elected, you did something notable. You didn’t criticize him head-on, but you spoke to him directly in two major newspapers with full-page ads urging him to keep the rule. You understood that there’s no one on this planet that Trump isn’t willing to fight. Describe the calculus that ultimately let to your decision.

JS: We had begun to hear rumors that he and his people were likely against the fiduciary rule. So we wanted to make our position known and call attention to it.

FR: Did you think about banding together with others? Perhaps behind the protective umbrella of a trade association?

JS: There are not a lot of companies to go into that fight with us. Why not do it with an association? Well, let me tell you: a lot of the companies that publicly supported it before, when they thought it was inevitable, went silent. Even Merrill Lynch, which took out an ad and said, 'We're all for this, we're going to fiduciary,” has said nothing since.

FR: Did you take this to your board and discuss with them what could happen? ‘Hey guys, I’m going to call out the president-elect and he may take offense. Perhaps he’ll tweet about how Personal Capital is fabulous and Betterment is a disaster, so just wanted to give you a heads up.’

JS: (Laughs) Well, we didn’t call a board meeting, but we did talk to some of our board members, some of our independent board members who have some experience with this kind of thing.

FR: As this issue heats up, do you feel like you've stated your case already, or will you continue to speak out on this matter?

JS: We will continue to be out front. Believe me, we're ready.

FR: I believe you. So as we wrap up, Jon, let me ask you: Is Betterment a financial services company or a technology company?

JS: A technology company. We've always been a technology company that happens to be in financial services. We have a bunch of employees with significant financial services experience, but we are a tech company.

FR: A final topic: Have you ever owned an individual stock?

JS: I've owned many. Some were good and some were bad. When I graduated from college, I got a small amount of graduation money and I decided I would invest that, so I started just reading everything I could. I knew about the efficient frontier, but I still tried to time the market. Take Enron. I bought it all the way down and rode it to zero. I was aware of tax and capital gains, but I found it virtually impossible to optimize for long-term gains and nobody made doing that stuff easy.

My experiences ultimately sparked my realization that the whole industry was set up to either sell products or transactions. I also watched the rise of ETFs, which led me to think that I could build one company that could recommend the best things from everyone. I also thought that I could manage it better than any one of those other multi-billion fund companies could. That’s the idea that became Betterment.

FR: You’re saying Betterment was born from your own attempts at do-it-yourself investing?

JS: Yes. I wanted a manager with my best interests in mind, that was going to manage my portfolio for me. A broker cannot do that and a mutual fund company can't do that either.

FR: Jon, on that note, thank you for taking the time.

JS: This was really fun, Gregg. Thanks for coming in.

This interview has been edited for content, length and clarity.

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