How Does Betterment Make Money? Dissecting Its Business Model

Executive Summary:

Betterment is a financial services company that offers investment, retirement, and cash management products to retail investors as well as companies.

Betterment makes money via its Digital and Premium plans, receiving compensation from partner banks, fees on debit card transactions, referral fees by promoting insurance packages, as well as through Betterment for Business and Betterment for Advisors.

Founded in 2008 and headquartered in New York, Betterment has become an immediate success with its user base. The company now counts more than 500,000 registered accounts and has $22 billion in assets under management (AUM).

What Is Betterment?

Betterment is a FinTech company offering robo-investing and cash management products to retail investors. The company offers four core products, namely IRA and 401(k), Invest, Spend, and Save.

With Betterment’s Spend, users will receive a mobile-first checking account and debit card to manage their spending. The account offers multiple advantages, such as reimbursed ATM, overdraft and foreign fees, FDIC-insurance of up to $250,000, contactless VISA payments, and no minimum balance.  

Betterment Save allows customers to opt into a no-fee, high-yield cash account to maximize daily savings. Customers are eligible for FDIC insurance of up to $1 million, can move money between accounts as often as they like, create joint accounts, and earn 0.40% APY on their account balance. 

IRA and 401(k) lets users create custom retirement plans using Betterment’s IRA accounts. A custom savings plan is then created based on the parameters the user has added. Betterment furthermore provides tax-saving features to optimize returns. The service is also available to businesses and their employees.  

Lastly, with Invest, Betterment automatically invests money on the user’s behalf. Betterment optimizes the investment portfolio based on the account holder’s goals. For instance, it can optimize savings for retirement, maximizing returns (but with higher risk), education (saving for your children’s college tuition), and more.

Betterment uses a combination of automation (in the form of algorithms) and human judgment to come up with a portfolio strategy. The majority of the company’s investments go into low-cost ETFs (exchange-traded funds), which generally offer safer and stable returns over time.

Users can access Betterment’s platform through their website as well as mobile applications (available on Android and iOS devices).

A Short History Of Betterment

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

Stein, who graduated from Harvard with a degree in Economics, was initially thinking to pursue a professional career in medicine. But the two things that ultimately held him back were his unease of blood as well as the perception that he would not be able to help enough people.

After graduating from Harvard, he went on to work in financial advisory for companies such as FMCG Direct.

The idea for Betterment originated from Stein’s personal frustrations with managing his money online. Some of the existing solutions at the time, such as Vanguard or ING Direct, were offering very poor user interfaces, complicated to set up, and charged outrageous account maintenance fees.

Having worked in the finance industry for more than half a decade, Stein thought to himself that he could develop a much better solution. At the time, he was enrolled at Columbia Business School, pursuing an MBA in Entrepreneurship.

With some additional time available, he began crafting out a plan for what would eventually become Betterment. To get a head start on development, he began consulting his then-roommate Sean Owen (a Google engineer and former CS major at Harvard).

Together with Owen, the pair developed a first working type of Betterment. Stein worked on the front end while Owen built all the backend capabilities. But given the complex regulatory nature of financial instruments, Stein needed someone with a little more experience in that field.

Luckily, that experience came in the form of Eli Broverman, who at the time worked as a securities attorney. The guys met a few years earlier at a poker game and remained friends throughout that time.

They registered the business soon after with the SEC, becoming an accredited investment advisor. What was missing, though, was how they would be able to become a licensed broker-dealer. The team visited a few conferences in which they became acquainted with Ryan O’Sullivan.

O’Sullivan, a serial entrepreneur himself, had an extensive network of broker-dealers and could thus make the necessary introductions to set everything up. So in August 2018, all the necessary agreements were in place, and Betterment LLC was able to officially incorporate.

Betterment finally launched to the public at the first-ever TechCrunch Disrupt (where it placed #1) conference on May 26, 2010. By that time, the founding team had already invested $640,000 to start the business.

Wayback Machine

Owen, in the meantime, had already moved on as he relocated to London to start his own business. His replacement as CTO became Kiran Keshav, who at the time ran Columbia University’s Center for Computational Biology.

To bank on the ever-increasing smartphone market, Betterment decided to launch an ancillary iPhone app weeks after.

By December 2010, Betterment had already onboarded thousands of users while managing millions in assets. That growth led to the company’s first-ever round of funding in which it raised $3 million from Bessemer Venture Partners, Anthemis Group, and a combination of a few angels.

Within two years of operation, the company had already amassed 10,000 paying users, which deposited over $50 million into their accounts. All of that was achieved with a team of 13. That certainly fits the operating model of CEO Stein, who writes the following about himself on LinkedIn:

“I’m an efficiency architect and happiness engineer. My “polestars” are efficiency and happiness. Okay, this is some high-falutin’ language; we can just have a beer and talk about power tools around a campfire if you prefer, but who knows who else might read this? Anyway, let me explain:

Efficiency is making more from less – it makes us humans (and the planet) better off (and in aggregate, happier). Transparency, reliability, process, and fairness are guideposts on the route to efficiency. Economics, psychology, and design are my favored navigational systems.”

That ethos has been carried forward throughout his company and became an integral part of Betterment’s success story. Another advantage was the firm’s ability to listen to its users and consistently expand its product offering.

One example is Betterment’s for Business platform (launched in 2016), which provides 401(K) plans for companies, and attracted 300 customers within a few days of operation. Another prominent example, highlighting its rapid speed of development, is its cash goals feature that was launched during the Coronavirus pandemic and helps users to better manage their finances in these trying times.

What’s surprising about Betterment, especially when compared to other high-growth FinTech companies such as Robinhood, is the fact that the company has been operating out of the public eye for most of its existence.

