Interesting interview with the head guy from Betterment

[Nick341981]

This guy did a pretty poor job of selling the robo-advisor and seems to think he can beat the S&P500 but when asked for proof doesn't want to provide numbers other than to say his company can consistently beat the S&P 500 by 1 to 2%. Doesn't seem like the kind of guy I would trust my money with.

http://www.cnbc.com/2017/03/05/warren-b ... -says.html

[TomatoTomahto]

I wonder how Betterment's Compliance Department and lawyers feel about that interview. For that matter, their marketing department.

I would release a statement blaming it on "doctor prescribed Ambien."

[triceratop]

This was an embarrassing interview for Betterment (though since it's the financial press, ultimately likely not damaging long-term). I'll say what I said in the other thread where this is discussed:

I've watched OnTheMoney for quite a while now (2-3 years or so)? In short, i was quite shocked how rude Becky Quick was to Jon Stein. She was attacking him so hard, it was easy to see how Jon misspoke a few times, being put on the defense like that when he was probably under the impression prior to the attack, that he was supposed to be a guest.

He was a guest. Guests routinely lie on air. Need I link to all the times CEOs lied to Jim Cramer on air (and the subsequent Jon Stewart takedown)?

I'll be more explicit: Jon Stein lied on air to Becky Quick and her viewers, in order to make untrue claims about how his company is unique in representing solely the clients' interests and inter alia to make a sales pitch to her viewers. If that doesn't call for strong, even harsh, pushback from the host then I don't know what else does. If you don't push back against obvious misrepresentations and falsehoods then all you're dealing with is a promotional advertisement for Betterment.

Let's break it down. This is my interpretation of how the conversation went.

...we tell you how much to save, what accounts to open, and we then maximize that money for you, in ways that the traditional financial firms can't, because they don't have the technology or the incentives to do the right thing for their customers.

If I were Becky Quick I would be thinking "but wait....Vanguard has advisors, and Vanguard's funds are run at-cost for the owner-shareholders. How can the incentives be misaligned?" So Quick pokes at the argument a little, asking if they do better asset management

So you mean like what, putting me in bond funds, putting me in stock funds, kind of figuring out how risk averse I may or may not be...?

Note: Jon Stein cannot agree with this since it would contradict his earlier statement that other firms are not doing this, since Vanguard does explicitly this. Instead he becomes bolder to cover up his deceit.

well think about the industry this way. For a long time it's been dominated by mutual fund companies who are just trying to sell you whatever is on their shelf, or brokers who are trying to sell you whatever makes them the most money. There has not been a firm, an institution that's there standing up for customers doing what's right for them all the time every day

It's important to note not just that this is a lie, but that it is a bold lie. Fortunately Becky Quick likely knows that this is a lie so she mentions that Vanguard, under the vision of Jack Bogle, is a fund company that does precisely this. The owners of the funds are the shareholders of the fund. When you read about "Vanguard slashing fees" that's just Vanguard running its firms at-cost which due to economies of scale mean the costs have been decreasing. Meanwhile, Betterment raised their fees. How is that consistent with how incentive alignment would be expected to work, were his claim true?

Don't forget that him bringing up that Vanguard introducing a Personal Advisor Services program is him refuting his own argument: those advisors don't earn commissions for investing in Vanguard (often cheapest, or close to depending on where in the cycle of the price wars we are in), and they don't earn fees for churning the account. The incentives are aligned. He refuted his own argument. But he's gish-galloping on to the next point and Becky can't respond to all of it.

They proceed to get bogged down in how Buffett invests, and taxes, etc. And sure, Becky investing solely in a S&P500 fund isn't as diversified as some of Betterment's customers are. But that isn't an argument against a traditional investing firm like Vanguard. It's an argument for being more diversified! Like, maybe, how a Lifestrategy fund invests! It's definitely not a reason to fork over 0.25% of your hard-earned cash every year.

He made a bold claim that Vanguard's incentives are not aligned with the customer and then to back that up used the fact that his firm thinks they have a better approach to portfolio management. But that's not nearly enough, even if true, to prove the claim. Their special sauce is just tax-loss harvesting, right? So he'd need to show that Vanguard won't tax loss harvest out of their funds into other funds because of a conflict of interest. Now it's possible to make that argument: Vanguard's inverted corporate structure means that this could be a possible conflict. But as the CEO of a massive wealth management company, is that the hill you want to die on to justify your firm's existence? No, so you lie.

And besides, half the funds that Betterment invests in are Vanguard funds. True, they're ETFs, not "open-ended mutual funds" which he derisively referred to as being in the past; but, perhaps he isn't aware that they're just the a different share class of the same underlying fund. Tax consequences identical. Oops!

So he lied on air; I have no sympathy for liars being interrupted by conscientious television hosts who don't want their viewers misinformed.

Kudos to Becky. Becky, if you're reading this you have my thanks, as a disloyal Vanguard customer.

