Betterment: Using a Challenger Mindset for Market-Leading Growth

Jim Marous:
Hello, and welcome to Banking Transformed, the number one podcast in retail banking. I'm your host, Jim Marous, CEO and owner of the Digital Banking Report and co-publisher of The Financial Brand. Launched shortly after 2008, Betterment pioneered robo-advisory services and opened the door for individuals to manage their money without the engagement of traditional financial advisors.

Jim Marous:
Despite this tremendous growth, a valuation of 1.3 billion in 2021 and a customer base of 700,000 customers, a limited market potential and significantly increased competition impacted the potential for long-term sustainable growth. This prompted Betterment to expand services offered and markets served.

Jim Marous:
My guest in the Banking Transformed podcast is Michael Reust, President of Betterment. Michael shares how Betterment is using a challenger mindset to future-proof earnings and growth. Faced with slower growth of Robo-Advisory services, Betterment believes pockets of growth remain from additional financial services and new distribution channels that will drive increased earnings from existing and new clients, offsetting the deceleration of a traditional growth. Mike, before we get into what's going on at Betterment, can you share a little bit about your career path at the firm and even before, and how that may have prepared you for where you are today and what your role is?

Michael Reust:
Sure. Thanks for having me, Jim. Happy to be here. It's a pleasure. So my career started off right after college in the software engineering field. That's my functional background before I got into all this business stuff and I graduated in 2008. And my first job was, it was a very interesting time because I went into the corner of financial services where you do the actual stress-testing of bank balance sheets.

Michael Reust:
That was my first job and it was in 2008 and that was obviously a pretty interesting time to do that. So I worked in Chicago at a consultancy and we worked for Bank of America and many other major banks. And my job was to build distributed systems to do the processing because we didn't have the Cloud to make that easy, and help do the analysis to determine how bad they were going to have in terms of a time, if the Feds moved the rates another point or if mortgage defaults ticked up a point.

Michael Reust:
So, I graduated and a month later I'm telling banks, "Hey, you have a trillion dollar hole, so this is going to be an interesting ride." So it was a very interesting couple years, but I did that for a few years and then for other reasons, I moved to New York City because my wife was going back to school. And I decided to try at the start-up thing since that was a really big deal there and that wasn't something I really had much access to in Chicago. And so I hopped around a few start-ups trying to look for the industry or the niche. That was really interesting to me. FinTech was barely a thing, so there weren't really many options. So I jumped around e-commerce, healthcare, some of those areas and then it just so happened that a company I was at was being sold when Betterment had raised a big round of funding and was growing.

Michael Reust:
And so, a friend of a friend, introduced me to John Stein, the founder of Betterment, and we just really hit it off and I ended up joining the company. And I was one of the first, I don't know, 25, 30 employees, something like that. So it was very early days and joined as a senior software engineer. I don't forget what the title was exactly, but something of that veracity and just kept building systems and products there. And so people know Betterment for the direct-to-consumer investing services we offer. But actually the first big thing I worked on was, we call it Betterment for Advisors now, but it's the RAA business where we support lots of RA businesses, large and small across the country. So basically my second month at Betterment, a bunch of us locked ourselves in a library, that was one of the big conference rooms, which was also a library. And we built that business in a few months and launched it in 2013.

Michael Reust:
And so it was a pretty intense time, but in any case, Betterment was growing pretty steadily on the retail side, the direct-to-consumer side and the RAA business was off to a good start. And so just as things continued to grow, it was a startup, limited resources, limited people. I was very aggressive about things I thought we should do as a business and was very vocal as an engineer. I didn't want to build the wrong thing, I wanted to build the right thing and not have any time wasted, any energy wasted. And just kept stepping more and more to the business side. And then we started launching some other products and some banking offerings and I just took on more and more of a general manager style role in that era and then just kept growing my career from there.

Jim Marous:
Yeah, it's very interesting because a lot of people on listening to the podcast are probably wondering, "Jim hasn't interviewed many investment companies and how does it relate to me?" And I think what was most interesting about the background of you, and as well as a company, is that your company is one of the early FinTechs that grew extraordinarily fast, but also had a challenger mindset enough to say, "We need to disrupt ourselves before we're disrupted," because it's a growth curve of robo-advising and investment services has a peak and a trust to a degree. And you really had to go... And you already mentioned you went beyond what your traditional product set was. How do you instill that challenger mindset in a company when it's successful and build in the mindset saying, "We need to disrupt what we're doing and move to other areas or else we are going to be part of that drop off?"

