The Compound and Friends - Everyone Deserves Good Financial Advice. Everyone. (Josh and Michael with Jon Stein and Dan Egan)

Episode Date: July 18, 2019

Once upon a time, quality financial advice was only available for millionaires and the sophisticated investors who had the expertise to find the right advisors and understand exactly what they were getting.  Non-millionaires and younger investors were ignored by traditional Wall Street brokerage firms, left to fend for themselves or, worse, to be preyed upon by unscrupulous brokers and insurance salesmen with skewed incentives.   But times have changed, thanks to an innovative wave of new advisory firms, new services from large institutions and disruptive technology. Now, quality investment advice is available to everyone.  Automated asset management services and robo-advisors unleashed a storm of creativity and progress, and now human advisors are adopting these technologies to incorporate into their practices, serving a new customer that they otherwise would not have been able to reach and help.  We built Liftoff as a way to serve young investors and those who do not meet the minimum asset levels of traditional wealth management firms. Rather than send our fans and friends away to figure things out for themselves, we wanted to be able to help them ourselves, which led to years of development and evolution.  Liftoff is a collaboration between Ritholtz Wealth Management and Betterment, combining what we believe is best in class asset allocation technology with the human touch of certified financial planners and advisors.  We'd love for you to try us out and see what it's all about! You can learn more at https://liftoffinvest.com/ right now! 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify   Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, I'm downtown Josh Brown, and we are live from Betterment Headquarters in the West 20s. And I'm here with Michael Batnick from my shop and John Stein, Dan Egan. You are the founder of Betterment, and what are you, employee number three? That's about it. 20, although I've killed off people who are more senior than me, so I'm moving up. Game of Thrones. Game of Thrones to attrition. But what's your actual title?

Director of Behavioral Finance. I love that. That's a title that every registered investment advisory should have. Yeah. And you're a founder and CEO. Yeah. Mostly now I just talk to customers, though. Okay.

So everyone knows who you are at this point. You guys have done an amazing job at, I think, building brand awareness for many generations, not just young people. Your ads are everywhere. Like, people just, they're aware of what you do, and I think you've gotten to capacity, and now it's just making the service better. I don't know how many advisors are aware that you guys offer a B2B solution for, what's the best way to put this? For firms that want to deal with clients that if they can't

scale it to a lot of clients, it would be tough to do it profitably. Like, is that the right way to put it? That's totally fair. I mean, we think about our role on the Betterment for Advisors side as empowering our advisor partners to do what they do best, which is go out and gather clients and work with those clients and plan with them and not to have to deal with the busy work of managing tax loss harvesting and asset location and all that back office stuff. Back office, middle office. Yeah. So the traditional RIA would not be talking to accounts that are under half a million dollars, right?

Would you say that's accurate? Maybe in some parts of the country lower, some parts higher. a million dollars, right? Would you say that's accurate? Maybe in some parts of the country lower, some parts higher. But you guys have built it so that a firm like ours could bring those clients on rather than see those clients go somewhere that you don't want them to go. Like Betterment directly. But so we've always looked at the automated asset management idea as something that would be great. And I think now that we're set up on your platform with our liftoff service, it's like finally, okay, we don't have to do the trading internally.

We don't have to do tax loss harvesting and all of the millions of requirements for paperwork. And it seems like you guys have almost built it through talking to a lot of firms and asking them what's the worst part about trying to run an automated program by yourself. like you guys have almost built it through talking to a lot of firms and asking them, what's the worst part about trying to run an automated program by yourself? It's the great thing about B2B is you can just go out and ask your advisor partners, what do they want? What do they want to see from you? And then build it. It's easier in a sense than a B2C business where you're combing through data and having to figure out from hundreds of thousands of people. I think it's actually even more powerful than that because Betterment is its own advisor with its tech platform. So odds are very high if it sucks for us, it sucks for our advisors as well. That's a good way to put it. So we feel