[azanon]

Long-time OnTheMoney viewer. I've never seen a host be so rude to a guest on that particular show, and instigate an attack like that. Now someone who's not a routine viewer might have thought that was normal for that show, so maybe if you're used to CNN/Fox News/interviews etc. you might think it was nothing, and that would have been typical of those stations.

But as a long-time viewer, I'm actually suspecting that Becky had a vendetta against either Jon or Betterment in general, for an unknown reason to break tradition of respect for their guests.

For me, it was sad, because I've actually been a fan of Becky's. But to now learn that she thinks a great portfolio is 100% S&P 500. It's mind blowing how even notable finance reporters who make 700k/year are so ignorant of even basic portfolio diversification. We bogleheads who know the value of diversification, particularly something as simple as including bonds in a portfolio, must really be fortunate.

[triceratop]

No, Becky never claimed in that interview that an investor should be 100% S&P500. For one, they were obviously talking about bonds as a way of risk management, so she isn't "ignorant" as you claim.

Becky also never claimed the appropriate benchmark was 100% S&P500 (alternative facts?).

[snowshoes]

First, kudos to Becky! I actually saw that on TV. It's ending was cut' in the link provided above. She hammered him, he was stuttering, his voice had an uneasy erratic tone, and he seems to change the subject around numerous times where people that are familiar with financial jargon can decipher it, others not so much. Great interview!

[Nate79]

Betterment raises prices on their customers. Jill Schlesinger sold out and now her podcast is a running advertisement for Betterment. Now their CEO comes on and sounds like a salesman for an active traded firm, or perhaps an insurance company. Really hard to trust them.

[bzargarcia]

IMO Jon Stein is one of the good guys in investment management. I can't think of a single person under the age of 50 that has been such an advocate of the individual investor.

Bart

[Nick341981]

Long-time OnTheMoney viewer. I've never seen a host be so rude to a guest on that particular show, and instigate an attack like that. Now someone who's not a routine viewer might have thought that was normal for that show, so maybe if you're used to CNN/Fox News/interviews etc. you might think it was nothing, and that would have been typical of those stations.

But as a long-time viewer, I'm actually suspecting that Becky had a vendetta against either Jon or Betterment in general, for an unknown reason to break tradition of respect for their guests.

For me, it was sad, because I've actually been a fan of Becky's. But to now learn that she thinks a great portfolio is 100% S&P 500. It's mind blowing how even notable finance reporters who make 700k/year are so ignorant of even basic portfolio diversification. We bogleheads who know the value of diversification, particularly something as simple as including bonds in a portfolio, must really be fortunate.

I think you may have missed the part where he said Warren Buffett is wrong. That's what triggered Becky and her response on the S&P 500, cause that's what Warren recommends, S&P 500 and pretty much little to no diversification. He has said multiple times in multiple ways that betting against the U.S. Is a losing bet and that bonds should be sold with a warning label. Becky was spot on in calling him out and he came across as anything but confident when it came to backing up his statements. Jack himself is not a huge fan of diversity out of the U.S. for the simple fact that almost all the companies in the S&P are global companies. Not all bogleheads are fans of diversification.

[triceratop]

IMO Jon Stein is one of the good guys in investment management. I can't think of a single person under the age of 50 that has been such an advocate of the individual investor.

Bart

Why would he go on TV and lie to the individual investor if he were such an advocate? The evidence does not fit the theory, here.

[bzargarcia]

General financial theory also says Warren is wrong. Vanguard, Fidelity and Schwab would agree with Betterment on this one.

Bart

[TomatoTomahto]

IMO Jon Stein is one of the good guys in investment management. I can't think of a single person under the age of 50 that has been such advocate of the individual investor.

Bart

I don't know much about him. Your impression of him might well be justified, but he came across incredibly poorly. He seemed slippery and deceptive, full of himself and his company, and possibly high (I know, I know, I have no basis for that, but it's unusual to commit such public acts of self-immolation otherwise).

On the basis of that interview, I would not give him a nickel of my money. I wasn't going to anyway, but I did once consider whether perhaps 15 basis points was worth it for TLH.

[triceratop]

I wonder: if all of the funds that Betterment invests in never have a down day in a given year, how is it possible for there to be guaranteed 1-2% of "pure alpha"? Shouldn't the alpha in this case be negative 0.25%?

[bzargarcia]

IMO Jon Stein is one of the good guys in investment management. I can't think of a single person under the age of 50 that has been such an advocate of the individual investor.

Bart

Why would he go on TV and lie to the individual investor if he were such an advocate? The evidence does not fit the theory, here.

'll be more explicit: Jon Stein lied on air to Becky Quick and her viewers, in order to make untrue claims about how his company is unique in representing solely the clients' interests and inter alia to make a sales pitch to her viewers. If that doesn't call for strong, even harsh, pushback from the host then I don't know what else does. If you don't push back against obvious misrepresentations and falsehoods then all you're dealing with is a promotional advertisement for Betterment."

That isn't a lie. Betterment can purchase any ETF/investment in their portfolios. They are not required to purchase ETFs from any firm (Vanguard, iShares, etc.); they have complete flexibility on that. Does Vanguard or Schwab's platform have that option? I would call that fairly unique in representing solely the clients' interests. But maybe I'm lying too.