Michael Reust:
It's really hard to create that culture and it's especially hard to scale it. So for us, one of our big advantages was our founder, John Stein, he is a visionary and he is insatiable. And for us, we started off on the direct-to-consumer market and that was going reasonably well at the time. So when I joined very late 2012, basically, that was going just fine. It was growing. I think at the time we had tens of thousands of clients and hundreds of millions in AUM. Which is tiny compared to today, but at the time, given the size of the company, it was decent revenue and the growth was great.

Jim Marous:
You were making money.

Michael Reust:
We're making money and it felt really good.

Jim Marous:
When you look at the FinTech marketplace now, that's a good thing, to your credit.

Michael Reust:
Yes. So, that was nice. And we were seeing lots of other folks trying to get into the market. It was still a little early for the incumbents. It took them a while to start to launch competitive products. Not too long, but a little while. But we were starting to see... There were entire startup incubators in New York City where we were headquartered, that did only robo-advisors. There was a period of time where there were 363, I think was the peak, in terms of number of robo-advisors in the US. And I think even people in this space can probably name five, maybe 10 if you include the incumbents that have launched products. So obviously there was a pretty big washout period that took on there. So anyways, we were very focused, very resource strapped, because this is small boot-strap startup, but Stein was always looking for the next thing to do.

Michael Reust:
And it was sort of an engineering mindset. We've built this platform, we've built this thing. At that time a lot of these FinTech service companies that exist now didn't exist. They didn't have a very easy way to create a fully disclosed investing account on the behalf of a consumer. So we had to build it all ourselves. And that took a while. But what it meant is we had built this platform that was really versatile, but it was a big R&D investment. And so it was important to us to leverage that and distribute it where we could. So when we were succeeding in the consumer market, we said, "Well, we're going to continue investing there. But the RAA market seems pretty interesting too." Their advisors trying to do the right things for their clients, and they're not served very well by the technology they were dealing with, the custodians they were working with, the wirehouses.

Michael Reust:
And so we saw an opportunity to use that platform over there and to do great things in the same way that, very early on, we were looking for our own 401k as a company, just as a benefit to offer. We looked at the normal players and they were fine, they were a little bit more expensive than you would expect, and the user experiences were not great. But more importantly, they didn't really help people solve problems beyond open-end fund to 401k. They didn't really help you plan your retirement. They didn't really offer interesting advice. And so for us, as a registered Investment Advisor ourselves, seeing this 401k market, we didn't have everything we needed to launch a 401K on our own, but we had the foundation. We already had sophisticated retirement planning advice where we would look at a combination of tax-sheltered and taxable accounts, and optimize the tax allocation across them. Use TLH on the taxable accounts, et cetera. Really do good stuff.

Michael Reust:
We just needed to expand into the 401K record-keeper space, and then we could pull that together and really leverage our platform even further. So just in searching for that, we saw that opportunity and we didn't really have any business launching at that time. We were already pretty busy, but Stein pushed us and we just had that culture, right? Because it's selection bias at that point, when that's your founder, and he's interviewing people and he's rallying the troops, that's just infectious. And the people-

Jim Marous:
You don't want to get left behind.

Michael Reust:
Yeah. The people who joined are the people who are attracted to that. And so that very much is a self-reinforcing mechanism that played out.

Jim Marous:
And Betterment is really a tech company that focuses a lot on the customer experience and customer care beyond just the technology side of this. That's the foundation of what Betterment was. How do you differentiate Betterment going forward? And even today in a marketplace that's filled with everybody saying about the same things, coming at it from different angles. We talked before the podcast, you got PayPal, you got Apple, you got SoFi, you got a lot of players out there that are doing things in different ways and addressing the marketplace. But everybody's vision is, they want to have the complete relationship of the consumer that meets our criteria for who we want as a target marketplace. So how will you differentiate Betterment in a marketplace that's getting more and more crowded with people that sound more and more alike, while maybe not delivering the same way?

Michael Reust:
Sure. It's really hard. One of the things I think we did imperfectly early on, is we were a bunch of very nerdy financial people who really understood how to create the best after tax, after fee returns we could imagine. We knew how to really think through those problems. We knew how to build real-time tax lot tracking systems, so that we could do things no one else could do; like before you confirm a transaction, we could tell you, down to the penny, the expected tax impact of that, which is something I still don't actually see anyone else doing.