the pain. We eat our own dog food. And that means that when something sucks, we want to fix it for ourselves and for our advisors. There's not that weird thing that sometimes happens in advisor tech where it's like, yeah, you're one of our clients and this is a unique thing like we have the same problems and we have to fix them right because you're running you're running it for yourself so you know what the pain points already are how many advisors are currently using the betterment platform for their younger investor clients or smaller account clients thousands of advisors on the platform currently using it. Thousands? Thousands. Of people or firms? People. There's, I think, 500 firms. Okay. That's more than I would

have thought. Are there firms that are using Betterment for all of their clients, not just the smaller accounts? Yes. Yes. They tend to be the more upstart advisors, right? Who are like growing a book fresh. And I think about our core target advisor is a hustler right like there's somebody who's out there trying to they're striving they're growing their business and those advisors you sometimes see them at small shops and they're independent you sometimes also see those same advisors at larger shops but they might be like the junior advisor on the team who's you know tasked with like really growing a new book it's less so like the most senior tenured advisor is just like sort of resting

on a large wealthy client base. So for the younger advisor, it's almost like you've replaced what would have been in a prior generation like a full-blown tamp because you have the investment management part taken care of. You're giving them the technology portal

so their clients can log in. A lot of the compliance stuff that needs to happen is happening. So like there's like a tampi kind of feel to it which I think is was needed especially for people who are trying new ways of billing clients right it's a temp without all the complexity of putting all the different pieces together right it's an all-in-one solution that gives you this client portal mobile apps everything your clients want in this day and age, as well as

the dashboard for you, the advisor, to interact with those clients, the emails, all of those kinds of things are just out of the box. So when did you first hit upon the idea of building something for advisors? Was this always part of the plan or did you one day say, you know what, professionals that are already doing advisory would love to have access to this for maybe their existing clients or a new type of client? What made you do that? So I started Betterment in large part because I was bullish on the idea of advice. I realized that people in general aren't great at long-term planning and making decisions about retirement, which is 30 or 40 years away for a young person. And yet,

these are really important decisions. And I just found it crazy that we live in a society where there's not advice for every individual. It's like if we had no doctors available to anyone and everyone had to do their own health care, that would be a kind of a problematic situation. That's sort of what we have on the financial side. There's not enough advice. And so I launched Betterment to address that need. And in doing, realized, so we're reaching lots of people who are happy going digital only. But there's lots of people who want someone to talk to and they want an advisor. And maybe they want a particular style of advice that suits their situation. So they want a person, but the asset management part should be really easy to access from an app.

Exactly. They still want to have an app. They still want to have clear performance. They still want to be able to deposit and withdraw on the go. So all of those kinds of things we made accessible to advisors. And that's been really exciting for me because we're just reaching, you know, tens of thousands of additional clients that way. And I hope that someday millions of clients

through the advisory channel. So I want to talk about like the money management itself. And obviously one of the big steps for us to move our automated service over to you guys was like, what do we think about your portfolios? What do we think? And, you know, between Michael and you, I think it was pretty that was the easy part but it was important um how do you guys think about portfolio management just generally and then like when you talk to advisors that are thinking about using betterment what are the some of the things that

you hear that maybe they aren't hurdles but they're things that you have to explain to them to make them feel like, okay, I can turn over the asset management to these guys. They know what they're doing. I think there's a couple of things that are strange. They're going to sound like they're opposite ends, but they're the same thing. It comes down to basically the process is the product. We are very focused on having a very high quality process that generates those outcomes. And we think very systematically about that. It's not kind of like I wake up some morning, I'm like, you know what, I hate Europe. So I'm going to reduce that. We build a process to make decisions. And then we just kind of like let that process go and see what it comes out with. So for our own core portfolio, that means... So you know what, let me jump in there. You know why that's

so important. The last thing an advisor wants is to turn money over to someone who does that where they say, oh, I don't like this thing going on with the ECB. I'm going to reduce Europe. And then that turns out to be wrong. And then the advisor has to answer for you. And then the relationship is bad between you and the advisor. The client's pissed because they're like, I'm paying you for advice and you're an idiot. So that's why that process has to be the way it's done.

