That’s why we designed our company—from the way we operate, to our people and our products—to improve upon traditional security, striving to provide as safe an investment environment as possible to consumers. We developed a vertically integrated structure as a way to deliver a premium customer experience through every step of the process.
We are a custodial firm like Fidelity or Charles Schwab, which means we are responsible for handling your funds and keeping all the records of your assets. We handle your funds with maximum oversight from a number of overlapping regulators, and we also execute on a number of internal controls on a daily basis.
We have two separate arms: the first, Betterment LLC, is an SEC-registered investment advisor, which operates the advice and investment platform you experience when you access your Betterment account. The second arm, Betterment Securities, is a FINRA member broker-dealer, which executes trades on your behalf, and is the custodian of your assets.
There are few institutions that are granted this privilege and with it comes duty. Betterment, Fidelity, Charles Schwab, and the few other qualified custodians are subject to the same set of strict capital requirements and regulatory oversight. These stringent requirements ensure your safety and help make us unique among other online investment managers, many of whom are introducing firms. Introducing firms have minimal capital requirements and in practice pass your funds through to another firm which custodies them. With Betterment, the only company you ever deal with is Betterment.
Then, we go a step further with safety—employing principles of transparency, simplicity, and verification from the ground up to provide state-of-the-art security for every customer.
You are protected in a crisis
First, it’s essential to know you are protected in the event of a worst-case scenario such as company insolvency. If our firm were to become insolvent in the future and funds were to go missing, your funds at Betterment Securities are protected by the Securities Investors Protection Corporation, or SIPC, up to $500,000 per account against those missing assets.
To be sure, it’s extremely rare that a firm cannot return customer assets in a crisis, or that customers must rely on SIPC. To put things in perspective, over SIPC’s 42-year history, less than 1% of broker-dealers have been subject to SIPC proceedings. During those proceedings, 99% of assets distributed came from the insolvent broker-dealer’s estate (not from SIPC) and 99.94% of all claims were fully satisfied.
Here is how the coverage works: if your account contained $1,500,000 and $1,000,000 was recovered, you would be made whole by SIPC. Each account at Betterment Securities that is a separate legal entity gets the full benefit of the $500,000 limit; if a Betterment customer has a taxable account under his own name, a trust account, and an IRA account, each is eligible for up to $500,000 of SIPC protection.
You can always verify your holdings
A key difference between Betterment and many other portfolio managers is the level of transparency we provide our customers. This is a function we created when we built the software behind Betterment—we wanted to make sure that our customers would be able to check their investments from any device and easily view what they were holding at all times.
At Betterment you not only own independently verifiable securities from companies like Vanguard and iShares—your performance and precise positions are fully transparent at all times. You can follow your performance over any period of time, directly from your account.
On any day, after any trade, we disclose the precise number of shares of every ETF in which you’re invested—that differentiates us from many portfolio and fund managers who do not openly share this information with clients. You can reproduce what we show on your own by plugging the results into any tracker.
This also extends to the way we prepare our dividends reports and tax statements, where we don’t just show the transactions we have made on your behalf, but we list each fractional share sold and the respective gross proceeds and cost basis for each.
We check and double-check
Another way we improve security is embedded in the way we have built our systems to verify investments and transactions. Our investment platform has verification built in at every step—customers’ transaction amounts are reconciled with cash transfers and ACH transaction amounts, which are then reconciled with trade amounts, which are then reconciled with positions, and then with fills.
Key to achieving this efficiency and precision is more than a dozen daily reports which cross-check and reconcile every imaginable permutation of activity in our system to ensure that our records are always precise.
For example, one report runs every night and adds up every single trade we’ve executed from the very inception of Betterment four years ago (over 13 million and counting), and makes sure the results add up the customer positions we have at the end of the day. These reports are designed to bring even the tiniest irregularity to our attention. Our operations team reviews every report daily.
When you deal with an introducing firm you are relying on the third party your funds have been passed on to — an organization you don’t really know — to perform these checks and have the precision you expect of Betterment.
We undergo regular independent reviews
We maintain our own books and records for all our customers’ assets—records that are routinely requested and reviewed by regulatory agencies. Our partner clearing firm also keeps its own records of all of the assets we manage for our clients, and we reconcile our records to our clearing firm’s reports on a daily basis, providing an additional independent source of verification.
We also undergo regular, rigorous examination independently both by the SEC and by FINRA to ensure that we properly maintain our customer records and satisfy our capital requirements. Our regulators scrutinize our revenues, expenses and available capital on a monthly basis. Three separate annual audits by our independent public accountants verify the adequacy of our financial condition, the safety of our operational controls, and the safekeeping of customer assets we custody. Each examination ensures that our records match up with the independently available records from our clearing firm.
This is yet another way we are more secure—the extent of our independent reviews is far beyond that of an introducing firm.
We have expert management
Another piece of security is understanding who is accountable. Our management team includes financial and investment experts—with more than a century of combined investing experience. The investment advisor board includes esteemed professors and practitioners of finance at some of the most respected institutions in the world.
That expertise and reputation extends to our funders, Bessemer Venture Partners and Menlo Ventures, two of the world’s premier venture capital funds with over $8 billion under management, and nearly 150 combined years of experience. Bessemer and Menlo share our vision that Betterment is the future of investing, and are closely involved in Betterment’s growth and operations. Our investors have deep expertise in the intersection between security, technology and financial services, which our management regularly benefits from.
We never commingle funds
Lastly, the way we handle our operations capital is yet another way we ensure the safety of your investments—and is a core part of our integrity as a company. Our operational funds are always 100% segregated from any kind of customer investment activity, always in different accounts. All of our trading and money movement is fully automated, and our software is built from the ground up to make any sort of commingling impossible.
We do only one thing—manage your money—and we aim to do it perfectly. That means we don’t engage in any other financial operations that many other retail brokers do, such as proprietary trading with operating capital, or lending out customer assets.
As Betterment Securities is the custodian of your assets, we also maintain substantially higher levels of net capital than an introducing firm—another way we have a higher level of security than many other online investment managers.
We respect your trust
In an era where there is no greater commodity than trust, Betterment is an investment manager that adheres to the highest fiduciary and ethical standards, in line with our overall mission of transparency. Our customers have the best of both worlds in that we operate as a major financial institution, required to keep a large capital cushion, maintain our own records, and undergo extensive examination by regulators and public accountants, but we never put our financial cushion at risk and we never let customer assets out of our hands.
Not only does our structure provide maximum safety and transparency—serving as custodian also allows us to fix many “business as usual” inefficiencies endemic to the financial industry. We built a myriad of automated cost-saving efficiencies and delightful features into our platform, which a firm forced to rely on low-tech third parties can never replicate. Ultimately, we deliver a safer and more efficient investment service for you.
You can read more about our security and privacy for accounts and transactions here.
All blog posts and investment advice are produced by Betterment LLC.