Michael Reust:
The problem is exactly what you're asking about, things like tax-loss harvesting. It is the example of what makes a robo advisor a robo advisor that attracts people like TLH. Even though there's meaningful performance differences between TLH on different platforms, it was exceptionally hard to get credit for that. It's exceptionally hard to actually understand the differences too, because these are black boxes in different places. So some people have tried to track this over time and compare them, but it's really hard. So what we've tried to differentiate on is a few different things. One of them is innovate through different distribution channels itself. One of the things that's true in the US market is a lot of people don't choose their primary financial institution because they sat down one day and they're like, "Gosh, I need a bank." And then they created a spreadsheet with all of these things.

Jim Marous:
Nobody does that.

Michael Reust:
No one does that, right?

Jim Marous:
It's basically, give me a name, let me push a button.

Michael Reust:
Yeah. It's like, who can I ask in my life that I trust enough? Or who do I trust most to answer this question? Or my employer forced me to use this one company for these reasons, or this bank has a branch on my street. Or even this investment firm, if you look at an Edward Jones or something that has actual branches everywhere. And so, that for us, means competing directly in the consumer market. It didn't even matter how well we could explain that stuff because only a small segment of the population was really taking it on as a considered purchase in that way. So that's part of the reason we started running at these different distribution channels. That's why we built the RAA business. We saw an opportunity to differentiate on the advisors' perspective and then provide value to their advisees. For us on the advisor channel for example, it's 'A', the technology we provide them is great. Right?

Michael Reust:
We help them be more efficient at managing their practice. They can go in and they can construct their custom-model portfolio with the weights they want across the ETFs and then we'll still do the TLH. We'll still do everything tax efficiency wise that we can do for them automatically. And it's great. We have services like Co-Pilot, where effectively there have a book of business and it will say, 'Here's the ones you probably should pay attention to'. Very, very simple things like, 'Hey, this person still hasn't filled out their beneficiaries'. Or 'Hey, this person is off track on a goal. Maybe you should take a look at it'. It helps them become more efficient in their business. On the 401k side, very different market. The decision makers are sometimes advisors or sometimes HR professionals or sometimes if it was an earlier stage company, just whichever executive decided to care about that particular problem.

Michael Reust:
And on that front, we differentiate heavily on the user experience, especially for the end client. If that company cares about their employees, not just checking a box and having a 401k, but getting great advice, and getting that tax efficiency and all of these other features on their phone that looks like a modern application, they don't have a lot of options in the market right now. And so that's an area we compete with in that way. But we're still also running at the direct-to-consumer market as well. And that's a marketing challenge and you have to meet different consumers a different way. It's like classic customer segmentation. What are their problems and get those things in front of them. An easy example is: we went into banking. Betterment launched basically a high-yield cash management program back in 2019, and we launched an actual DDA checking account shortly thereafter in 2020.

Michael Reust:
And part of the reason we did that is because a lot of consumers are shopping for banking products, not shopping for investing products. And that's the entry point that can become the front door and it can also become a relationship deepening product for our existing clients. And that's important, not just because it drives LTV for those clients and revenue and it helps the business. Those clients can then talk about it. If you've created great experience and new products that they're engaging with, then that's talk triggers, right? Then they're going to tell their friends. So it helps reinforce that referral flywheel that you have going on.

Jim Marous:
Well, it also builds engagement. Which at the end of the day, a lot of your competitors are both in the investment service side and other FinTechs. What they're looking for is not just the product and the distribution, which you mentioned, but they're saying, "How do I get people to want to come to my platform more often?" And it's easier in some ways to take a really robust, very powerful but easy-to-understand platform on investment services, and add a checking account to that mix, because you already have the foundation for that engagement capabilities. And we were talking about, before the podcast, I think my personal opinion is that the primary financial institution that every banker wants to know, they look at the checking account, and we're all being lulled into a false sense of confidence because nobody's a [inaudible 00:15:46]. Basically. I have not changed my accounts, 15 years in one organization, 12 years in another.

