 Hello everyone and welcome to the sixth episode of Bokel Heads on Investing. Today we're talking about behavioral finance. Our guest is Dan Egan, Director of Behavior Science and Investing at Betterment. My name is Rick Ferry and I'm the host of Bokel Heads on Investing. This episode is brought to you by the John C. Bogle Center for Financial Literacy, a 501 C3 corporation. Today we're talking with Dan Egan. Dan is a behavioral scientist who works at Betterment. Betterment is a robo-advisor who is using technology to help people invest better and a lot of what Betterment is doing and the programs that they're running are based on behavioral science. I've been following Dan's work for several years now and I find it extremely interesting how this company is, for lack of a better word, controlling their clients behavior by analyzing client data and testing various hypotheses in a real lab of hundreds of thousands of clients to improve their investment performance. Let's get right to Dan Egan. Welcome Dan. Thank you very much for having me. I really appreciate you being on the show. You're an up-and-comer, if you will. What you're doing at Betterment as the Director of Behavior Science and Investing is extremely interesting and I thought it'd be great to have you on the show so you can talk with us about all the work that you're doing there and all the neat stuff. It's like you're in this big lab in real world and you get to actually run experiments on real people and do real things as opposed to the theory sort of an ivory tower classroom setting. So can you tell us a little bit about who you are and how you ended up at Betterment? It's a great place to be but with great power comes great responsibility. I'll trace out so that I think it's actually useful for the path that I got hereby is interesting and explains my background of it. I did my graduate degree in decision science which is a combination of psychology and game theory and statistics. So trying to figure out how to help people, real people, make better decisions and I had never had any desire to go into finance or investing but during that program one of the people who I worked with said why don't you come and work with my investment company for a little while and I thought you know I heard that these people get paid well and it sounds really interesting what they're doing. So I went and did that and I worked there for about a year and it was an incredible experience learning very quickly the difference between academic finance and real-world finance and after doing that for a year I realized that that specific kind of finance a private equity firm was not what I wanted to do and this job came up at Barclays Wealth in the UK which is a high net worth asset management firm doing applied behavioral finance trying to help advisors give better advice not only in terms of it fitting to the client better but also the client being more likely to adhere to it to actually go through with it and I worked there for about six years with advisors both building behavioral tweaks to the platforms as well as integrating it into their advice and one of the things that kept striking me as you've alluded to is that there's this three-body problem going on so we have the end investor who's going to come with their specific circumstances but also their psyche and their particular strengths and weaknesses as an individual then you have the same thing for the advisor and here's me sort of in the background trying to change the system trying to change the system and the advisors and search them and train them to see if we can help the end client be better off and that's a very noisy environment to be in the feedback is delayed and noisy you're never really sure if what you are doing is actually working so I moved to the US and I started looking at better minutes struck me as a great opportunity to improve upon both of these so number one I as a behavioral scientist can try to improve things with clients but test it in a rigorous fashion in the real world see what impact it has on the behavior and if it works roll it out to all of them and have high confidence that it actually works rather than hope that it works so what you were looking at betterment as an option and you like the idea that it was a real-time experiment with real investors and at the time the company was up and running and they were using index funds did you given any thought to why John Stein had chosen index funds and why that was the focus of the investment philosophy behind betterment I think there are a lot of reasons to go with index funds obviously they tend to be much lower cost than more opaque or more actively managed funds they're also more transparent about exactly what they're going to do and when and how they scale very well and that they can generally you can put a lot of money into them and it's not going to negatively affect the performance of the funds which is an issue of some active funds and we wanted to be able to say to clients that we were doing what there was a lot of good long long evidence for which is that lower cost systematic index-based investing tends to do better but you're using only ETFs as opposed to open-end traditional mutual funds is that an operational reason or do you think they're better than open-end funds kind of want to go with one type of fund I would definitely say an ETF is better we manage a lot of taxable accounts and ETFs are significantly more tax efficient than mutual funds they are able to trade throughout the course of the day that's something that we can talk about and come back to you about whether or not that's clear about if you use them in a portfolio provides some services and functions that it's much harder to do with mutual funds a very small example in terms of transparency is that a lot of mutual funds have 12v1 in marketing fees embedded in them which are not transparent to the end user but is a way that third parties can be compensated for using those funds structurally that's just not possible with ETFs the