TABLE OF CONTENTS
- Goal-Based Investing
- Goal Forecaster Projections and Related Advice
- Recommended Allocation and Risk Analysis
1. Goal-Based Investing
Betterment’s investment advisory services are designed to help clients achieve particular financial goals that clients can indicate in their account. When we refer to a “goal,” we mean a future spending need. During the signup process, Betterment asks clients to identify one or more savings goals; clients can add other goals at any time after signup.
Goals fall into three groups, (1) investing goals composed of exchange-traded fund (“ETFs”) or in certain cases, mutual funds, stocks, and bonds (collectively, “traditional securities”), (2) cash goals through its Cash Reserve offering, and (3) crypto goals through its crypto offering.
This disclosure focuses on Betterment’s advice relating to investing goals and cash goals. To learn more about crypto goals, please review the Crypto Disclosures.
Additionally, Betterment permits clients to provide additional information relating to their retirement investing goals in order to set up a personalized retirement plan (“PRP” or “retirement plan goal”). Betterment applies different assumptions in connection with advice and projections for PRP goals. For more information on PRP goals, please review our Retirement Planning Advice Disclosure. This disclosure does not apply to investing PRP goals and only describes assumptions related to investing non-PRP goals.
Investing goals fall into one of five categories, each of which has different attributes and, correspondingly, different advice. These categories of investing goals are:
- Safety Net
- Major Purchase
- General Investing
After selecting an investing goal category, clients will be prompted to provide details about their goal, such as goal amount and goal time horizon (or to accept Betterment’s default assumptions for these inputs, as applicable), and to select a portfolio strategy composed of traditional securities. Betterment provides information about each available portfolio strategy to inform clients’ decision-making, but does not recommend clients select any particular strategy. Based on the type of investing goal and associated time horizon, Betterment recommends a portfolio allocation and a specific mix of stock-to-bonds that corresponds to risk level, and provides advice on how to save (or withdraw, if in retirement) to help achieve the goal. The projections and advice described below then allow clients to see how a one-time deposit, recurring deposits, or change to the time horizon can help them achieve their goal.
2. Goal Forecaster Projections and Related Advice
Betterment provides allocation, savings, and withdrawal advice alongside a “goal forecaster” projection graph. The graph is intended to show possible future investment values in order to illustrate the impact of different contribution and withdrawal choices, investment time horizons, and portfolio allocations. Actual individual investor performance will vary depending on market performance, the time of the initial investment, amount and frequency of contributions or withdrawals, intra-period allocation changes, and taxes.
A. Methodology and Assumptions
- For investing goals, the expected investment portfolio returns used in the goal forecaster graph are based on the expected returns for a client’s selected portfolio strategy and their target portfolio allocation at Betterment. (See more about how the expected returns are derived.) The allocation choice corresponds to weights of the underlying funds in the applicable portfolio strategy. For cash goals, the expected return is based on the current APY on Cash Reserve, Betterment’s interest earning cash account. For crypto goals, Betterment does not project future returns because of the inherent volatility in crypto assets.
- For purposes of the goal forecaster graph for investing goals, Betterment estimates the uncertainty in returns for a client’s investment portfolio at Betterment and the underlying risk-free rate. The “risk free rate” (which is the return a risk-free asset such as a U.S. Treasury bill will return), and an equity (or bond) “risk premium” or excess return, reflects how much Betterment expects risky assets like stocks and bonds to return in addition to this risk-free rate. For cash goals, Betterment assumes in its projections that the interest rate for Cash Reserve will vary over time commensurate with any changes to the underlying risk-free rate.
- For investing goals, the goal forecaster graph displayed is net of a client’s current annual Betterment management fee (which is based on a client’s deposit schedule and/or account balance) as well as any management fee charged by the third-party Advisor to a client on Betterment for Advisors, and Betterment assumes that fee holds throughout the term of the investment. Investing goal projections are also net of fund fees. If you are a participant in a Betterment 401(k) and your employer has elected to pass along the investment management fees associated with your 401(k), your investing goal projection is net of such fees. Betterment assumes that this fee also applies to any external connected accounts that you have linked to a particular goal.