Jim Marous:
And I have no intention to, however, I've greatly distributed what I do in the banking world from investment services to savings to lending and everything else. And so while the traditional bank may think I've not lost this customer, they have lost the relationship. When you look at what you're doing, you've mentioned about how you've expanded just in different distribution markets. You just started talking about new products. How do you see this all coming together? Is an investment services foundation a stronger foundation maybe for expansion relationships than a traditional checking account would be? I mean are you in a better position, do you believe, as Betterment, to go out to the marketplace and say, "We have your best interests of your funds and your financial wellness in mind." And the foundation, this is really the Betterment account and all the other things are, one's better for payments, one's better for transaction, whatever else. Is that the direction you see going?

Michael Reust:
I think it's tough. I mean I think you're right. So on the points of the checking account being the center of the relationship, the way I would frame that is the place where your direct deposit goes, the place where you get paid. Part of what is implicit in what you were saying there is, doesn't really have to be a classic checking account in the way you might imagine. There's lots of cash management accounts which this isn't new. Fidelity's been doing cash management accounts to get around banking for decades, right? But it has definitely taken it to the next level as you've seen a very large proliferation of FinTechs offering this, right? And it's still interesting, in the US, all of the neo-banks, the challenger banks, whatever you want to call them, one has bothered to get a banking charter so far, right? Varo. And beyond that, most still don't see it totally core to their strategy. I guess SoFi would be another reasonable example, if I'm thinking through it now. But in any case, I do think it will remain important where you get paid, I suspect-

Jim Marous:
It's a launching point.

Michael Reust:
It is definitely a launching point. It's where the money starts and it's definitely trending with the payroll providers, and otherwise towards the more real time payment oriented paychecks as well. Why is it on a monthly cycle? Why is it on a bi-monthly cycle? Why isn't it right after you check out of your clock, whatever? I think that's going to take a long time to play into the space. But I think that will just further break the current model of primary financial accounts is like, "This is the place, I get my check here, and then I can do other stuff with it." And to your point, you're using lots of ancillary services. So I don't know, it's really tough to know how that plays off. What I think about at Betterment is, where are the places where I can have really high confidence that we can win in the immediate. For me, that's the 401k, right?

Michael Reust:
You don't have a choice as an employee when you join a company where the 401k is. And that is, so I can effectively guarantee a shot Betterment has with every employee that joins that company, and as long as we maintain that relationship, that we can build that relationship. And we have to be mindful of the fact that employees only stay an average of 2-3-4 years. Depends on the industry and demographics, but we have to really latch onto that consumer and show them that we're awesome. So they don't just-

Jim Marous:
Doesn't matter where you go to work.

Michael Reust:
Because they're going to get another job and there's a reasonable shot that's not going to have a Betterment 401K as well. And so we want to make sure we hold onto that. So we've built a deeper, more full-some relationship. So we definitely think about those consumers and adding on those services.

Michael Reust:
And I think that's important. I don't know how the paradigms will play out, but I'm definitely not inspired by the strategies I'm seeing currently in the market by folks to really build the all-in-one bank account, financial services account solution, to be everything-

Jim Marous:
The super app.

Michael Reust:
Yeah, that is a paradigm that is working in some countries in the world. It doesn't seem to be working particularly well here. And it's interesting and it's an artifact of history and there's a lot of inertia to overcome. I think consumers generally want it, but because there's so many economics to play with in the US, you can incentivize people so powerfully for different products, I think it's going to be really hard. As long as interchange in the US is massive, compared to the rest of the world, there's always going to be a compelling BNPL, or at least credit card offer that's going to break up that relationship, right? And are you really going to lock in on Amex or JP Morgan Chase or whoever, falsomely? Well I don't know. You're going to get that enticing offer because they have so much revenue to play with to entice you. And as long as that's true, I think it's going to be really hard to pull off the single app to do them all.

Jim Marous:
So let's take a short break and recognize the sponsors of this podcast. Welcome back to Banking Transformed. So I'm joined today by Mike Royce, the president of Betterment. We have been discussing the shift in strategy from Betterment, as from their origination to today, and also the importance of continually challenging success. So Mike, we were talking a bit about your distribution strategy, your product strategy. When you look at the growth of Betterment going forward, do you see it more around trying to build a broader distribution marketplace or broader product marketplace for the current customers you have?