ETF doesn't know who owns it so there's a level of transparency and an inability to have conflicts of interest that may ETFs preferable as well as tax efficiency the founder of the company John Stein made a comment that there would be no betterment without Bogle in fact I think what that was the title of the article that he wrote and that Bogle was his idol and he was invited by Jack Bogle to go to Vanguard and he spent all day with Jack and Jack was very encouraged by what he was doing and I can understand that because to get young people particularly interested in index fund investing at a young age is something that well I didn't have when I was growing up you know when I was in my 20s there was one index fund but unfortunately you know I didn't know about it so what you're doing by getting the word out about index fund investing at a young age I find it to be very encouraging and very good for society long-term John hopes to do for broader personal finance what Jack Bogle did for investing Jack was able to do well by doing good he didn't compromise on his morals and what he thought was right and his ability to be successful and to grow a very large company that served millions of people that's a perfect inspiration for what we're trying to do the betterment and I think that you know he created a little beachhead there in terms of investing and having low cost funds that were owned as mutuals but that is a very small component of what most people need in terms of help with their finances they need the ability to kind of plan for and manage cash flow better the ability to use the correct account types that we're talking about are Roth or a traditional IRA or a 529 investing in personal finance is very complicated especially if you want to do it if you want to make the most out of all of the possibilities out there making it easy for the vast majority of normal people to do that is John's mission one of the things that I found fascinating about betterment is your automation you truly believe that through automation you can get people to behave better and you talk a lot about bad behavior of investors and the cost of what's called the behavior gap or the investor gap and there's different names for it but you use the behavior gap can you first talk about the behavior gap and then talk about what betterment is doing in the automation that you've created to get people to invest better absolutely so the behavior gap most broadly is that we might know what it is that we are supposed to do in order to get some kind of an optimal outcome but it's hard for us to actually execute on it you can think about wanting to lose weight it's fairly straightforward that you eat less and exercise more and you'll probably lose weight but it's hard to actually get through with that to actually stay the course and be consistent in it in investing we see this come up in a number of different places I think there's a lot of the studies transparently lead to investors try and do too much and do the wrong things at the wrong time they trade more than they should and every time they trade they probably pay commissions and bid-ask spreads and possibly even taxes if they have any gains that they're realizing they hold much more concentrated portfolios so they'll hold a few stocks of companies that they're familiar with or maybe they've done a little bit of research on but they tend to not be very diversified or not intentionally diversified and these two or three things which actually take a lot of work and thought on the part of the investor end up with them underperforming a simple low-cost index portfolio so there's a strange thing where they're doing worse because they're putting a lot more effort in because they're they're trying harder what we're trying to do is number one make it so that people are confident and comfortable that they are doing the right thing by investing in the diversified portfolio by allowing us to manage it in a really transparent systematic way for them and that will help them be comfortable and reduce the kind of anxiety provoked actions they might take like selling out after the market goes down or trading a little bit too much Now the interesting thing about your research is you have actual data I mean you have access to literally hundreds of thousands of accounts that you can drill down into and you're like to study quant and you're a programmer and and you can drill down into actual accounts whereas other researchers at academics they would have to ask companies for data you have the data and you can drill down and you can look at what your investors are doing and you found that even in your own accounts that there is behavioral issues even with your own investors based on our research about 70 percent of our clients are what I would consider like they get a 100 out of 100 the remaining 30 percent have very specific markers of when and why they are behaved badly and I'd actually take your your statement and double down on it and say not only do I have access to really good data I really care about improving that data if I could put myself out of a job that would be fantastic because when you look at that 30 percent of clients who are making specific mistakes it's fairly predictable they are going to trade too much one of the things that we look at is the role that gender plays and men trade they log in more they trade more than women and here's the neat thing when they trade they make much more extreme moves so men are much more likely to go from 100 percent stocks to zero percent stocks than you sort of would cause whereas women are much more likely to go from 90 percent stocks down to 80 percent stocks if they're going to make an allocation change so looking at the things that predict people's bad investing behavior and then at the same time saying okay how could I improve that how do I reduce this gap using this behavior and then going out and running scientific trials of those improvements that's what I love doing and so what have you found and what have you done to