- Cash goals projections assume the current annual percentage yield (“APY”) when forecasting a client’s cash goal account balance. Cash goal projections also assume no fees on your account balance. Betterment does not charge fees on Cash Reserve. (For Cash Reserve, Betterment receives compensation from our program banks; Betterment does not charge you fees on your Cash Reserve balance.) The assumed time horizon for a cash goal is 1 year.
- Monthly contributions or withdrawals, if specified, are assumed to be made at the end of the month.
- Betterment offers an automatic adjusted allocation feature (“auto-adjust”) for clients that automatically modifies clients’ portfolio allocations to become more conservative as the goal time horizon approaches for applicable goal types and portfolio strategies. If Betterment’s auto-adjust feature is enabled for a goal, Betterment will incorporate the corresponding expected allocation adjustments into its goal forecaster projections. If auto-adjust is not enabled for a goal, Betterment assumes that a client maintains the current allocation until the end of the investment term.
- Betterment’s goal forecaster graph assumes that clients maintain the same portfolio strategy over time. If a client’s portfolio strategy changes over time, the client’s actual performance will be different. Betterment’s goal forecaster graph will be updated based on whatever a client has currently elected as a portfolio strategy.
- Betterment projects client balances in monthly increments. Betterment projects allocation changes on a monthly basis.
- The recommended monthly contributions estimate is based on a 50% likelihood of the portfolio value reaching the goal target at the end of the investment term for all investing goals, other than PRP goals. This also applies to non-PRP retirement investing goals. Investing goal projections are displayed in nominal terms.
- Betterment’s goal forecaster assumes that all dividends are reinvested immediately. Actual time of reinvestment may vary and is dependent on timing of trades. Goal forecaster also does not account for downward rounding of actual dividends below one cent.
B. Linked External Accounts
- Betterment allows clients to connect external accounts to their Betterment profile. When clients do so, such “connected accounts” will be displayed on their Betterment dashboard and factored into their total net worth.
- In addition, clients may link certain “connected accounts” – including investing accounts, cryptocurrency, checking accounts, savings accounts, HSAs, and real estate – to a particular goal. When clients do so, the assets in these “linked accounts” are considered as part of Betterment’s goal projections, and Betterment makes certain assumptions based on the applicable Betterment goal about how the linked accounts will perform.
- The starting balance for Betterment’s goal forecaster graph incorporates account balance information (or current value, in the case of a real estate investment) for any linked accounts. If provided by the client, Betterment also takes into account any recurring deposits, annual contributions, and/or 401(k) employer match (if applicable). In the case of annual contributions, Betterment divides the total amount by 12 and assumes monthly deposits of that amount. Betterment assumes that any recurring deposits into a linked account are invested and subject to all of the same assumptions described in this disclosure.
- As described above, the goal forecaster graph projects performance net of fees. However, Betterment does not take into account the specific fees that are currently or will be assessed by other provider(s) in connection with any linked accounts. Instead, Betterment assumes that its management fee (which is based on your deposit schedule and/or account balance) – plus any third-party Advisor fees if applicable – applies to any linked accounts.
- Note that Betterment applies these fee-related assumptions even if a client has provided information regarding the fees associated with their external accounts. That information, if any, is not incorporated into Betterment’s projections.
- If clients link an external account with fees that materially differ from Betterment’s assumptions, that will cause the projections and related advice in the projections to be inaccurate.
- Betterment’s goal projections assume that the allocation of any linked accounts aligns with the portfolio allocation a client has selected for the relevant goal. For example, if a client has a General Investing goal with a 90-10 stock-to-bond allocation, Betterment assumes that any linked accounts also have that allocation, regardless of what kind of accounts they are and what their actual allocations are.
- If clients link other types of external accounts that have materially different allocations or investment styles as compared to a particular goal, the corresponding goal projections and related advice in the projections will be inaccurate.
- If Betterment’s auto-adjust feature is enabled for a goal, Betterment assumes that the expected allocation adjustments apply not only to your Betterment portfolio but also to any linked accounts.
- Betterment assumes that any linked accounts have the same portfolio strategy and are invested in the same funds as the Betterment portfolio that is linked to the same goal. For example, if clients link an external account to a retirement goal with a Betterment Core Portfolio strategy, Betterment assumes that such linked account contains the same funds as the Betterment Core Portfolio.
C. Betterment For Advisors Fee Assumptions
- For Betterment for Advisors clients, goal forecaster projections include both the Betterment platform fee and the Advisor’s fee. Betterment assumes that both fees applicable on the date the projection is displayed will remain the same through the entire projection term.