Michael Reust:
Yeah, I mean the answer's both. I think for us... Well, let me give you a very recent example. So we've talked a little bit about the 401k business at government. The 401K business has been around for many years at this point, right? The first few years were tough. It's tough to find a product market fit. We were young and thought it would be easy to build a 401K record keeper. It was hard. It took some time, it took some effort, it took a lot more effort to build some of the payroll integrations than we would've liked. So it took some time, but we really found our stride a few years ago and it started to really grow quickly. And so that was an example of business, that it was working, and we were expanding the distribution channels, the way we would sell that product, outbound, inbound through the advisor networks, different ways of approaching that problem.

Michael Reust:
But in any case, we were quickly seeing ourselves, while we were growing, we didn't lose that, "Let's challenge ourselves," mindset. So what we did on the 401K business, and this has been rolling out over the past year, is we're now thinking about it much more as an employee wellness business. So the 401K is the anchor product. That is still probably the starting point that most folks are out there shopping. But we launched a couple complimentary products and we have more in the works. So the first product we really launched to supplement this is Student Loan Pay Down Automation and Matching. So it is obviously true that a lot of younger employers have student... And older employers have employees have student loans. And so managing that plethora of loans, paying them down, it's not the hardest math problem in the world. Pay down, pay your minimums, pay down the ones with the highest interest rate, et cetera.

Michael Reust:
But it's a pain in the butt. It's easy to forget. And so for us, automating that for folks is very, very powerful. And also employers can offer that match. One of the things we sort of think about is the inequity on... 401K is a great product if you have the means and the money to save for your retirements. But if you don't, because you're in debt, pay down mode right after college, it's not necessarily the best use of every dollar you have. You should definitely start saving for retirement as early as you can. That's very, very powerful. But employers, we were seeing interesting appetites and demands for, "Well actually I'd like to allocate some of these dollars to folks who are not as focused on retirement savings yet. And so can I match their student loan down payment?" Things like that. And so we built that product and we offered that into the market.

Michael Reust:
We're doing effectively the same thing right now, when we've already announced, and we'll launch in not too terribly long, 5-20-9s. So that's another common use case for employees. They want to save for their children's education. So retirement, to pay down debts, probably the next product on the horizon would be emergency savings. Thinking about that side of it. And you've got four powerful pillars that employers can use to offer benefits, because the employee marketplace got really competitive even it's still very true today. And so employers were coming to us saying, "It's hard for me to attract and retain talents." Right. "Salary's one thing, but let me do these other more fulsome things as well." And so we've seen really good resonance with that strategy so far and we're going to continue to lean into that. And for an employer, you can get it bundled, you can now un-bundle it and just do this one and this one, however it really works for you and your business.

Michael Reust:
You can sign up and we'll make that work. And so that's an area where that's tough. These are hard products to build and it's tough to integrate them. You have to think about a lot of things, especially on the legal and compliance side because 401K is still legislatively kind of its own thing. But there's a lot of legislation in play at the state and federal level. So it's a tough problem to navigate and it would've been a lot easier for us to say, "Oh this is hard. Let's see what it looks like in three years and then we'll decide whether or not to go into it." But we were diving in head first and attacking that. And so for us that is very much a product shelf broadening, but they're exceptionally complimentary. Because you would imagine many employees would engage with multiples of these benefits.

Michael Reust:
So it's very, very powerful sometimes one per person and sometimes the collective of these products for those people. But we're still going to continue to look for different ways to distribute and different ways to think about this. I mentioned for example the advisor channel for us on the 401K business. A lot of companies look to an advisor to advise them on what 401K to use. That's something we'll continue. That's a little early for us and we're going to continue to engage in that model on the retail side. So when we launched banking on the direct and consumer side, our timing wasn't great. We launched a very high-rate account, I think it was 2.67%, something like that in July, of 2019. And then the Fed sort of laughed us, and tanked rates pretty rapidly. So it was a tough time to grow a high-yield account when it went to effectively zero over the next six months.

Michael Reust:
But in any case, we're now seeing a higher rate environment and that's just a really nice clean, simple value proposition to put in front of customers and to use them to bring them into the business. So that's a distribution channel for the retail business. And we see really healthy cross-sell from that channel into our investing products, even organically. We certainly have a very sophisticated marketing and product marketing organization that think a lot about the right message, the right time, and how to engage consumers. But even organically, consumers see that, they're, "This is great product." And then we have the others next to them, and they're, "Oh, what's this?" They open it, they find it's a really great cohesive system that drives that organic cross-sell. And then we just ratchet it up with the product marketing and the marketing folks and we see that growing really, really healthily. So it's going to be a lot of both.