help that 30 percent who are making the mistakes one component of it which is neat is knowing who's really paying attention to the markets if you take a hundred people and the market is going down and it's generating a lot of news a standard traditional financial advisor especially because of the client base they work with might be tempted to say well I need to get in touch with all my clients and tell them what I think about what's going on in markets right now and what we've found again running randomized control trials is that the vast majority of people really aren't paying that much attention to what's going on in markets they have other things in their lives that are far more important and so if you do send out a sort of blast communication or email of some kind you're actually going to generate more anxiety than you are going to resolve because you're hitting a lot of people who weren't worried about it then I completely agree with you when you talk about alerting clients that the market is going down so not to worry that that causes anxiety I recall several times in my career when we would have a downturn in the market and some of the advisors who worked with me would say look we need to send out a letter to client to tell them everything's okay and I would say no we don't if it's not okay they'll call us if it is okay then let's not make them worry because anytime we send out a letter that says don't worry they worry so one of the the things that we when we saw this issue we said okay so what we need to do you know much like as if you're a doctor is that you don't treat everybody for a disease you only treat the people who are afflicted by it so we want to be able to identify just the people who are really engaged with markets who are most likely to be anxious about what's going in the markets and so rather than sending out blast emails when you log in we would send you a targeted notification with different messages to try and see if different messages resonate differently with different kinds of people some of the messages will be highly factual and relate to the market other messages will be very personal they'll say you're doing a great job and you're still on track for retirement keep going they'll be positive and affirming of things and in testing those messages we found that number one the the targeting rather than the shotgun blast is much much more effective it means that we get much fewer false positives and number two tailoring the message so that it is more relevant to how the person thinks about it and that it's going to be more positive and affirming for them personally is much more effective generally speaking when we run experiments to learn this we see the people who get those messages have about a 15 to 20 percent improvement in their behavior meaning that they're less likely to make allocation changers or withdraw all their money do you happen to go as far as sending a different message to men than you do to women or different age groups we haven't intentionally targeted it quite that way yet one of the reasons is that generally we use broad archetypal variables like age and gender because we don't have a better measure of some underlying thing like how engaged you are with markets if i can use a variable like the clients login rate how often they log in how often they log in on mobile versus how long they log in on web that's generally like a higher fidelity signal about how engaged they are with markets whereas a lot of other researchers will say well young men tend to be the most engaged with markets i would even go down to an individual level metric that lets me see what does this person look like they're doing now you wrote a paper called the mercat effect where you found that on both positive and negative market days big days big up days big down days more people do have a tendency to log in and and look at their accounts but once they do log in you're trying to ensure that they don't do something about it yeah this is an interesting thing that i think it's worth taking a step back on to give better context to one of the things i've learned over the years is that the same person will look and think fundamentally differently depending upon what platform there are take a person who has a 401k through their employer they are going to treat that 401k in terms of trading and log ins and management very differently than they're going to treat their betterment account which is very different than they're going to treat their online brokerage playing account the mere cat effect study was done on an online discount brokerage where a lot of people had highly concentrated portfolios and logged into trade and i think that behavior might be localized a bit to the the platform that you're on you don't go to vegas to have a quiet time and i think that the behavior that we're going to see depending upon the dataset the same person who has a brokerage account is going to act differently inside that brokerage account then they're going to act on the betterment platform us and vanguard have done studies looking at our clients looking at the same when do people pay attention to their account into markets and you see we're a little bit closer to vanguard and that when people have some including including that the market is down and that they're going to be unhappy about their accounts they're less likely to log in then i found it was interesting and listening to one of your presentations that the 30 of the people who will get on the betterment website and trade that if you show them how much they're going to have to pay in taxes if they do this trade that they're thinking about that it almost stops them in their tracks from doing the trade can you talk about how taxes are the prospect of having to pay taxes affect people's decisions definitely and i'm going to again take a step back and give a little bit of broader context about why this is so interesting for end consumers most of us will have interacted with our finances through websites that are set up by brokers