Choosing your investment platform is a difficult process with so many good options to pick from.
There are a number of things you should consider when making this decision.
The methods companies use to make money is something that you may want to take into account to understand the scope of the service.
Today we are going to be looking at Betterment and some of the ways that they make money.
By the end, you will have a thorough understanding of how Betterment is making money and how they stand in terms of safety and profitability.
Betterment is a robo advisor that has built their system around saving your money and planning for the future.
Betterment is one of the largest robo advisors out there today with over $16 billion in total managed assets.
From their start in 2008, they have grown to a user base of over 500,000 individual accounts.
When it comes to their platform, there is certainly no lack of automation to attract hands-off investors. Their goal is to make your account completely hands free, something you can put to the back of your mind.
They offer a great system for a beginner investor who is just learning the ropes with plenty of features and an easy to use interface.
One of their main focuses is retirement accounts and life planning so you can make smarter decisions about your finances.
Here's our full review of the Betterment Roth IRA retirement account!
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Betterment has many facets to help protect investors. Though there is always a risk when investing your money, the platform itself should not be the cause of this risk.
Betterment is technically two different entities. One of which is an investment advisor and the other is a broker-dealer.
Both of these are SEC-registered and are regulated by FINRA.
They are also a member of the Securities Investor Protection Corporation (SIPC) and therefore are protected under the safety provisions of SIPC.
And you can take peace of mind knowing the SEC is watching and will step in if they suspect any foul play is involved.
As far as the banking or Betterment Cash Reserve goes, you are covered under FDIC insurance via the custodial bank used.
The most direct way Betterment is making money is through an annual asset management fee.
Think of it this way, if they have $16B in assets under management, even if everyone was just paying 0.25% per year that is $40M in fee revenue per year.
However, some people use the Premium plan which is 0.40% per year, meaning they are making even more than that!
Betterment has two different tiers of service; Digital and Premium.
Their Digital service comes with the platform’s basic features, but not their advisory services and has no minimum deposit. This level of service has an annual fee of 0.25% of your total managed assets.
Premium is their higher-level program. It is for people that will be investing with more than $100,000 dollars as this is the minimum deposit. Being in this tier will allow access to Betterment’s human financial advisors and has an annual fee of 0.40% of your total managed assets.
If you are in the Digital tier of service, as most investors are on Betterment, you will not have access to their investment advisory team. That is unless you purchase the packages that allow you to utilize them for a time.
Betterment offers five different packages that you can choose from depending on what you are looking for at the time.
Includes a 45-minute phone call with a certified financial planner. This is mostly intended for beginning investors or people new to the Betterment platform.
It will go over how to use Betterment’s Features and make the most use of them.
Package cost: $199
Comes with a 60-minute phone call with a certified financial planner. The checkup package is for when you have general questions or want an overall analysis of your finances. It’s sort of their go-to help package.
Package Cost: $299
It gives you a 60-minute phone call with a certified financial planner for the purposes of higher education.
Whether it be for you or your children the CFP will go over your family’s finances. They will also make recommendations on how to invest to plan for this important life milestone.
Package Cost: $299
Another 60-minute phone call with a certified financial planner. Merging your finances can be a big undertaking for a lot of investors. This package will advise you on the best way to go about it.
Package Cost: $299
Includes a 60-minute phone call with a certified financial planner for retirement. As a staple of the Betterment system, it is no surprise that they have an option for retirement planning.
Package Cost: $299
They will give you a “holistic review” of your assets and tell you where you are in relation to your goal. Then they will make suggestions on routes you can take including employer plans and your accounts.
Betterment has a feature called Everyday Cash Reserve. This is a high yield online savings account. This money is insured for up to $1 million in FDIC coverage.
Since Betterment is not a bank, they must use a bank in order to store your money. Those banks then pay Betterment a fee to be able to hold this money for them.
Many traditional banks make money this way called interest rate spread. The banks make money on the spread between the interest rate they receive and the interest rate they pay out to depositors.
To explain this simply, banks pay money on cash called interest. Betterment lends your money to banks in FDIC insured savings accounts. Those banks pay Betterment a fee. Betterment gives you most of that fee or interest, but keeps some as profit.
Another Feature of Betterment is their Everyday Checking program. This comes with access to the Betterment Debit card in order to use your cash. This is not released yet, but it will be a revenue driver for them.
Just like a bank or credit union, Betterment receives a percentage of interchange fees from merchants when you swipe the card. It does not have any effect on your cash though.
The amount of money they make on this per swipe is not substantial as it shares this fee with Visa and the partnering banks. It usually just equates to fractions of a cent per swipe but it adds up with thousands of users.
They also get a portion of the net interest margin on your account. It is unclear from their website exactly how they determine this portion.
As you may have wondered at this point, yes Betterment is profitable.
In 2018 it was estimated that they made around $50 million in revenue and their projections indicate that their growth isn’t going to slow down anytime soon. We will probably see Betterment around for quite some time.
They have become a more stable company since their launch in 2008 and have moved out of venture capital territory.
The success in their investment platform allows them to begin investing money in other interests.
According to a quote from Betterment CEO Jon Stein, we will likely see more innovative products from them in the future.
“Once you get to a sufficient scale, you have a real business from which to attack adjacent categories.” - Jon Stein, Betterment CEO
Betterment has a growing business and they use a few different options in order to generate revenue.
They make a good portion of their revenue from the fees they charge on their accounts which are 0.25% for Digital and 0.40% for Premium. With $16 billion in total managed assets, you can see how much they make just off this alone.
The packages that Betterment offers to bolster their Digital plan are also a substantial revenue gainer for them.
Betterment says that a significant amount of their users take advantage of financial advice packages, especially the Getting Started Package that runs at $199.
It’s Cash Reserve program accrues them some income through banks. Betterment uses banks to store the money that you deposit into this account since they are not a bank themselves.
Those banks will then pay Betterment a fee in order to have the right to hold this money for them.
And finally, their Checking service (coming soon) comes with a debit card. This debit card will earn Betterment a small amount of money, fractions of a cent, every time you use it to make a purchase.