Jim Marous:
What's interesting is, from the outside looking in, Betterment looks like in a very efficient technology company that can produce products and distribute them at a very narrow cost, compared to a traditional finance institution. But what's interesting, you go well beyond that. I think one area that people don't realize when they aren't engaged with Betterment, is that you're really focused on engagement. You use the data and the analytics as well as any firm, and you keep the communication going, because I often say, "Just because you build it doesn't mean they'll come." Just because you have streamlined your new account opening process down to three minutes instead of 15, doesn't mean people are going to find it if you haven't promoted the fact that it takes you a whole lot less time to open an account with us. Or if you build a new high rate deposit account, people aren't going to know it unless you find the place where they want to buy it. And it's not about cross sell.

Jim Marous:
And especially in investment services, it's about looking out for the customer, a customer wellness journey. And you're at the MXS Experience Summit and it's a great place to talk about this, but the ability to build engagement. How foundational is that to what Betterment really is looking at today saying, "We can't expect people to find all the great things we have, but we got to do it on their benefit than just because we have it." How do you build that communication off the data analysis you have?

Michael Reust:
So one thing that's interesting is, there's a lot of companies that talk about themselves as being client-centric, right? Which is great-

Jim Marous:
The alternative sucks. It really does. Saying the alternative sucks, "We don't care about the client." Everybody's got to go that route.

Michael Reust:
But what it often means is we're just trying to thoughtfully build products we can sell. It's just about growing the business. That's what the client-centricity is. One of the things we think a lot about is client outcomes. So we are a very client-outcome-centric organization. So when we think about engagement, we definitely care about it. And I'm going to hit on your question very, very directly, but I thought one interesting tangent here is, we think about what does that engagement do for their outcomes? If we engage with clients when the markets were very, very choppy and they came to the platform and panicked and took all their money out of the market, and it wasn't for an immediate use, but it was still a longer term goal horizon or something, that's probably not great. It is typically buy-and-hold, on average, tends to be pretty good compared to trying to time the market. There's like that classic graph of the markets getting a little bit choppy. And so you buy at the top and then you sell at the bottom and then you repeat until broke.

Jim Marous:
Right. Exactly.

Michael Reust:
And we try to help people avoid that. And one of the things we often do when we are doing outbound messaging... But we also don't want to be silent. So when there's choppy markets, we will do outbound messaging and we will very much test that against this message versus this message, this channel versus this channel versus holdouts, where we're not actively trying to engage them, and see what happens. And then lean into the one with the best customer outcomes, which for us, we're very customer aligned. The more money you have on the platform, the more money we make. So it's a pretty nice simple alignment. And so for us it's very easy to then choose that right message that helps them do the right thing, which tends to be, stick to their longer term goals, maybe recalibrate the risk a little bit, et cetera. But that's powerful for us.

Michael Reust:
Same thing I mentioned earlier, our Tax Impact Preview feature. One of the reasons we launched that, and when we tested it in markets where they're choppy, people would come in and they'd be, "Oh my gosh, this feels really bad. I'm going to sell everything." They would see... For the folks that would see actually everything still in the green, this is going to be a massive tax impact. Aside from, "I'm going to lose my market exposure on some time, the market's going to go back up.: Aside from that, "I'm going to have to pay a lot of taxes. This is a double loss." We see massive reductions in customers taking harmful-to-themselves actions as a result of putting that kind of data in front of them. And that's hard for us to actually execute in real time. But that's the sort of thing that's really, really potent.

Michael Reust:
And so that's a little bit of how we think very, very hard thoughts about how to avoid consumer harm when driving engagement. But it's also true that we do want people to be engaged because people who are engaged tend to do more good things as well. They set up more goals, they set up more auto deposits, they're saving more frequently. And so we try to engage with the right consumers, the right messages, to make them feel that the system's working for them, that the system is doing the right things for them. It's a bummer when markets go down, but you can still feel a little bit better because you harvested a lot of losses. So at least your tax bill is going down too. And so that feels good. So there's things like that we can engage with for consumers so that they feel good.

Michael Reust:
And that's just, we have our systems with data stores behind our applications that funnel in and stream data into warehouses that are aggregated and then we build audiences and marketing, messaging, and strategies off of that. So it's just a very sophisticated streaming data system that we engage with and we built some automated product experiences that continuously engage based on those sort of data points and heuristics. And then we also have teams of product marketing and like CRM experts who are engaging with that stuff at a human pace and then building audiences and segmentation and looking for opportunities to help people do better things for their finances. And then launching messages and campaigns using sophisticated MarTech.