and brokers if you think about it they have very specific incentives they make money when you transact when you trade or you buy a cell fund and they also make money when you hold cash and that means that a lot of the interfaces we're used to in a very subtle way encourage those two things they're going to encourage us to trade and they're going to encourage us to hold cash it might be by using red and green to indicate things going up and down which excites us emotionally cash always feels safe here's a neat thing if you want to get rid of red on your holdings you can sell it and it just simply goes away it's like you never had that loss and you go back to feeling like you're safe and cash and one of the things that's different about betterment is that we are a fiduciary advisor and we make money when clients grow their money more so we're kind of aligned in that way so we don't have these incentives to have people trade more or hold cash and one of the things that we were noticing is that people were trading and it looked like they weren't taking into account the fact that they were going to owe tax because they were realizing capital gains and taxes work like a really really bad credit card in that in February if you get worried about the markets and you sell out of everything and you realize a $1,000 short-term capital gain nobody tells you about it and you don't owe any money right then you have to wait until the following April when you do your taxes with the IRS to find out that actually you didn't make a $1,000 gain you made a $500 gain because the IRS is going to keep half of it so it was important us to say well you know we don't make money when people trade and maybe people are trading because they're not taking into consideration all of the important factors like how much this is going to be worth after they pay the taxes on it so we were able to in real time they say like I would like to go from 90 stocks to zero stocks where we calculate how much that's going to realize in short-term and long-term capital gains and put up an estimate of that impact in front of them and what we saw is that people who were given that information if they were going to owe more than $50 in taxes regardless of how big their account was there was less than a one in ten chance of them going through with the allocation change so the first component of it actually I think is important is that it looks like people didn't know or weren't considering that when they do this thing now they're going to owe a lot of tax because of the transaction and simply by putting important information in front of them at that point in time we are able to reduce how much they were market timing you said if there was going to pay $50 in taxes regardless of the size of the account I mean I could understand that if it's a small account but you know people had millions of dollars I mean $50 is nothing but you found that it was it didn't matter yeah this is one of the interesting things is so I actually ended up writing an academic paper on this that people's aversion to taxes isn't rational it is just a I really don't like taxes there are a number of papers that find that people will pay more than a dollar to avoid a dollar's worth of taxes. Dan another piece of research that you wrote or participated in writing for the journal of economic behavior in organization talked about second-order beliefs in other words if everybody around you is optimistic thinking that the market is going up that even though you've done all this great work to determine what your risk allocation should be what your optimal asset allocation should be for your situation people have a tendency to increase that and add more equity and perhaps getting them over their tolerance for risk unintentionally. There's a saying by John Maynard Keynes that the stock market is like a beauty contest it's not really necessarily that you're trying to say like if the market's overvalued or undervalued but what do other people think you know if you want to be able to speculate effectively it's not a matter of being right in an absolute sense it's a matter of just being ahead of the crowd and so we went out and looked at how much people thought they knew what other people were thinking how accurate they were in those beliefs and how comfortable they were being different from the herd and so one of the first things that we picked up on is that everybody thinks that the crowd agrees with them more than they actually do so if you're really bearish for the next quarter you're going to believe that most people are very bearish too and if you're very bullish for the next quarter you're going to believe that too and one of the nice things that we found was that the more self-aware a person was about when their views diverged from the crowd so you have two things you have how good are you at understanding what the broad sentiment of the market is and are you accurate at conveying that and number two do you know that you are being a maverick by having a different view that sense of self-perspective and crowd perspective there were very few people that had it and the people who had it tended to have better performance Dan in one of your presentations you gave to a CFA group you talked about how exocortex of a brain the part of our brain that does the logic and the thinking and comes up with asset allocations and so forth that through artificial intelligence and other technology tools we are taking a lot of the decision making and we are letting computers do it letting machines do it and that this is a good thing and that there's a lot of things out there in personal finance that used to take a lot of thought and advisors and individuals take up a lot of time and quite frankly made a lot of mistakes that by outsourcing it if you will to machines behavior is getting better could you talk about that whole concept and what can be outsourced to a machine these days one of our key advantages as a species is our ability to not only sort of use tools but also imagine and