Betterment (investment service)

Betterment (also known as Betterment.com) is an online-investment adviser registered by the U.S. Securities and Exchange Commission based in New York, New York. Betterment provides investment advice and diversified, fully automated investment management to customers for less than the typical cost of a traditional financial adviser or wealth manager. All transactions occur online - it is an execution-only service. Betterment does not have brokerage sales representatives or advisers.^[2]

Betterment is headquartered in New York City, and has received funding from Menlo Ventures, Bessemer Venture Partners, and Anthemis Group.^[3] Notable angel investors include Thomas Lehrman, Jason Finger, and Andy Dunn.

Due to the overall customer experience, including ease of use and emphasis on design, Betterment has been called the "Apple of finance."^[4]

Business model

Betterment is an automated goal-based investing service. Betterment invests in a portfolio of passive index-tracking equity and fixed income exchange-traded funds (ETFs)^[5] and offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).

Betterment’s core portfolio optimization incorporates insights of Modern Portfolio Theory, the Black-Litterman model, and Behavioral Asset Management. Modern Portfolio Theory (MPT) relies on diversification and asset allocation to attempt maximum portfolio return for an amount of given risk. Black-Litterman enables passive asset allocation by using world market capitalizations to attempt to estimate expected returns. Behavioral Asset Management focuses on investor returns, and attempts to optimize the returns an investor achieves, including minimizing potential market-timing behavior.

Betterment has no investment minimums for customers. Account fees are tiered between 0.15% and 0.35% of aggregate assets managed across all a customers goals. Customers with accounts of $100,000 or more receive pricing of 0.15%.

Products and services

Betterment provides both financial advice and investment management to customers. Betterment's software invests and rebalances accounts automatically using cash inflows and dividends. Betterment uses software and algorithms to track whether or not a customer is likely to reach a specific goal.

Betterment produces content pertaining to diversification, retirement, taxes, financial advice and behavioral economics. Betterment distributes this content on its proprietary blog, through third-party publications such as the Wall Street Journal, social media channels, and in client communication emails.

In October 2014, Betterment launched a B2B offering called Betterment Institutional.

In July 2016, Betterment announced its assets under management (AUM) had surpassed $5 billion, becoming the first robo-advisor to reach that mark. ^[6]

Engineering

Betterment’s product offering consists of two facets: a consumer-facing, responsive interface and the core trading application. The interface portion is backed by a Java + Spring MVC stack running in the Apache Tomcat container, and frontend by an in-house JavaScript framework built on top of Marionette.js and Backbone.js. Trading is written primarily in Java and Scala, leveraging Xignite web services for real-time pricing information.

Concerns and controversies

On June 24, 2016, Betterment suspended trading for 2.5 hours without communicating with its users. As a result, customers raised concerns. Following this incident, a state regulator also raised concerns over Betterment's actions: “These customers were put at a great disadvantage,” said Massachusetts Secretary of the Commonwealth William Galvin.^[7]

The unexpected trading suspension also caused concern among financial advisers using Betterment through the Betterment For Advisors platform. Advisers like Eric Roberge grew concerned over the trading suspension as it prevented him from updating client portfolios: “I don’t feel comfortable with someone else telling me what I can and cannot do” on clients’ behalf, said Mr. Roberge.^[8] Other advisers expressed concerns about Betterment's decision regarding communication and questioned why decision was not communicated to the customers and financial advisors, causing lingering questions around Betterment's policies, especially those regarding trading suspension.^[9]

Research

In addition to its standard product offerings, Betterment’s data analysis team released an open source research project written in Python and Pandas analyzing mutual fund data from the Center for Research in Security Prices (CRSP). Led by Alex Benke, CFP, the team co-authored a whitepaper with financial planner Richard A. Ferri, CFA, Founder of Portfolio Solutions.^[10] The report identified four key findings which support investing using an all-index fund portfolio:

1. Advanced portfolios holding ten asset classes showed index fund outperforming comparable actively managed portfolios 90% of the time.
2. Diversification of active managers within asset classes (holding two or more funds of the same asset class) reduced active portfolio performance dramatically, with the passive strategy outperforming multiple active funds 90% of the time.
3. Increased holding period steadily increased the chance of index fund portfolio outperformance.
4. Low-fee actively managed fund portfolios did not meaningfully increase the chance of success.

References