Yep. And it's robust, right? You love that word. Love robust. Me, the entire investment team. I would say that's the word that best defines Michael. Definitely. It's robust.

His hairline is so robust. Too soon. Like me, the entire investing team, we could get run over by a bus tomorrow. This thing's going to keep chugging along, right? It's going to fall in the process. I mean, let's hope not,

but yeah, I got it. Okay. One of the things that we hit though, which is very true, is like we know that there are circumstances where a client

should have a different allocation or where you need to tailor it because of what they hold in their company 401k. And so we wanted to be able to say like, there are things that if you are an advisor and you know what's going on with your client, you should be able to say like there are things that if you are an advisor

and you know what's going on with your client you should be able to tweak and change the portfolio so advisors are like power users in our system where they can change the allocation they can tailor per client they have a little bit more control over the details because they have the skills and expertise necessary to do that with a client focus so but you have to be careful about how much of a tool you give the advisor, like how much they're able to go in and make material changes because you've got compliance and all these other things you're bound by just like we do. And so one of the things we do is as we make those power tools available to advisors, we show the advisor and the client how much drift do they

have away from that target portfolio? We'll show them how well diversified are they? These kind of metrics that are reminders and nudges to keep to a well-diversified portfolio to make sure that the client is on track to their goals. All of our projections and advice continue to work. Are you sure you want to do that? Exactly. Without quite saying it that way. How do you think about different investment strategies and how they might

sort of differ from like your bedrock principles, indexing, low cost, diversified portfolio. So things like risk parity and things like trend following and smart beta, like how do you think about that versus what you're doing today? I think there's a common thing of thinking that there's sort of one best portfolio for everybody, which just as soon as you say it out loud, you're like, wait, that doesn't make sense. But that's what people are asking a lot of times. So like, we can start out with circumstances where if I'm a resident of New York, and I'm a high income taxpayer, right? Like maybe I should be using New York muni bonds instead of global, not global, national bonds. All right. So that's about my tax circumstances.

Obviously, we tailor for risk tolerance. But then there's things like, maybe I really care about socially responsible investing, I'm happy paying some extra bips for those funds. I'm going to stick with that because I believe in it. So as soon as you flip it and you say, we need to be able to give people the portfolios that they're going to stick with, the strategies that they understand and they believe in, then it's very easy to start having these different portfolios and strategies because they make sense from the client's point of view. They're not something we come out and we change every quarter saying like, okay, now we hate Europe or whatever it is. But they're strategic sort of like, I believe in a factor quant approach. I believe in

SRE. I believe I just need income yield at this point in my life. They're very strategic long-term ways. And because of that, we can have a process around them where it's like, all right, let's go out again this quarter. Let's see if these are still the best funds. But within reason. Like, you're not going to do a strategy because somebody wants to do it recreationally. So somebody says, I really want to, like, be in oil. It's like, this is not interactive brokers. That exists. You don't need us for that. I remember a period of time when there was a lot of, you guys had the last laugh on this,

but I remember it was probably three years ago. You guys had the last laugh on this. But I remember it was probably three years ago. There was like a media blow up because there was a down market. Futures like gapped down. I forget what the panic. Was it Brexit? Something ridiculous.

And people and you guys doing the right thing were like we are not putting through trades into this down market until it sorts itself out. Not that you were making a market call. You were stopping people from letting the media panic them. And it was, in hindsight, obviously, that was 27,000 as we're sitting around the table today. I mean, it was obviously, and even if the market hadn't gone up, it's still the right thing to do. But people were like, what? In the media, not your clients. Your clients didn't say anything.