design new tools for us to use and for a lot of history you can think about like cameras and steam engines and so on these were physical tools that we built outside of ourselves and we're just now starting to build and really explore the use of logical tools that are able to make decisions in the real world for us we're still the ones building and designing them computers aren't building and designing themselves quite yet that allows me to do a lot more because i can kind of like outsource a lot of my thinking and monitoring to software so i i don't actually know what i'm doing after this call but i'm sure that my calendar knows my calendar is going to notify me with what i need to do next but we're still the ones who need to say well how what do we want this technology to do for us how do we want it to expand our capability something you keep coming back to is that the things that computers are really good at are things that we are not good at they're incredibly good at doing the same thing over and over again hundreds of thousands of times they're very good at math they're very good at statistics what they're not good at is non-routine creative imaginative labor that understands human beings and understands the circumstances that they find themselves in so there's a really nice symbiosis like yin and yang going on right there where we can take the things that are boring and routine things like processing trades and calculating how much to put in each asset class and looking at whether or not the taxes are going to be worth changing it compared to the fees we can program a computer to do that and the programming itself the thinking and designing of how we would go about that decision is very creative and very sort of challenging but once we've done it we can have a computer execute it for lots and lots of people and i sort of think this in terms of how it dovetails with advisors is that there was a period of time where advisors had to because we didn't have the kind of exo-cortex doing things for us had to figure out how much each asset class should be bought in order to rebalance or where the money should come from in terms of tax efficiency when you're doing retirement planning we knew what the answers were we just needed to implement that thought process in a machine and now that frees up advisors to spend more time with clients on the things that the computers are not going to be able to do sitting down with a couple and having a conversation with them about how they're going to actually spend time in retirement you know how much they're going to spend every year what the budget constraints mean what they're comfortable with that's something that you still need human to human back and forth on knowing when somebody says something but doesn't really mean it and being able to detect that and being a good coach a personal financial coach for them that's somewhere where advisors are going to excel for a long time and so i really like where we're coming to now where advisors are letting go of well i need to be the one to place the trades and to do due diligence on all of the indices and so on really sort of like detailed in the weeds labor and they're getting freed up to do that which means that they are spending more time having better higher quality conversations and doing more quality planning with the people on the other side of the table with their clients i completely agree with that as far as a lot of the execution and then the implementation of portfolios tax loss harvesting which has now become automated back in the day when i was doing it 10 years ago you had to do it by hand so a lot of the things that we used to have to do by hand as advisors machines can do it much better more accurate and i don't have to spend time doing it but not only that human beings are expensive and expensive commodity so you know you can outsource this to technology the advisor can spend more time where it's really needed which is on the behavioral side so that's all good one of the areas that i actually think advisors don't give themselves enough credit for is the communicating of different things to different people so when a person comes to a website it's very hard for the website to know ahead of time that a football analogy would work very well for them but advisors know that different people they can track those different people's interests and know what kind of analogies or explanations are going to really resonate with them such they get a point whereas a lot of times technology has in terms of communicating things a one size fits all dimension especially during the educational and onboarding component of advising a client advisors have a real advantage in that they will communicate more effectively and more efficiently with each individual client because they can change the way they talk on the fly hey i can give you a story about that i was talking with a client several years ago and i made a golf analogy and i was talking about index funds and i said you know let's say you went out on the golf course and every time you went out on the golf course you shot par every single time that would be great wouldn't it and i was asking this woman and she said i don't play golf and i have no idea what you're talking about yep but you're right i mean if we have a questionnaire where it says you know what are your hobbies and somebody wrote down golf that could use that analogy with that person damn one of the other things that you do at betterment which i find very interesting and i i learned a lot from listening to one of your presentations is that when you're talking about goals with clients in other words what what do you want your money to do for you where do you want to go that people have a really difficult time articulating or defining what their goals are so you sort of reversed all that you've come to the realization that most people have common goals and that it's better to have them eliminate goals rather than say what the goal is can you talk about how you came to that conclusion yeah