Betterment Business Model | How Does Betterment Make Money?

Betterment LLC offers online financial advice in the United States. Exchange-traded funds (ETFs) include both stocks and bonds within their portfolio. 

Moreover, the organization offers financial planning, retirement planning, 401(k), standard individual retirement accounts (IRA), Roth individual retirement accounts (IRA), simplified employee pension (SEP) IRA, trust accounts, and tax-loss harvesting services.

Betterment Business Model is based on a portfolio optimization program that optimizes your portfolio based on your age and risk tolerance. In addition, Betterment makes investing as easy as possible by keeping it to a few minutes each month.

Betterment is probably a good option for anyone who wants to build their wealth without spending much time managing it.

Investors seeking long-term returns that outpace the market should consider Betterment. The company has incorporated numerous optimizations into its platform that enable them to outperform common investment managers. The Betterment robot advisor is one of the most affordable options available on the market.

What is Betterment?

Betterment offers investment, retirement, and cash management products to retail consumers and businesses.

Betterment has a revenue model involving its Digital and Premium plans, reimbursed by partner banks, debit card transaction fees, referral fees generated from insurance package promotions, and Betterment for Business and Betterment for Advisors products.

Betterment was founded in New York in 2008 and instantly gained a following among its customer base. There are currently over 500,000 registered accounts and $22 billion in assets under management (AUM).

How Does Betterment It Work?

Betterment is a fintech startup that offers investment and cash management products to retail customers. Betterment’s four most important products are IRAs, 401(k)s, Invest, Spend, and Save accounts.

Betterment’s Spend will provide users with a mobile-first checking account and debit card to monitor their spending. 

Several benefits of the account include reimbursement of ATM, overdraft, and foreign transaction fees, FDIC protection up to $250,000, and no minimum balance requirement.

The bank offers its customers no-fee, high-yield cash accounts for maximizing their savings. 

As a result, customers enjoy up to $1 million in FDIC insurance, the ability to transfer money between accounts anytime, the ability to open joint accounts, and an annual percentage yield of 0.40 percent.

IRAs and 401(k)s are Betterment’s retirement plans, and they allow consumers to create customized retirement plans. 

A custom savings plan is then developed based on the user’s parameters. Betterment also offers tax-saving options that help maximize returns. The service is also available to businesses and their employees.

Betterment invests money on behalf of users with Invest. Betterment optimizes the investment portfolio according to the account holders’ financial needs. 

As an example, it can help you maximize retirement savings (but at higher risk) and education (savings for your children’s education), among other things.

The Betterment portfolio strategy is developed through a combination of automation (algorithms) and human judgment. 

Most account benefits of the company’s assets are invested in low-cost ETFs (exchange-traded funds), which usually offer more consistent and predictable returns over time.

The Betterment platform is accessible via the Betterment website and mobile apps (iOS and Android).

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How Does Betterment Make Money?

Betterment earns money in the most direct way possible: through an annual asset management charge.

Consider this: if they handle $22 billion in assets, even if everyone paid 0.25 percent annually, it would generate $55 million in fee revenue.

However, most of its users subscribe to the Premium plan, which costs 0.40 percent annually. This shows that they are generating far more than the minimal $55 million in management fees.

Betterment makes money from its advice packages, Betterment for Business solution, Digital and Premium plans, Betterment for an Advisors software tool, income from partner banks (via Cash Reserves), Visa transaction fees, and referral fees from insurance companies.

Below, we’ll explore these monetization strategies in more detail.

Advice Packages  

Betterment tries to simplify finance, but it is often not successful. So Betterment developed the Betterment Advisor Network to deal with this complexity.

The firm is run by certified financial advisors who have decades of experience in the industry. 

Those interested in getting information and advice can choose from a variety of consultation packages offered by Betterment.

The services Betterment offers clients are advice on getting started with Betterment, tracking their financial condition and investments, and helping clients plan and save for life-changing events, such as marriage or college.

There is a one-time cost of $99 to $299 for a one-hour consultation. Betterment’s advisor network is comprised primarily of independent contractors. 

Therefore, it would seem that the company’s advisors are sharing the revenue generated by the packages.

Digital & Premium Plans

Betterment manages client money through two investment programs, Digital and Premium. 

Betterment’s investment strategy is developed through a combination of computers and human judgment, as mentioned previously.

Each user pays the company an annual fee in proportion to the amount of their account. For example, Digital costs 0.25 percent annually, whereas Premium costs 0.40 percent annually.