Jim Marous:
It's not just selling. I mean, you are an early believer in content as being, "Oh by the way, it doesn't have to sell something." If we can inform a consumer saying, "Oh, by the way." And there's nothing more frustrating in the traditional marketplace for investments than the investment advisor that goes silent when the market goes south. You are an organization that believed that the more I communicate with the consumer at that time, there's a benefit there, because they're not going to jump off, which is really the end result of that. But at the same time, you're continuously reinforcing why I'm doing business with you. There are very few companies in the financial service area that do that at all, if well. And sometimes it's completely mis-targeted, the name may be right, but everything afterwards is a sales message. You don't have to peel back the layers too much, you're not looking out for me.

Jim Marous:
On the other hand, I brought up the fact that I've used Acorns in the past. They don't stop communicating to me about what I should do, how I should do better. And you know it's in their best interest. But betterment's another one, you've replicated what the live advisor is meant to do, but in a way that makes it so that I never turn off that engagement or only benefit for the highest investors. And I think that's a differentiator that plays well long term because it's not just about selling, the sales will come, but you have to prove it on a daily basis.

Michael Reust:
You also have to make sure you have the right incentives. If you are not incentivized in a way that's aligned with your customer, that's not going to work out for you. If you make all your money on that interest margin, it's going to be really hard for you to tell people the right, fair objective balance of how much they should have invested in equities or something, if you don't make as much money in those sorts of products. If you make money on the amount of trading activity that happens on your platform, especially consumer indicated trading through [inaudible 00:34:34] or other mechanisms, it's going to be a little bit harder for you to say, "No, no, no, it's okay. Stay calm. The markets are going to be okay. Stick to your plan because you're going to make money if they trade," if they panic.

Michael Reust:
And so that's really hard if you institutionalize those incentives to do the right thing for the client and they're going to feel that, "Why are you telling me to trade again? You told me last time and you told me to buy this instead and it didn't work. What are you talking about?" And one of the things I thought about in your question too was, the sales and the message. Almost nothing feels worse when you're using a bank and they try to sell you something that literally makes no sense. Right?

Jim Marous:
It happened already. Yeah. It's on the worst occasion.

Michael Reust:
I'm sure there's like some reasonable business justification. But I am watching my credit report on your system. Why are you sending me balance consolidation offers? You know I have zero debt. What are you doing?" "You're mailing me nicely printed direct mail campaign packages. What is happening? You know I don't need this product."

Jim Marous:
And today more than ever, because when Netflix listens to what I watch and they can immediately tell me what else I'd like to watch, even though it may not be something I would. It's interesting, we have two places, and one place has Netflix and the other one has DirecTV, the differences are stark. Where on one, I got to record anything, even if I don't want it and I'm missing all the things I really like. On the other one, I'm finding all the things I like and I can go back and record later or see something later. But it seems to me, in the financial marketplace today, how we miss that opportunity to use content. It's a driver for engagement and for sales without pushing the sales. And so as we wrap up, if I was to have this interview again two years from now, where is Betterment and where do you want it to be two years from now? And I hate to go any further than that. Cause we've all learned any further than two years out. There's too many ifs.

Michael Reust:
That's true. I actually find it easier to think a little bit further out. Maybe it's just idealism. But what's really, really hard is thinking about priorities the next three to 12 months thinking about ROI, customer matching, market events, et cetera, and what's the right sequencing. But the giant plethora of things I'd love to have on the platform and the services, is on a three year time horizon. I'll be wrong, but I have a sense for what I think that is. I think let's start with the 401k business that I said is transitioning. It's called Betterment at Work and it's effectively an employee wellness business. We have other products I mentioned we'll be launching. And I think we'll continue to go further there, but I am really, really excited for a slightly more certain legislative context where we can provide really cool compliant equity-centric benefits, right. Where you can say, as an employer, "I'd like to provide this level of benefits, this level of matching."