i think there's two inputs to this there's two reasons we ended up here one is just the general idea that we can learn a lot from each other one of my favorite books that i've read over the last year was 30 lessons for living from the oldest americans they speak to a 70 80 90 year olds about what they think went well in their life and what didn't go well and what they you know would go back and change across career and marriage and being a parent and i think we really need to do a better job of learning from each other and using the wisdom that's available to us from a wide array of other people one of the things that we've been doing is looking at how clients use our platform looking at what goals our cfps recommend to people and rather than trying to reinvent the wheel every single time for each client and putting the weight upon them to do it so wait we know what goals our cfps are going to recommend for somebody who's in their early 20s and we know how they would go through a budgeting plan we know that they're the ones if you are in your mid 20s and not yet married you know maybe you need to start thinking ahead to the kind of goals that come up later whereas if you're in your mid 50s and you've already kicked the kids out of the house you have a different set of goals the other elements of it you know you start with it we have a really good kind of like wise set of goals that come up from the experiences of lots of people through time the other element of it is that as you said people have a hard time coming up with their those goals themselves we're in there in the future i you know i could go back now and tell 25 year old me things he should be thinking about but 25 year old me would feel it was very hard for him to think ahead so rather than have people try and you know come up with an imagine and brainstorm the things that they might need to spend money on over the next five 10 15 20 years we put them there in front of them and say these seem like the they're the things that you need to be thinking about why don't you remove any that you know aren't applicable to you and we can work through prioritizing the rest of them that's a lot less effort on the individual generally speaking people who are given a kind of master list of goals that they remove from end up with twice as many goals that they want to be planning for compared to somebody who you force to start from scratch so it's a very effective way of helping people identify what goals they think they should be planning for based on the wisdom of the crowd and it also means that those people are better set up to invest intelligently for the future because instead of saying well i'm going to assess performance by whether or not my account went up and down they say well i'm going to assess performance based on whether or not i'm track i'm on track to hit these personal finance goals that i have one of the questions i have for the future of fintech using technology to become better investors is the shift that is going on with the and if you don't mind me saying robo advisors i don't know how you feel about that phrase being that you go for it okay is that you know there are set up for young people who are just getting started and you know how to do a budget put a few bucks a month away get them into index funds all that's very good uh get them investing they're going to need to learn how to invest and this is a great way of doing it but one of the things that i always found lacking at least at the beginning of all of the robo advisors is it was for that other generation it was for the millennials it wasn't really for my generation which is the baby boomer generation who are retiring so a lot of the tools that were created were for the accumulation of assets and i believe the next phase of all this is how do you provide tools for people like me who are 60 years old and the distribution of our assets in retirement seems to me that that's the next phase of this whole robo advising world it's definitely going to happen i would say for three reasons one is that myself and the current crop of people we get one year older every year and that's steady march you know we're good at building for ourselves because we kind of know what we need at this point in our life the closer we get to retirement the more that we hear about and want those sets of tools for ourselves i already have these discussions with my parents and understanding what they need is really important on the flip side of the market is the consumers my parents are very uncomfortable with the idea of just using a digital investment solution because they want to be able to talk to somebody because they want to have them communicate and one person that they know face-to-face do younger generations you know they go both ways i think there's a mix of it but they're more likely to be comfortable with a purely digital solution and less feel like they need a face-to-face contact that might change over time as the cohort gets older either way i think that we're going to see greater adoption of sort of decumulation in retirement software and planning as people who grew up with computers and who've been using them their entire white collar professional life are going to want that same thing in retirement as opposed to a generation who might not have and i think to your point there are more people who are even right now starting up companies that are focused on retirees to try and help them make those decisions one of the interesting components of it is when you look at a business that has a target customer that is accumulating money over time they kind of have positive growth curves built into their customers a retiree focused product is looking at specifically customers who are reducing their wealth over time so i think there's going to be an interesting kind of like they're going to want to look at different compensation models for that kind of advice to dovetail better with the incentive schemes that are present specifically for retirees and how they are going to be