Custom Portfolios Disclosure

You should carefully read this disclosure and consider your personal circumstances before deciding whether to elect Betterment’s Custom Portfolio Strategy (“Custom Portfolio”).

1. Overview and Custom Portfolio Construction

Betterment’s Custom Portfolio provides clients with a menu of investment products in Betterment’s interface from which to construct a custom portfolio. Investment products may, but will not necessarily, include exchange-traded funds (“ETFs”), mutual funds, other similar equity-related index funds, stocks, bonds, money market funds, U.S. treasury funds, and liquid cash-like vehicles. Unlike Betterment-constructed portfolio strategies (e.g., the Core Portfolio), where Betterment is responsible for selecting the investment products that comprise each asset class based on your selected allocation, a Custom Portfolio allows you to choose a target allocation mix of individual securities. You are responsible for choosing the securities in and target allocation of your Custom Portfolio. Before investing in a Custom Portfolio, please consider your investment objectives, risk tolerance, and individual circumstances.

Betterment will provide feedback on the overall risk and diversification of your allocation weights; such feedback is for informational purposes and not a recommendation to invest in a particular allocation. Selecting individual securities and target allocation weights results in tradeoffs along several dimensions, including expected return, risk, diversification, and tax efficiency, which impacts the potential performance of your Custom Portfolio.

Security groups are groupings of securities that include a primary ticker, and can include secondary and/or secondary IRA tickers designed to help avoid wash sales and allow for tax-loss harvesting opportunities. When designing your Custom Portfolio, you can elect to import a template from an existing Betterment-constructed portfolio or build your portfolio from scratch. You adopt and are responsible for the security selections and allocations upon accepting your Custom Portfolio, including if you elect to start your Custom Portfolio from a template of an existing Betterment-constructed portfolio strategy. Depending on your particular selections of primary securities in your Custom Portfolio, Betterment provides one-time pairings of secondary and secondary IRA tickers for use in Tax-Loss Harvesting (“TLH”), if this optional feature is enabled in your account (information about how TLH operates in Custom Portfolios is discussed below). Secondary pairings generally seek to track a similar investment category and strategy, with similar risk/factor exposure, without meaningfully higher fees, and from a different issuer than your selected primary security. Betterment only makes secondary or secondary IRA pairings for a subset of securities where a similar alternative is available; not all securities are guaranteed to have pairings. Betterment does not guarantee that any secondary security will achieve the same or similar returns, risks, or fees compared to the primary security. To the extent Betterment subsequently updates securities in its constructed portfolios (including primary, secondary, or secondary IRA tickers), those updates will not be reflected in your Custom Portfolio. To learn more about how Betterment’s constructed portfolios are built, please review the portfolio strategy disclosures available on Betterment’s website.

Depending on the assets and weights you select, you may incur aggregate fund costs that are greater or less than those in a Betterment-constructed portfolio for a comparable level of risk and expected return. Some securities available in Custom Portfolios are complex financial products – that is, investments with features, strategies, or payout structures that are more difficult to understand than traditional stocks, bonds, or broadly diversified funds, and carry additional risks. You should understand the risks of complex products before you invest in them. Before selecting a complex product for inclusion in your Custom Portfolio, please carefully review the product’s prospectus, offering documents, and Betterment’s complex product disclosure.

If a security in your Custom Portfolio undergoes a corporate action or otherwise becomes unsupported, Betterment will use reasonable efforts to adjust your portfolio to reflect such changes. Betterment reserves the right to remove or substitute a security, or make other changes necessary to your portfolio to address any corporate action or unsupported security. Please refer to the Client Agreements for more information.

Custom Portfolios contain a small operational allocation to cash, which does not earn interest. If you are looking for an account in which to hold a significant cash position for an extended period of time, you should consider an interest-earning option like Cash Reserve. See Betterment’s Cash Sweep Program Disclosure for more information.

2. Betterment’s Portfolio Management Tools

Clients should be aware how Custom Portfolios interact with other Betterment portfolio management features, including rebalancing, tax loss harvesting, and tax coordination. Betterment’s auto-adjust feature is generally not compatible with Custom Portfolios. To the extent that you would like for a goal with a Custom Portfolio to become more conservative as you approach the end of its term, you will need to adjust the allocation yourself. Adjusting the allocation over time yourself may be less tax efficient than allowing Betterment to automatically adjust your allocation in a Betterment-constructed portfolio.

i. Rebalancing

Custom Portfolios are compatible with Betterment’s rebalancing features, as described in Betterment’s rebalancing disclosure, but function differently for a Custom Portfolio as compared to a Betterment-constructed portfolio. Unless you have disabled rebalancing, Custom Portfolios with balances above the minimum required threshold will automatically be eligible for rebalancing when their allocations exceed Betterment’s drift thresholds. For Custom Portfolios, Betterment evaluates drift at the security group level and utilizes a 7% drift threshold, but Betterment may change the default drift threshold at its discretion.

