Betterment (company)

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Betterment
Private
Industry Investment services
Founded 2008
Founder
Jon Stein (Founder, CEO)
Headquarters New York City, New York, United States
Key people
Products Financial services, asset management, portfolio management, trust services
AUM $13.5 billion (March 2018)[1]
Parent Betterment Holdings, Inc.
Divisions

Betterment for Business

Betterment for Advisors
Website www.betterment.com

Betterment is an online investment company based in New York City, registered with the Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (FINRA). Also known as Betterment.com, Betterment is a registered investment advisor (RIA) and a broker-dealer.[2]

The company is an automated, goal-based investing service. Betterment invests in a portfolio of passive index-tracking equity and fixed income exchange-traded funds (ETFs) and offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).[3]

As of March 2018, Betterment had $13.5 billion of assets under management.[1]

History[edit]

Foundation and launch[edit]

Betterment was founded in 2008 in New York City by Jon Stein, a Columbia Business School MBA graduate, and Eli Broverman, a lawyer out of NYU School of Law. Stein and his roommate Sean Owen, a Google software engineer, started building the first online platform for Betterment in 2008 using a Java application and MySQL database on Apache Tomcat servers with an Adobe Flash- and Flex-based front-end design. Initial prototype designs were provided by Stein's then-girlfriend, Polina Khentov. Facing regulation associated with starting a financial company, Stein began negotiations to bring on Eli Broverman, then a securities lawyer he met over regular poker games, as a co-founder in 2008.[4]

Broverman and Stein were prepared to offer financial advice online as an SEC-registered investment advisor, and also decided to offer broker-dealer services for advice to customers. Betterment added Ryan O'Sullivan, a "serial entrepreneur",[4] to establish Betterment's broker-dealer operation.

From 2008 to 2010, the founding team continued to develop the platform for launch. Betterment gained approval from FINRA for membership. In 2009, Anthony Schrauth, a former colleague of Stein's joined Betterment as chief product officer, and Owen was replaced by Kiran Keshav of Columbia University's Center for Computational Biology. O'Sullivan left his role as president in 2010.[4]

Betterment, LLC was established as a Delaware corporation on April 7, 2009. The parent company for Betterment LLC and Betterment Securities, Betterment Holdings, Inc. was established in Delaware on January 29, 2008.[5]

The company launched at TechCrunch Disrupt New York in June 2010, and won the award of "Biggest New York Disruptor."[4][6][7] Within 24 hours, Betterment had attracted nearly 400 early customers, and the company began talks with early investors.[8][4]

Betterment received Series A round funding from Bessemer Venture Partners in December 2010. By October 2012, Menlo Ventures provided Series B funding along with Bessemer Venture Partners and Anthemis Group.[8][9] By 2012, the company established product offerings, such as IRAs, auto-deposit, auto-rebalancing, and goal-based investing advice.[9]

Trading suspension post-Brexit[edit]

On June 24, 2016, Betterment suspended trading for 2.5 hours, after the unexpected vote in favor of Brexit sent shockwaves of volatility through the financial markets. Subsequently, the firm was accused of not properly communicating the halt in trading with its customers. Following this incident, Betterment faced significant backlash against the protective move on social media, and Massachusetts Secretary of the Commonwealth William F. Galvin raised concerns over Betterment's actions, remarking that some customers could have been at a disadvantage because of the trading halt.[10][11][12]

The unexpected trading suspension also caused concern among financial advisers using Betterment through the Betterment For Advisors platform. Advisers including 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, Roberge said.[10][11] Other advisers expressed concerns about Betterment's decision regarding communication and questioned why the decision was not communicated to the customers and financial advisors, causing lingering questions around Betterment's policies.[13]

Pricing changes[edit]

On January 31, 2017, Betterment updated their pricing for deposits, which effectively raised prices for customers with deposits of $100,000 or higher from 0.15% to 0.25%. The shift in pricing structure aggravated some existing users, causing additional media attention.[14]

Current operations[edit]

Betterment's current business model includes three areas of business: retail investment, a platform for advisors, and a 401(k) for mid-market business. In July 2017, Betterment announced its assets under management (AUM) had surpassed $10 billion.[15]

The company's personalized financial advice uses principles-based robo-advisor technologies such as computer algorithms. Licensed financial advisors provide over-the-phone consultations to customers who opt for additional support.[16] Betterment's primary retail platform offers individual retirement accounts, trusts, taxable investment accounts, and tax-coordinated asset location services.