spending their money and managing their assets i completely agree with you the company that i'm starting hourly based advice where i'm not actually going to be implementing anything i'm just going to be talking with people and getting paid for that intellectual property and when it comes to the actual implementation use these tools such as betterment and others to actually implement the clients portfolios at a very low cost so it's getting back to what you're saying it at some point people need or want that human interaction they want that second opinion they want to run it by somebody and get input but it doesn't need to be ongoing it doesn't need to be every quarter every year so the pricing model on that type of advice needs to reflect the way it's used as opposed to say just assets under management there's advisors that are charging one percent per year and and clients are not utilizing one percent per year worth of advice they might use it one year but for the next two or three years they don't need it so i think the pricing models and the way it's delivered there's going to be a separation between the advice givers who get paid for the advice and the implementers who get paid for managing the portfolios as a difference in the way that the services are delivered and betterment has already started to go down this path because now you've implemented a financial planning and advisory model betterment started out just charging 25 basis points to our retail clients and over the years we learned that number one some people wanted more of a CFP engagement we found that there's a lot of upfront costs so we have to get to know them gather all their data understand their circumstances and then have one or two calls with them and then they didn't want to start again from scratch later so we started offering what we called betterment premium which was 40 basis points instead of 25 basis points and it was a annual fee so that you were kind of locked in for one year at 40 basis points rather than 25 and the uptake on that was just of a very specific person who wanted kind of like that ongoing relationship where they wanted to be able to call us anytime which was a subset of people I think a lot of people think like you think which is well actually I just have this specific question that I want an answer and some guidance on and I don't want that to translate into this long ongoing relationship so about six months or a year ago we started offering what we call advice packages which are modular little a la carte packages you can buy like I'm getting married and I want to understand what's involved in merging our finances and the options there or planning for a kid's college education or optimizing social security and retirement these are questions that the person doesn't feel like they need advice tied to their assets in any way but they do want as you said a conversation with an expert somebody to take a look at it check their work make sure that they're doing the right thing and then once they have that confidence maybe help them set up a bit of the execution for it maybe set up goals and their betterment account and we found that that's been very effective most common package that people lie is actually an initial getting set up in checkup package where they're just going to pay us I think something like $200 for us to look at their information set up their betterment account the right way check that everything's right have a conversation with them and their spouse about it and then they're confident then they're ready to like have it run on the 25 basis points for the rest of the time so I think that that kind of giving people the option to buy the level of service and the type of service that they feel is appropriate for what they want is very important I think that there's room for both of them I think there are people who want to pay an extra 25 basis points to have an ongoing relationship and and feel like you're going to be monitoring and looking at it and they can call you anytime but there are also people who know that they have specific discrete questions and there's no reason for them to have an annual fee ticket them answer I think that's great at giving people options on how they pay for the advice that they're getting is a great concept again I used to be on the all asset management side we used to give some advice now just giving people different options as to how they can pay for the advice going forward whether they're going to roll it into an asset management fee whether they're going to just pay for it a la carte which is what you're talking about they could pay for it through a ongoing retainer that they're paying directly to advisors such as XY planners a company that is doing subscription-based type planning I mean there's a lots of different options available to people out there now and it's just getting better it all better aligns the services that are being provided to the clients with the fees that are being charged to clients I didn't know about your a la carte offering and I'm happy to hear that it's going well it does seem to be a very good way of doing things the next level in this that I'd like to see at some point is a fee arrangement that is based upon the success of the client so number one I wish advisors were a little bit more incentivized to take a look at clients ahead of time and see what value they could add and say I think that I can ring an extra $50,000 out of your retirement savings if we if we tweak things and change them and if I help you adhere to this plan over the next 10 years would you be willing to take me on as a kind of a profit share because I want to see you succeed and you want to see you succeed so let's figure out a way where advisors even going further down that incentive alignment chain where advisors are kind of equity holders in their client's success and I would want to you know like know that I'm going to get paid not only for like knowing the financial planning details but actually helping the client execute on those plans