Digital subscriptions include the following features:

  • Rebalancing accounts regularly
  • Optimize your tax returns with tax-saving features
  • Five-day customer service available
  • Personalized financial advice, such as asset allocation recommendations and investment amounts
  • Portfolios with diversified investments

Betterment’s Premium subscribers receive all the benefits of its Digital plan, as well as financial advice outside of Betterment from CFP-trained professionals. The minimum balance for premium users is $100,000.

Empower Retirement acquired Personal Capital for $1 billion, which follows a similar consulting strategy.

Betterment For Advisors

Betterment collaborates with accredited financial advisors who work with a portion of the company’s clients.

Betterment has developed a SaaS tool to help advisors manage their clients’ wealth.

You can rebalance accounts at any time, harvest tax losses, locate assets, deposit, and withdraw money at any time.

Advisors of Betterment pay a flat monthly cost of $150 plus a tiered wrap fee between 0.12 percent and 0.20 percent of client assets (based on the firm’s overall assets).

Betterment For Business

Betterment for Business is a customized 401(k) plan designed for businesses and their employees.

Betterment’s consumer programs also provide personalized guidance (via a network of advisers) on how to set up a 401(k) account and which customizable investment options to choose. 

Furthermore, clients have access to the payroll of several tool providers such as Workday, Ceridian, and Rippling.

The cost of Betterment for Business’s 401(k) plans varies based on the number of employees, the amount of money invested, the add-on features, and the payroll provider with whom the plan will be integrated.

Checking Account

Betterment offers a standard checking account and debit card in addition to the high-yield cash reserve account.

There are no monthly account fees, maintenance fees, or withdrawal fees associated with this account. As a result, Betterment pays all ATM fees worldwide, including Visa’s 1% foreign transaction, purchase, and ATM fee.

Are Betterment’s accounts simply free of charge? Not exactly. Whenever a debit card is used by a customer to make a purchase (such as Starbucks or H&M), Visa charges a transaction fee to the retailer.

A typical fee ranges from 2% to 3%. Betterment and Visa will likely split the revenue from that transaction.

Several FinTech startups, such as Chime or Venmo, have previously used revenue-sharing structures.

Cash Reserve

Betterment’s Cash Reserve will provide users with no-fee, high-yield cash accounts. Account-holders can earn an Annual Percentage Yield of (currently) 0.40 percent, eight times the national average.

Betterment earns money by charging banks to invest the client’s money in other assets.

Banks such as Citi, Barclays, Valley National Bank, Seaside National Bank, Trust, and Georgia Banking Company are among the partners.

Bank account holders do not have to worry about their money being wasted. Betterment is insured by the FDIC up to $1 million.

Cellphone Insurance

Betterment and Sure announced a partnership in September 2020 to provide mobile insurance protection to all its members.

There is insurance coverage for both theft and damage. A customer may make up to two claims per calendar year, each worth up to $600.

Betterment includes insurance with its bank account. Each insurance policy booked on Betterment’s website will earn Betterment a referral fee.

Is Betterment Safe?

Several protections have been put in place by Betterment to reassure its investors. Investing money always entails a degree of risk; the platform, however, should not create this risk. 

Betterment is technically composed of two separate entities. The first is a financial advisor, and the second is a broker-dealer.

FINRA and the SEC regulate each of these firms.

Furthermore, Betterment is a Securities Investor Protection Corporation (SIPC) member and is thus protected by SIPC’s safety rules. 

The purpose of these regulatory authorities is to ensure that Betterment acts in the best interests of its users. Regulatory agencies protect you from losing your money if Betterment engages in questionable business practices.

You are protected by the FDIC through the custodian bank regarding banking or the Betterment Cash Reserve. You’re covered up to $1 million by the FDIC! Betterment users will significantly benefit from this.

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Success Story of Betterment

Betterment was founded in August 2008 by Jon Stein (CEO), Eli Broverman, Sean Owen, and Ryan O’Sullivan in New York City.

Harvard graduate Stein has considered a career in medicine but decided against it. Ultimately, however, he was held back by two factors: his fear of blood and his belief that he would not help everyone.

His first job after graduating from Harvard was to work as a financial consultant, including at FMCG Direct.

Betterment was founded by Stein as a result of his frustrations with online money management. Several options available at the time, such as Vanguard or ING Direct, which offered poor user interfaces, were challenging to set up and incurred expensive account maintenance fees.