In October 2014, Betterment launched a business-to-business offering called Betterment Institutional, subsequently renamed Betterment for Advisors, a digital platform for managing client assets using Betterment's built-in financial advice. In January 2017, the Financial Planning Association (FPA) and Betterment for Advisors ran a program on digital investment advice for the association's members.[17]

Betterment for Business is a turnkey 401(k) platform aimed at mid-market employers. It uses the same underlying investment strategy and generally costs less than most traditional 401(k) plans.[18]

Research[edit]

In 2013, Betterment’s data analysis team released an open source software 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.[19] 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. Increasing the 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[edit]

  1. ^ a b "Form ADV Part 1". Betterment. 28 March 2018. Retrieved 26 April 2018.
  2. ^ "Investment Safety and Security at Betterment". Betterment. 2014-03-03. Retrieved 2017-06-01.
  3. ^ Rodriguez, Josh. "Betterment Review". Modest Money. How Does It All Work?
  4. ^ a b c d e "The History of Betterment: How We Started a Company That Changed an Industry - Betterment". Betterment. 2016-07-20. Retrieved 2017-06-01.
  5. ^ "Division of Corporations - Filing". icis.corp.delaware.gov. Retrieved 2017-06-01.
  6. ^ "Betterment Launches On Stage At TechCrunch Disrupt - Betterment". Betterment. 2010-05-25. Retrieved 2017-06-01.
  7. ^ Arrington, Michael. "The TechCrunch Disrupt Final Five: Betterment, MOVIECLIPS, Publish2, Soluto And UJAM | TechCrunch". Retrieved 2017-06-01.
  8. ^ a b "How We Got Funded: Betterment". Inc.com. March 6, 2013. Retrieved 2017-06-01.
  9. ^ a b "Betterment Raises $10 Million Series B Financing from Menlo Ventures, Bessemer Venture Partners, & Anthemis Group - Betterment". Betterment. Retrieved 2017-06-01.
  10. ^ a b Tergesen, Anne; Wursthorn, Michael (2016-07-02). "Robo Adviser Betterment Stokes Concern Over Brexit Trading Halt". Wall Street Journal. ISSN 0099-9660. Retrieved 2016-09-30.(subscription required)
  11. ^ a b "Robo Halt Stirs Concerns — WSJ - iPR Newswire business". commodity-market-news.com. 5 July 2016. Retrieved 1 June 2017.
  12. ^ "The pros and cons of using a robot as an investment adviser". Boston Globe. 29 April 2016. Retrieved 1 June 2017.
  13. ^ "After trading halt, Betterment suffers its own Brexit shock". Retrieved 2016-09-30.
  14. ^ Ludwig, Larry (2017-02-19). "Betterment Review – Making Investing Simple". Investor Junkie. Retrieved 2017-02-19.
  15. ^ Cohan, Peter (31 July 2017). "Robo-Advisor Betterment Is On A Personalization Push As It Surpasses $10 Billion In AUM". Forbes. Retrieved 31 May 2017.
  16. ^ "Robo-Advisor 'Betterment' Adds Human Advice". CNBC. 31 January 2017. Retrieved 19 May 2017.
  17. ^ Powell, Robert. "The robots are coming for your investments — why that might not be a bad thing". MarketWatch. Retrieved 2017-06-01.
  18. ^ "Robo-Advisor Betterment Launches 401(k) Plan for Employers". NerdWallet. 2015-09-11. Retrieved 2017-06-01.
  19. ^ Betterment/crsp-whitepaper. June 2013.

External links[edit]