- For projection purposes, Betterment calculates an effective fee that is a sum of the Betterment fee and the Advisor’s fee. Betterment converts each Advisor’s fee into an effective fee rate expressed as a percentage of client assets. This Advisor’s effective fee rate is calculated using one of the following methods, depending on how the Advisor’s fees are structured:
- If the Advisor uses a constant asset based rate as their fee (e.g., 0.25% / year), Betterment uses that rate as the effective fee rate in its projections.
- If the Advisor uses a flat fee, Betterment calculates the effective fee rate as the flat fee divided by the balance of the household assets held with the Advisor at Betterment.
- For example, if a client has $50,000 of advised assets with an Advisor, and that Advisor charges a flat fee of $100 per year, Betterment calculates the effective fee as ($100 / year) / ($50,000) = 0.2% / year.
- If the Advisor uses a tiered fee system with a series of asset-brackets and marginal rates, Betterment calculates the effective fee rate by multiplying the amount of advised dollars in each bracket by the marginal rate, summing those values and dividing by the total advised dollars.
- For example, if an Advisor charges a tiered rate of 0.25% / year for the first $100,000 of advised dollars and 0.15% / year thereafter, and an advised client holds $150,000 with that Advisor at Betterment, Betterment calculates the effective fee as ((0.25% / year * $100,000) + (0.15% / year * $50,000)) / $150,000 = 0.217% / year.
D. Goal Forecaster Graph Explanation
Betterment considers volatility in its returns estimates and displays a client’s likelihood of success in reaching their investing goals depending on market performance. The goal forecaster graph exhibits the possible range of projected portfolio values using color and shading.
- For all non-retirement goals, one line (as indicated in the goal forecaster graph) shows the projected portfolio value under average market conditions. This means that there is a 50% likelihood of portfolio values greater than this, and a 50% likelihood of portfolio values less than this.
- The lighter, shaded region indicates the range within which there is 80% likelihood of obtaining the projected portfolio value. This means that there is a 10% likelihood that your portfolio will achieve values greater than the top of this region, and a 90% likelihood of portfolio values at least as high as the bottom of this region. The darker, shaded region indicates the range within which there is 50% likelihood of obtaining the projected portfolio value. This means there is a 25% likelihood of portfolio values greater than the top of this region, and a 75% likelihood of portfolio values at least as high as the bottom of this region.
E. Savings Goal Status: On Track Or Off Track
Betterment constantly tracks the performance of goals. For savings goals (as distinct from retirement income goals), Betterment indicates the ability of the portfolio to reach the goal target, assuming average market performance, and categorizes the goal as “On Track” or “Off Track.” If the goal is off track, Betterment makes recommendations to increase the likelihood of reaching the goal target. Betterment categorizes goals as either “On Track” or “Off Track” differently depending on the goal type:
- For all savings goals (except PRP goals, as noted), the goal is “On Track” when the total projected portfolio value exceeds the goal target assuming average market performance. This is equivalent to a likelihood of 50% and above of reaching the goal target. The goal is “Off Track” when the future projected portfolio value (i.e. current balance plus future contributions, plus investment growth) is not sufficient to reach the goal target assuming average market performance. This is equivalent to having less than 50% likelihood of reaching the goal target.
- If a goal is “Off Track,” Betterment provides advice on three ways to bring the goal back on track: (1) increasing the amount of future monthly contributions, (2) increasing the time horizon of the investment, or (3) increasing the current balance in the account by making a one-time deposit.
- An indication of “On Track” is not a guarantee of achieving a goal in the future. Further, acting on savings and withdrawal advice is not a guarantee that goals will be met or that the investment will meet cost- of-living needs throughout one’s life.
- The goal target is a user input and may not be sufficient to provide income for actual spending or retirement income needs.
- Information concerning linked accounts is provided by the user or by Plaid. Betterment cannot guarantee the accuracy of that information, and inaccurate information regarding linked accounts will affect the quality of Betterment’s projections.
- Betterment’s assumptions about linked accounts may not align with the actual characteristics of those accounts. Any such misalignment will affect the quality of Betterment’s projections.
- The goal forecaster graph does not account for any taxes. All investing goal values are assumed to be pre-tax (except PRP goals).