Bart

[Loandapper]

Great interview.

It's an interview, not a free ad. She pushed back asking for evidence and facts he could not provide.

[in_reality]

He made a bold claim that Vanguard's incentives are not aligned with the customer and then to back that up used the fact that his firm thinks they have a better approach to portfolio management. But that's not nearly enough, even if true, to prove the claim. Their special sauce is just tax-loss harvesting, right? So he'd need to show that Vanguard won't tax loss harvest out of their funds into other funds because of a conflict of interest. Now it's possible to make that argument: Vanguard's inverted corporate structure means that this could be a possible conflict. But as the CEO of a massive wealth management company, is that the hill you want to die on to justify your firm's existence? No, so you lie.

Perhaps a better approach would be have been to not say they won't, but rather they effectively can't and point to the many, many instances where Vanguard is having trouble handling spec id. If they were into tax loss harvesting, you'd think their system would be able to easily handle it.

It could be that Vanguard simply is bigger and so has more chances to mess up, but I have never seen a complaint here that Betterment sent a (mis) corrected 1099B that now uses FIFO for the cost basis method instead of what the trade confirmation shows.

Anyway, I wouldn't call it a lie to say Betterment certainly has a better system for it. I don't think it's necessarily worth Betterment's cost though.

So if your interests are in having effective tax loss harvesting, Betterment is probably more aligned with you.

viewtopic.php?f=10&t=213035

[triceratop]

He made a bold claim that Vanguard's incentives are not aligned with the customer and then to back that up used the fact that his firm thinks they have a better approach to portfolio management. But that's not nearly enough, even if true, to prove the claim. Their special sauce is just tax-loss harvesting, right? So he'd need to show that Vanguard won't tax loss harvest out of their funds into other funds because of a conflict of interest. Now it's possible to make that argument: Vanguard's inverted corporate structure means that this could be a possible conflict. But as the CEO of a massive wealth management company, is that the hill you want to die on to justify your firm's existence? No, so you lie.

Perhaps a better approach would be have been to not say they won't, but rather they effectively can't and point to the many, many instances where Vanguard is having trouble handling spec id. If they were into tax loss harvesting, you'd think their system would be able to easily handle it.

It could be that Vanguard simply is bigger and so has more chances to mess up, but I have never seen a complaint here that Betterment sent a (mis) corrected 1099B that now uses FIFO for the cost basis method instead of what the trade confirmation shows.

Anyway, I wouldn't call it a lie to say Betterment certainly has a better system for it. I don't think it's necessarily worth Betterment's cost though.

So if your interests are in having effective tax loss harvesting, Betterment is probably more aligned with you.

viewtopic.php?f=10&t=213035

Agreed! I agree with everything you said. But I'd just note that Stein didn't merely claim Betterment had a better system than Vanguard and their advantage was due entirely to being technically superior and allowing more tax-efficient portfolio behavior (though he did claim that and I agree); in addition he claims that financially their incentives are misaligned, implying a clear conflict of interest. But he hasn't shown any evidence of that (In principle VPAS could TLH from, for example, VTI to VV, while keeping an asset allocation more or less in line). That's why I say he is lying. Financial and ethical Incentives being misaligned is different in kind from having a poorer technical system and he has no evidence for the former.

[Bodhi312]

There are so many misuses terms from basic investing theory I don't really know where to start. However, I do find it funny that he crapped on Vanguard and index funds (in a round about way), while his own firm builds portfolios out of.. index tracking ETFs, which seem to come from Vanguard (https://support.betterment.com/customer ... -portfolio).

His asset location derived alpha (https://support.betterment.com/customer ... ?b_id=9042) isn't alpha. Alpha implies something nearly or entirely unique due to some business advantage. There is nothing in the methodology that I can see that isn't well known in the entire wealth management industry (and beyond). What he's claiming is alpha is simply the normal activity of a tax aware investor.

This CEO behaved in an irresponsible way with regard to his customers, his investors, and to his employees making the claims he made. He's putting himself and his company at risk if the relevant authorities decide to pursue him.

You simply can't promise alpha or outperformance, legally or morally. Mr. Stein holds a CFA designation. His behavior definitely is a no-no for the CFA Institute.

A quick Google search on Betterment's returns brought up this page. I can't speak for the veracity of the claims, but I do find it a bit funny given the claims made by Mr. Stein.
http://www.mrmoneymustache.com/betterment-vs-vanguard/

[wickywack]

That isn't a lie. Betterment can purchase any ETF/investment in their portfolios. They are not required to purchase ETFs from any firm (Vanguard, iShares, etc.); they have complete flexibility on that. Does Vanguard or Schwab's platform have that option? I would call that fairly unique in representing solely the clients' interests. But maybe I'm lying too.

Schwab's robo uses Vanguard funds: https://intelligent.schwab.com/public/i ... asses.html

[bzargarcia]

Longer interview, same point.

https://youtu.be/CPCkQ48fWXA

Bart