yeah I don't know how the SEC is the security exchange commission is going to feel about that you know participating in any way in any of the client's profits aside from AUM which is a way of participating in their profits is something the regulators have always looked at very negatively because it creates incentives to the advisor to take more risk in the client account I understand what you're saying to be an equity holder in the client's success but what's the downside in other words what if it doesn't work are you also you know are you on the hook are you on the hook yeah yeah there's um there are a number of companies now my wife happens to be doing one of them which is a sort of doing a career change into being a software engineer and a lot of them are set up where they're going to train you for three to six months and they only get paid when you are making more than $80,000 a year in a tech job and then they can make up to sort of $40,000 so I'm seeing more and more incentive-aligned or success incentive-aligned commercial relationships and it's interesting to think about in ponder how you could legally also do that for personal finance yeah so what you're doing is deferring the fee in other words you know what the fee is going to be you're just deferring it until you have you have success and if you don't have success then the fee that you owe me would be less or maybe non-existent so I could understand that where the fee is up front this is our fee we're just not going to collect it we're just going to collect a little bit now and we're going to collect the rest of it later on down the road when you are successful I think that would be an intelligent approach rather than just kind of a profit sharing where we're going to get more if you're more successful later on out down the road it's all interesting Dan generally in the financial services industry we separate people from between delegators and do-it-yourself investors the delegators will go out and hire an advisor have somebody manage their portfolio because their free time is important to them either they don't want to do it or they can't do it but to them they'd rather not do it they'd they'd rather go do something else and their free time is important the do-it-yourself investors though they might like it as a hobby they might prefer to save the money of the advisor because the delegators do have to pay something as you say 25 basis points fair fee but on the do-it-yourself side there's also a cost and that's the behavioral cost as we talked about can you talk about the difference between the delegators that do-it-yourself investors and how to maybe get more do-it-yourself investors to see that the value of delegating is really worth the cost if you're a delegator or if you're a do-it-yourself or it's easy to see the the pros for your side of things and I think it's easy to not see the cons to be fair if you're a delegator maybe you don't really understand everything that's going on in your portfolio and maybe you're not completely on top of it maybe there's a higher chance that somebody might have you invested in a not great fund or a high fee fund so there are costs to being completely hands-off at the same time there are huge costs I think to being very hands-on I do not tune up my car or my bike myself I don't try and be my own plumber or my own electrician and I think that the people who spend a lot of their own time being their in portfolio manager they might be missing out on that number one they're kind of valuing their free time at zero when they should have a really high value of it and they could be using that time to help other people profitably themselves more so like I really enjoy building out portfolio management algorithms and working with the teams and design them well and I kind of think of that as like my contribution to society if I'm a liver cell this is the role that the liver cell plays and I rely upon all the other cells to do right by me and if we try and be all things and if we try and be a portfolio manager and be our own financial advisor we're probably not going to do as good a job at it as somebody who dedicates their entire life to doing that thing and it also means that we're spending that time not playing with our kids not developing our own skill sets our own professional network in some way that would be more advantageous to us as a whole so I think that DIYers they might enjoy it it might be a good hobby but I think they often miss out on the costs that they don't see that they are paying by virtue of not delegating it I've started to note when people are a little bit cost-averse in an irrational way too so I think that Jack Bogle did a great job of making us very conscious of costs but the idea that the cheaper one is definitively better when the difference in cost is so low isn't quite true I have this thing where I cut my hair at home so that I can save money and then I realized that I actually am not as good as a professional at it and I need to go out and get a professional to cut my hair sort of every other month so that it doesn't look too silly and I worry about people a little bit like being too tax-averse even though the costs are small the costs are something that they can avoid and so they're becoming kind of irrationally cost-averse too where they're not considering the value that they get for the cost they're just looking at cost as a way to make the decision well Dennis has been really an interesting discussion with you and I really appreciate you giving us all the insights that you've gathered seeing real people managing their money over at Betterment and we're looking for great things from you in the future so thanks for being on the show thank you very much for having me it's been a pleasure this concludes the sixth episode of Bogleheads on investing I'm your host Rick Ferry join us each month to hear a new special guest in the meantime visit bogelheads.org and the bogelheads wiki participate in the forum and help others find the forum thanks for listening