ii. Tax Loss Harvesting

Investors considering a Custom Portfolio should consider how it impacts the operation of Betterment’s Tax Loss Harvesting (“TLH”) and Tax Coordination features. Depending on the individual assets and corresponding weights you select, there may be more or fewer opportunities for tax loss harvesting in your Custom Portfolio relative to tax loss harvesting opportunities in a Betterment-constructed portfolio with a comparable level of risk or expected return. Single stocks and mutual funds are not eligible for TLH. In particular, if a Custom Portfolio security group contains a single stock or a mutual fund as its primary ticker, the security group containing the single stock or mutual fund cannot have secondary or tertiary tickers of any type defined, and therefore will not be eligible for TLH. Eliminating exposure entirely to individual asset classes in a Custom Portfolio will generally also reduce opportunities for tax loss harvesting relative to a Betterment-constructed portfolio.

Electing different portfolio strategies for multiple Betterment goals (including electing multiple Custom Portfolio strategies or a Custom Portfolio strategy and a Betterment-constructed or third-party model portfolio strategy) may cause TLH to identify fewer opportunities to harvest losses than it might if you elect the same portfolio strategy for all of your Betterment goals. This is because there could be overlapping tickers in certain asset classes of the portfolio strategies you elected. TLH does not harvest losses in any asset classes with overlap to minimize the risk of wash sales and/or permanently disallowed losses. Betterment does not alter its TLH methodology to optimize the effectiveness of TLH for any particular Custom Portfolio. See Betterment’s Tax Loss Harvesting disclosures for further detail about TLH.

iii. Tax Coordination

You can use Tax Coordination with a Custom Portfolio, though clients should be aware that Custom Portfolios that incorporate “target date” mutual funds are not eligible for Tax Coordination if the client’s goal includes a taxable account.

If you elect a Custom Portfolio for your tax-coordinated Retirement Goal, all Betterment investment accounts within your Retirement Goal will share the same Custom Portfolio, with individual asset classes distributed using our asset location strategies. However, altering or removing asset classes relative to a Betterment-constructed portfolio may reduce the benefits of Tax Coordination. For more information, review Tax-Coordinated Portfolio Disclosure.

iv. AI Insights

The Custom Portfolios product also includes an “AI Insights” tool that provides educational insights by reviewing your Custom Portfolio selections and utilizing generative artificial intelligence (“AI”) to analyze and describe, in plain language, your selected mix of securities and their allocations. When your Custom Portfolio reflects a meaningful concentration with respect to a particular security holding, sector, geographic region, or asset class, the AI Insights tool will identify and explain the significance of that concentration. AI Insights has limitations. It does not provide recommendations to buy, sell, or hold any security or other asset, or endorsements of any product, service or investment strategy. AI Insights is educational, informational, and for illustrative purposes only. The AI Insight tool analyzes the Custom Portfolio securities and allocation selections you are making at the time the analysis is conducted, and does not consider your Betterment financial profile information, any Betterment account balance you may have, any external accounts or assets you hold outside of Betterment, or your total net worth. You remain solely responsible for reviewing and determining the target allocations of your Custom Portfolio, and determining whether to include any particular primary security.

AI Insights bases its observations on a defined set of information about your Custom Portfolio: your selected holdings and allocations, and how those holdings are categorized by asset class, sector, and geography. AI Insights uses content, market data (including pricing information), news, research, and other information (collectively, “Third-Party Data”) obtained from third-party data providers that are not affiliated with Betterment to inform the AI Insights categorization of holdings, asset class, sector, and geography.

Using your selected holdings, allocations, and Third-Party Data, AI Insights analyzes concentration within four areas: individual stock holdings, industry sector, geographic region, and your exposure to cash, cryptocurrency, and alternative investments. AI Insights will describe a concentration occurring based on certain thresholds.

If your Custom Portfolio meets more than one of these thresholds at the same time, AI Insights will describe up to three concentrations, focusing on those that are most relevant to understanding your portfolio. If your selected portfolio mix does not hit any concentration threshold, the AI Insight tool will describe your portfolio’s overall mix of stocks, bonds, and other holdings generally. None of the information presented by the AI Insights tool is a recommendation to buy, sell, or hold any security, or to otherwise change your investment portfolio(s).

The output of the tool is created using generative AI, which can contain material inaccuracies and not reflect correct, true, current, or complete information; please independently verify the accurateness and appropriateness of any information provided. The appropriateness of a particular investment will ultimately depend on your individual circumstances and objectives. Further, AI Insights is an interactive analysis tool, and any insights or analysis provided about the composition of your Custom Portfolio based on historical metrics or the underlying securities represent hypothetical outcomes and do not represent actual, individual outcomes or performance. Past performance is not indicative of future results, and individual results may vary.