Meet Your Financial BFF

Jon Steins company, Betterment, has won overmillennials with low fees. Now the rest of the financial industry wants in

- Max Chafkin & Julie Verhage

In August, Fidelity Investments, the wealth management giant, did something wild, at least by the standards of the wealth management industry. It announced it would offer two mutual funds with no management fees. The move was seen as the culmination of a price war among companies such as Fidelity, Vanguard Group, Black Rock, and Charles Schwab, and as great news for middle-class investors. Jon Stein, however, wasn’t a fan.

Stein is the chief executive officer of Betterment LLC, the startup that helped spark the fee war by persuading millennials to buy the cheapest funds they could find. “I love that fees are falling rapidly,” Stein says, before noting “problems” with Fidelity’s approach. The only way Fidelity can make money on a free product, he says, is if it persuades customers to also sign up for revenue- generating services, such as actively managed funds with significant fees. “They’re trying to cross-sell you into high- margin products,” he adds. “That’s the way most incumbents play the game. They typically try to hide fees or do a little bit of a bait and switch. And that’s not our model.” (A Fidelity spokesman says its pricing is transparent and that the free funds are standalone products.)

If Stein, 39, sounds cynical, that’s what the 2008 financial crisis did to people who were affected by it. The low-fee evangelist founded Betterment after a stint at First Manhattan Consulting Group before the recession. At one point he asked a senior partner why financial services companies didn’t spend more time talking to customers. The partner’s response, Stein says, was that the banking industry doesn’t make money from customers. “We make money off money,” the partner told him.