Jon Stein got a good education in economics at Harvard and Columbia Business School. In nearly every economics class, Stein said he was taught that for any investor who doesn't have better market information than another, there's just one optimal portfolio to own: The market portfolio.
Yet when he started investing on his own, Stein said he followed the same trail of bright lights and high hopes that many other investors are lured to through individual stocks. He wanted to hit it big, and thought he found a discount.
"The first thing I did was to invest in Enron, a company whose growth seemed remarkable, but which had just hit a road bump and its share price had fallen," said Stein, the founder and Chief Executive officer of Betterment (www.betterment.com). "I thought I was getting a great deal -- buying something at half price!
"Of course, the stock soon fell to zero, and I lost that first investment," Stein said.
The loss was an important lesson for Stein. Too many consumers are lured into seeing the market by the daily flashing signs and tickers that demand attention. Instead of a more reasonable and conservative strategy of investing in a market portfolio, investors are trying to play a game picking and choosing individual stocks and investments when they aren't properly armed with better information to do so.
Since most investors just want the returns, Stein founded Betterment -- "The best investment for busy people."
Betterment was founded in August 2008 and launched in May 2010 at TechCrunch Disrupt, where Betterment was named "Best Start Up in New York City."
Betterment earns more money for investors than a typical savings account, it gives investor flexibility, and it is designed simply so that anyone can use it, regardless of their market knowledge. All one has to do is open an account, link it to a checking account, set their allocation according to desired risk -- from lowest to highest -- and log in to see the market returns.
Betterment says it has "a simple platform ... with sophisticated capabilities." The company says investments are not share-based, it diversifies every penny invested through Betterment's proprietary software, it is goal-based, it deploys dollar cost averaging, and it is a portfolio comprised of the most efficient ETFs, allowing for liquidity -- funds can be withdrawn at any time.
"This is investing from a customer focus perpsective," said Stein, from Betterment's New York offices. "What does the average busy investor want? They just want returns. This is a better way to manage for the long term.
"It's about the best returns with the lowest risk at the least cost. There's no better way than the market portfolio. We monitor and balance. We're not trying to beat the market. The idea is to match the market."
Stein said Betterment has a high customer-retention rate -- higher than industry competitors in the online account business -- and that the company has added new customers faster than models originally anticipated. What's more telling, perhaps, is that Stein said Betterment is doing well attracting educated, young investors.
Because Betterment has no minimum balance, and because the company charges a tiered fee of between 0.3 and 0.9 percent depending on account balance, investors can start up at any level at low cost, contributing to the company's median customer age of 33, while Betterment competitors typically have average-age customers of 43 to 45, he said.
"A better investment company should start with the assumption that what people really want, when we consider things rationally, is the best return (factoring in costs) for the least risk," Stein said. "It should help people avoid the temptations of alternative strategies and bad ideas. And to attract customers, it should be easy to use and broadly accessible.
"That's is why I created Betterment."