Michael Reust:
And we, as a product, can have a conversation with your employee about their priorities and what's going on in their life. And then we can just magically allocate those dollars and those matches and everything for them. No questions. The right goes towards your student loan down payment, the rights going towards your emergency savings to make sure you're insulated from any emergencies, et cetera. That's just a beautiful system that works well for that consumer and they are far more financially independent or at least resilient than they would otherwise be. So that's a big outcome on that business that I think would be really, really cool. On the consumer space, there's a lot of areas I really want to round out. One of the areas we're going deeper into right now is, I'm going to use the term a little bit generously, but I'm going to say alternative investments. And the first one we're going to launch is crypto. We acquired Makara. The version of that, that's going to launch on the Betterment platform is going to come out rather soon. I can't give you a date just yet.

Jim Marous:
What's interesting is, I'm looking to timing of this and it sounds very similar to your high rate account that came out when there was... But the thing is, I know that you're looking because it's a longer term play. It's not. You're not market timing this.

Michael Reust:
But it's also sort of similar to what you saw play out last year with the Meme stocks, right? Everyone in 2021 thought or learned, not everyone, but a lot of people learned a lesson that they're a great investor, they're a great stock picker, which was not a great lesson and they very quickly learned they were wrong. That's effectively the right way to think about the crypto market right now. So for us, offering a truly diversified managed crypto offering, if you want exposure to the crypto asset class, let me use that term. This is the right way to do that on a long term horizon, and we're going to do it thoughtfully. We're going to tell you, you shouldn't allocate more than this in your portfolio to it. We're going to manage it. We have very thoughtful people who are experts in this, looking at the portfolios, modeling them, thinking about the ongoing management there.

Michael Reust:
And we'll launch that product and that'll be great. On the longer term time horizon, I would imagine other alternative investments are coming online that looks similar, to think about that. We'll also think about the right composition of that in taxable and tax sheltered natures. One of the things that's maybe a little counterintuitive is that, probably not for your audience, but maybe for the average American, is the more volatile the asset class is, the more it's appropriate for your longer term investment goals. Because you get to ride that volatility and capture that risk premium that you're hopefully paid for over time. And then you should draw down the risk when you get closer to your goal. But if you've got 30 years, it's a good thing to engage with. So I think it's actually going to be interesting to bring more and more alternative exposure to longer term goals and investments. And so I think we'll go much, much further there.

Michael Reust:
I think, on the advisory side, we need to just keep going further on. I mentioned the copilot functionality. There's just so much more we can do there. To your point about engaging with data and surfacing the right message for the right time, that will maybe be delivered via your human advisor. We can just empower them to do so much more than we're doing today. So I think that will be true, but I think we'll be really ramping up these distribution channels, providing a lot more functionality. Some of these things are kind of on the periphery between expanding the products we have versus new products. It's alternative investments and new pro... I don't know, I'm not sure how to categorize it, what the taxonomy should be, but it'll be a large expansion of the investment sophistication we offer and continuous improvement of all of our financial planning and advice along the way. And the same will be true of our banking products. There's only so much innovation really needed for the high yield savings account style products, but there's definitely work you can do on cash management broadly.

Jim Marous:
A lot of that's behind the scenes, is how you propose it to your prospects and your current clients as well.

Michael Reust:
Yeah, I think this is going to be true for Betterment. It's going to be true more across the industry too. Cash movements going to be pretty much instant, 24/7, in not too terribly long in the United States. I think equities won't be there, but it'll be closer. And so I think those are some of the things that come to mind when I think about what we'll be leaning into the next couple of years.

Jim Marous:
Thank you very much for being on the show. I know that you probably had questions about, "Okay, so why am I going to be interviewed by a banking podcast?" For those of you who stuck around, the real message here is everything Mike said... It's always in motion. There's more product development, there's distribution channel development, there's testing the markets and getting out of things that may not work, and the importance of content for the benefit of the consumer. That's the message to all financial institutions. And Mike, thank you so much for being on the show today.

Michael Reust:
Appreciate it, Jim. It's a pleasure to be here. Thanks.

Jim Marous:
Thanks for listening to Banking Transformed, the winner of three international awards for podcast excellence. If you enjoyed today's interview, please be sure to give our podcast a five star rating on your favorite podcast app. Also, be sure to catch my articles on the Financial Brand and the research we're doing for the Digital Banking Report. This been a production of Evergreen podcast. A special thank you to my producer, Leah Haslage, audio engineer Sean Rule-Hoffman and video producer Will Pritts. Until next time, remember, even market leaders must challenge the status quo to remain a market leader.