- The goal forecaster graph does not account for forced withdrawals such as Required Minimum Distributions that must be taken from qualified retirement accounts after a certain age.
- The goal forecaster graph does not account for auto-deposits that are skipped.
- The savings model for non-PRP goals is in nominal terms and therefore does not have a direct inflation assumption.
- Betterment’s advice model for goals outside of the PRP context does not take into account other sources of income outside the Betterment account. A comprehensive financial plan should include all sources of income and a spending needs analysis.
- Past performance is not indicative of future results. These projections do not guarantee investment performance.
- Extreme market conditions, sustained high inflation, or other unforeseen events may reduce portfolio value and withdrawals. Portfolio returns, and resulting income, are not guaranteed.
3. Recommended Allocation and Risk Analysis
In addition to projecting the expected performance of clients’ investing goals through the goal forecaster tool, Betterment provides advice on recommended allocation and overall risk for a goal during account setup and on an ongoing basis in the “Portfolio Analysis” page.
During account setup, Betterment organizes its advice into an advice type framework by investing goal type (Education, Retirement, Safety Net, Major Purchase, and General Investing), each with different attributes and a discrete advice model. Betterment solicits input on a client’s anticipated time horizon in order to recommend a portfolio allocation, which is a specific set of asset classes (i.e. stocks, bonds, and if applicable, other asset classes) and the relative distribution among those asset classes in which a client’s account will be invested. Clients can either accept the recommended allocation or adjust the allocation according to their own risk preferences, and Betterment provides information about the risk level associated with that allocation setting.
Betterment’s allocation recommendation differs depending on whether a client’s goal is taxable or tax-advantaged and when the client expects to draw on their goal. In general, Betterment will recommend to clients who indicate a more conservative advice type (such as a Safety Net) or shorter time horizon a more conservative allocation, and will recommend to clients who indicate a more aggressive investment advice type or longer time horizon a more aggressive allocation. If the client does not have a time horizon input associated with the goal type (e.g. General Investing), clients can select an allocation according to their own risk preferences, and Betterment provides information about the risk level associated with that allocation setting.
On an ongoing basis in the “Portfolio Analysis” section of clients’ accounts, clients can view Betterment’s recommended allocation for their goal as a whole (including any linked account). This recommendation is based on the information provided during goal setup, as well as any subsequent updates that clients may make in their account.
- This page shows the overall risk level for the investments associated with that goal, and for your external linked accounts specifically. Betterment’s risk analysis is based on the recommended stock allocation that corresponds with the glidepath associated with a selected goal advice type (even if this differs from the actual allocation of the corresponding portfolio) and factoring in the allocation of any linked accounts. Betterment displays whether a client’s risk level for the goal and for any linked accounts is very conservative, conservative, moderate, aggressive or very aggressive. Learn more about Betterment’s glidepath allocation recommendations.
- For external linked account investments with available data, we map holdings to our asset classes for risk analysis. In some cases, we do not have data for a specific investment, usually because the holding is a non-publicly-listed vehicle, such as a private 401(k) plan. In those cases, we use proxy tickers to determine the appropriate asset class exposures.
- Proxy tickers are provided by Plaid, our third-party data provider for connected accounts. Plaid uses a proprietary process to identify similar public securities to the unknown ticker using structural information (including security type and fund name) and to qualify the confidence level of the similarity. Betterment uses Plaid’s proxy tickers only for securities that pass a threshold confidence level of similarity. Plaid’s methodology may change over time. Betterment will continuously evaluate any such changes, but cannot guarantee the accuracy of the information it receives from Plaid.
- If Betterment lacks sufficient information about the assets held in a client’s linked accounts, Betterment will be unable to provide advice about the risk associated with the goal, and the overall risk will be displayed as “unknown.” Additionally, if the information regarding a client’s linked account allocations is inaccurate, this will impact the quality of Betterment’s risk analysis and corresponding recommendations.
- If Betterment determines that the investment account holdings in a client’s linked account are very risky relative to the client’s goal considering their stock-to-bond ratio, Betterment will recommend that the client transfer those external assets to Betterment.
- Betterment’s advice concerning linked accounts is dependent on the details we receive regarding a client’s linked accounts via Plaid or from the client directly, and Betterment cannot guarantee the accuracy of that information.