Stein argues that this is due to the company’s focus on making personal finances as easy and hassle-free as possible. It wants to create a safe space for individuals to manage their wealth and save for retirement. The company therefore has implemented a low-risk investment strategy by primarily focusing on ETFs and bonds.

Today, Betterment serves more than 500,000 accounts with an average account size of $44,000. It now has $22 billion AUM, which makes it America’s biggest robotic advisor (with Wealthfront being a close second). Furthermore, close to 500 people are now employed by the company.

How Does Betterment Make Money?

Betterment makes money via its Digital and Premium plans, advice packages, its Betterment for Business solution, a software tool for financial advisors (called Betterment for Advisors), compensation from partner banks (through Cash Reserve), Visa transaction fees, and by referring customers to insurance partners.

Let’s dive into each of these monetization methods in more detail below.

Digital & Premium Plans

Betterment offers two plans, named Digital and Premium, which invest money on the client’s behalf. As stated above, Betterment uses a combination of algorithms and human judgment to come up with their investment strategy.

The company charges an annual fee that is based on the user’s account balance. With Digital, the annual fee is at 0.25 percent while Premium charges 0.40 percent.

The Digital plan offers the following features:

  • Personalized financial advice, such as recommended asset allocations or the amount of money that should be invested
  • Diversified investment portfolios
  • Automatically rebalance accounts at a set period
  • Tax-saving features to optimize tax returns
  • Customers service available 5 days a week

With Premium, users receive all the benefits that the Digital plan offers, plus in-depth advice on investments outside of Betterment as well as unlimited access to CFP-trained professionals. Premium subscribers need to have a minimum account balance of $100,000.

Competitor Personal Capital, which was acquired by Empower Retirement for $1 billion, employs a similar advisory model.

Advice Packages         

While Betterment tries to make finance simple, it often isn’t. In order to account for that complexity, the company has created its so-called Betterment Advisor Network.

It consists of accredited financial advisors with decades of experience in the industry. To access that knowledge and advice, Betterment offers a plethora of consultation packages.

These include advice on how to get started with Betterment, checking up a client’s financial situation and investment portfolio, or how to effectively budget and save for life-changing events such as a marriage or college.

Clients pay a one-time fee, which starts at $99 and can go as high as $299 for a one-hour consultation. Most of the advisors in Betterment’s network are not directly employed by the company. It can thus be assumed that revenue from the packages is shared with its advisors.

Betterment For Business

Betterment for Business is a custom-made 401(k) plan specifically built for companies and their employees.

Similar to its consumer plans, Betterment offers personal advice (through a network of advisors) on how to set up the 401(k) portfolio and what customizable investment solutions. Integration with various payroll tools, such as Workday, Ceridian, or Rippling, is offered on top of that.

Betterment for Business prices its 401(k) plans based on the number of employees, monetary assets deployed, add-on features, and the payroll provider to be integrated with.

Betterment For Advisors

As highlighted above, Betterment works together with accredited financial advisors that consult some of the company’s customers.

To expand on that relationship, Betterment has built a SaaS application for its advisors which helps them manage their client’s wealth.

Features include flexible account re-balancing options, tax-loss harvesting, asset locations, deposits, and withdrawals at any time.

Betterment charges its advisors a flat $150 per month, plus a tiered wrap fee ranging from 0.12 percent to 0.20 percent of client assets (based on the firm’s aggregate assets).

Cash Reserve

With Betterment’s Cash Reserve users will get access to a no-fee, high-yield cash account. Account-holders will be able to earn an Annual Percentage Yield of (currently) 0.40 percent, eight times higher than the national average.

Betterment makes money by receiving compensation from the banks that invest the client’s money into other assets.

Partner banks include Citi, Barclays, Valley National Bank, Seaside National Bank, Trust and Georgia Banking Co., and many more.

Luckily, account holders don’t have to be afraid that the banks will gamble their money away. Betterment offers FDIC insurance of up to $1 million.

Checking Account

Apart from the high-yield cash reserve account, Betterment also offers a regular checking account along with a debit card.

The account is free to use and does not charge any monthly account fees, maintenance fees, or withdrawal fees. In fact, all worldwide ATM fees will be reimbursed by Betterment, including the Visa 1 percent transaction fee on foreign transactions, purchases, and ATM transactions.

So does Betterment just hand these accounts out for free? Not exactly. Whenever a user pays with the debit card, Visa will charge the merchant (such as Starbucks or H&M) a transaction fee.

These fees normally range anywhere between 2 to 3 percent. Visa and Betterment then share the income from that transaction, in all likeliness.

Other FinTech companies, such as Chime or Venmo, have adopted similar revenue sharing models in the past.

Cellphone Insurance

In September 2020, Betterment announced that it would partner with Sure to offer cellphone insurance protection to all of its members.

The insurance offers coverage for damage as well as theft. Customers will get up to $600 per claim with a maximum of 2 claims per 12 months.

The insurance is offered within Betterment’s checking account. Betterment will make money from referral fees it collects for every insurance that is booked through its platform.

Betterment Funding, Valuation & Revenue

According to Crunchbase, Betterment has raised a total of $275 million across seven rounds of venture capital funding. Notable investors include Kinnevik, Bessemer, Menlo Ventures, Francisco Partners, and many more.

During the company’s latest round of funding, announced in July 2017, Bettermint’s business was valued at $800 million. The company, in all likeliness, has surpassed the $1 billion valuation mark, making it a unicorn.

Betterment does not disclose any revenue or profit figures publicly. To continue financing its growth, Betterment is probably not profitable yet.   

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.