People on television, like, how dare you if I want to do a trade? And I'm sitting there with these people, and I'm like, it's not fucking E-Trade. Do you not understand that this is advice? People are paying them for advice. It's not a brokerage service. John was on TV defending himself. I was. And you should not have had to, but people were like hung up on this because they don't understand the difference between advice and brokerage. What's funny is we executed trades

faster than any of our competitors on that day, right? There's other services out there that offer advice and they only execute your order the next day or a mutual fund. Mutual fund, you have to wait until four o'clock. Only executes at the end of the day. What we do is we let you execute anytime during that day. And on that particular day, we knew that markets might open because you're ETFs, right? And ETFs can be very volatile. We've seen flash crashes where they can fall 20, 30% within a few seconds. And so we never want to trade a client into some sort of surprise like that. That morning, because of the heightened volatility, we still were taking orders from clients. We were taking things in. We just waited to execute them for a couple hours until markets had stabilized. But

still, everyone got executed on that day at a good price. There was a misunderstanding in the press about that, as is typical when it comes to complicated things like getting best execution for your clients. And what kind of advisor would you be if you let somebody sell out of an ETF below its NAV? And at 930. At 930. Exactly. There is no professional advisor who knows anything about markets or who would ever do that. So why would an automated advisory platform do that?

So it was the right advice, but it's new. It's novel. People associate online with like serve yourself, do it yourself. Right. But I thought the way that you guys weathered that was admirable. And in hindsight, any time you build a technology that helps people to not panic, I think you're doing them a favor. There's also general fear of technology in some cases, right? And like what algorithms are out there doing things in the markets, which is this interesting balance that we have in our space where an advisor

is actually an important part of this oftentimes. And having that human connection is an important part of managing your money. A brokerage doesn't mind you trading when the spreads are huge. No, they want you to. Exactly. So let's cut the shit. When is the Betterman private equity firm fund launching? Is that next quarter? I'm taking deposits right now. Do you feel like either a venture capital sleeve within an asset allocation or a private equity? I know, are we allowed to say the V word?

I know Vanguard's got a private equity exploration going on where they're considering it. One of the things about the modern markets is that people have said a lot of the small cap premium is happening in the private market. And so when you're looking at historical returns in small cap, maybe you're not getting them if you're only in ETFs. Maybe you need to invest in your nephew's bumblebee farm or something like that. How do you guys think about that? Do you get questions about that or is it too early?

You bet. We talk a lot to the firms who are doing those kinds of private equity vehicles. Also the real estate vehicles that are out there for investing in commercial or private real estate deals. Like non-REITs. Non-REITs, exactly. Non-publicly available things. Because there's an increasing market there. The challenges have been one, access. There's this accredited investor rule where you have to have a lot of money to get into these vehicles and liquidity So it's hard to get your money in and out of these things when you want it Yeah, and those so far have prevented barriers. I'm happy that people like like Blackrock and Vanguard and and so on are

investigating this to make it more liquid and available because ultimately it Frustrates the hell out of me that there are people in our society who have access to investments that not everyone can touch, right? Can I pitch you on, I think I know the way it's going to happen, tokenized real estate? And then you guys can, the tokens will be liquid even if the building is not? It'll be on the stock chain.

We'll talk about that later. When do you come in public? So we've always said we want to be a public company. We continue down that path. We continue to grow very quickly. No date in mind today, but in general. Would you consider, like you don't have to commit to this now, but given that you have big brand name awareness amongst investors,

wouldn't it make sense to at least consider a direct listing like Slack and Spotify? Exactly. I love that model. Save yourself $100 million. I also want to know how do we get our early customers, right? How do we reward them for their loyalty to us? We've got almost 500,000 customers now. They've been with us for nearly a decade.

Should they get a first call on maybe owning a few shares? Yeah, you have to be careful with all of these kinds of things. That's been done. I want to do the right by our customers. Somebody's done that before. I forgot who. All right, will I be ringing the bell with you

on the platform? I hope so. Will Michael? You got to grow your advisory firm. Let's do it together. We're always trying. All right, guys, thank you so much. Really appreciate everything that you've done to help us build our automated platform, Liftoff.

It's Liftoff Invest if anyone wants to check it out. It is Betterment x Ritholtz collab, I guess you would say. We're pretty proud of it and proud of everything that you guys are doing. We're so excited to be working with you guys. Awesome. Thank you. All right, thank you.