The long-time finance professional believed that he could design a superior alternative. During that time, he earned an MBA in Entrepreneurship from Columbia Business School.

He began developing a strategy for what would later become Betterment while he had some free time. His then-roommate Sean Owen (a former Harvard CS major and Google engineer) helped jumpstart his progress.

They created the first version of Betterment together with Owen. Stein was in charge of the front end, while Owen was in charge of the back end. 

Stein, however, needs someone with more experience in this area, given the complex legal environment surrounding financial products.

Fortunately, Eli Broverman, a securities attorney at the time, was able to provide that experience. They met at a poker game a few years ago and have remained friends ever since.

The business was then registered with the Securities and Exchange Commission, becoming an accredited investment advisor. However, there was no information on how they could become licensed brokers-dealers. When the team attended conference after conference, Ryan O’Sullivan was there as well.

Serial entrepreneur O’Sullivan had an extensive network of broker-dealers and can therefore facilitate the introductions essential to smoothing. In addition, regulatory. Therefore, Betterment LLC was allowed to incorporate in August 2018 once all required agreements had been signed.

Betterment was introduced to the public at TechCrunch Disrupt’s first-ever conference on May 26, 2010 (ranked #1). Founders had already invested $640,000 in the startup at that point.

By the time Owen moved to London, he had already established his firm. Kiran Keshav, the CTO of Columbia University’s Center for Computational Biology, succeeded him.

Betterment launched an iPhone app weeks later to capitalize on the growing smartphone market.

Betterment managed millions of dollars of assets and gained thousands of customers by December 2010. 

This expansion resulted in the company’s first round of fundraising, which earned $3 million from Bessemer Venture Partners, Anthemis Group, and a few angel investors.

The company’s second year of operation had accumulated 10,000 paying customers who had deposited more than $50 million. 

This was accomplished by a 13-person team. CEO Stein describes his operating model as follows on LinkedIn:

“I am an architect of efficiency and an engineer of happiness. Efficiency and enjoyment are my  “polestars.” For sure, this is high-falutin’ jargon; if you prefer, we can just sit around a campfire and talk power tools, but who knows? Anyhow, I’ll explain:

The best way to make the world a better place is to be more efficient. It will benefit humanity (and the planet) (and ultimately, make us happier). The virtues of transparency, reliability, procedure, and equity all guide the path to efficiency. 

The navigational systems I prefer are economics, psychology, and design.”

Betterment’s success has been directly related to his approach, which has been carried across the organization. Additionally, the firm’s capacity to constantly increase its product offerings and meet the demands of its customers was advantageous.

Betterment for Business (introduced in 2016) already has 300 users who offer 401(K) plans to business owners. 

The monetary objectives function, developed during the Coronavirus pandemic to assist consumers with managing their finances better during these challenging times, is another example of its rapid growth.

Betterment has been largely hidden from view for much of its existence, especially when compared to Robinhood or other high-growth FinTech companies.

Stein thinks that this is because the company’s primary objective is to make personal finances as simple and hassle-free as possible. In addition, it aims to offer individuals a secure environment to manage their wealth and save for retirement. 

This has led to the corporation focusing mainly on ETFs and bonds, which are low-risk investments.

Currently, Betterment serves over 500,000 customers with average balances of $44,000. It now manages $22 billion in assets under management, becoming America’s largest robotic advisor (with Wealthfront being a close second). Moreover, the company employs approximately 500 people.

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What is the Funding and Valuation of Betterment?

Crunchbase reports that Betterment has raised $275 million in venture capital funding over seven rounds. Kinnevik, Bessemer, Menlo Ventures, and Francisco Partners are notable investors.

Betterment’s business was valued at $800 million at the company’s most recent round of fundraising, announced in July 2017. The company has very indeed reached the $1 billion valuation threshold, establishing it as a unicorn.

What is the Revenue of Betterment?

Betterment does not publicly publish its sales or profit data. Therefore, Betterment is presumably not profitable yet to finance its growth.

Key Takeaways From the Betterment Business Model

Betterment is a financial advisory firm based in the United States founded in 2008 by Jon Stein and Eli Broverman. The company offers investment, banking, and retirement planning services.

Betterment charges a flat fee for its two investing plans, which charge a percentage of the investment value.

It also makes money through its advisory services, in which it provides individuals and corporations with competent financial guidance and access to a range of tools. Furthermore, Betterment earns a little money through fee-free checking and high-interest bank accounts.

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