Account Protection

How Betterment Protects Your Investments Your investments with Betterment are protected by SIPC. History suggests that even if you had millions of dollars invested with a brokerage firm that became insolvent, it is extremely likely that you would be made whole. Insurance is meant to provide a safety net in the case of an emergency. Health insurance covers the cost of a broken limb; dental insurance covers a root canal; homeowners insurance covers leaky plumbing. The Securities Investor Protection Corporation (SIPC) provides insurance that protects your investments, including those held by our broker, Betterment Securities. It covers up to $500,000 of missing assets, including a maximum of $250,000 for cash claims.1 But the difference between SIPC and some other types of insurance is that there’s a very good chance you’ll never have to use it. Since the inception of SIPC in 1971, fewer than 1% of all SIPC member broker-dealers have been subject to a SIPC insolvency proceeding.2 During those proceedings, 99% of total assets distributed to investors came directly from the insolvent broker-dealer’s assets, and not from SIPC.3 Of all the claims ever filed (625,200), less than one-tenth of a percent (352) exceeded the limit of coverage.4 History suggests that even if you had millions of dollars invested with a brokerage firm that became insolvent, it is extremely likely that you would be made whole. How SIPC Insurance Works All brokers are required to be SIPC members. The $500,000 coverage limit applies to each legally distinct account. For example, if you have a taxable account, an IRA, and a trust, each is eligible for its own $500,000 of coverage. The limit applies only to the value of missing securities, not losses due to market volatility. If there are securities identified as belonging to the customer, these (or their equivalent value) will be returned regardless of account size, and the $500,000 limit will apply only to the difference. Some investors mistakenly think that they should never have more than $500,000 in a single brokerage account, but the coverage applies to what’s missing, not to the overall balance. Let’s walk through an example to see how it works. You have an account with three different brokers, and each account holds $2 million in assets. Each of those accounts is covered separately by SIPC, up to $500,000. If one of those brokerage firms were to go bankrupt, a judge would appoint a trustee to sort through the broker’s books and distribute assets back to you and other clients. Here are some possible outcomes, with specific numbers just to illustrate: The trustee recovers your original assets—that’s your $2 million—from the insolvent broker-dealer, and you are made whole. You would experience zero loss on your account. (Since the inception of SIPC in 1971, 99% of total assets distributed have come directly from the insolvent broker-dealer, not from SIPC.)5 If the trustee can only recover $1.5 million of your assets, the remaining $500,000 would be covered by SIPC insurance, and you’d be made whole. If the trustee can only recover $1 million, you would still be covered for $500,000 on the missing amount, but you would incur a partial loss for the remaining $500,000. Historical data shows how extremely rare this is: Over the 46 years that SIPC has existed, there have only been 352 people who have ever had a loss where SIPC wasn’t able to make them whole.6 Three Illustrative Outcomes for an Investor After Brokerage Failure While SIPC is sometimes compared to the Federal Deposit Insurance Corporation (FDIC), it is neither a government agency nor a regulatory body. It’s a private nonprofit group funded by the brokerage industry (every member pays semi-annual dues). It’s not completely on its own, however. SIPC is allowed to borrow from the U.S. Treasury if its own resources are strained—so there is very little chance that SIPC would not meet its coverage obligations. It’s also important to note that FDIC guarantees your principal up to its coverage limit, whereas SIPC does not cover market fluctuations, only missing assets. Insurance That Is Rarely Invoked Why is SIPC insurance so rarely called upon? Because an elaborate set of guardrails around a broker-dealer’s financial operations makes SIPC an absolute last resort. There is a vast framework of regulatory safety checks and audits that custodian broker-dealers undergo on a daily, weekly, monthly, and annual basis. For example, the requirement to segregate client assets from those of the broker greatly increases the likelihood that account holders can be made whole without having to use SIPC funds. If this segregation is properly maintained, account holders should be made whole in case of firm insolvency, no matter the account size. Close monitoring of a broker’s net capital cushion serves a similar purpose. Again, adherence to these safeguards is a foremost focus of a custodian broker-dealer—every single day a custodian broker-dealer is required to perform applicable safety-checks and immediately report problems to its regulators. Of course, there are outliers when an institution fails under more nefarious circumstances. In the most notorious example, the Bernard Madoff Ponzi scheme, some investors could not be compensated when it turned out they didn’t own the securities they thought they did. Madoff just lied and said that they owned them. (Additional rules were enacted post-Madoff, which are discussed in more detail below.) Betterment Securities holds only publicly traded ETFs in client portfolios, allowing for complete transparency. All of our clients can track their assets and returns on a daily basis. High-profile cases such as Madoff are exceptions, overshadowing the fact that SIPC proceedings are very rare. As shown in the chart below, there have been just 328 proceedings since the organization was set up in 1971, out of more than 39,600 brokers who have been SIPC members over that period. There were 109 proceedings initiated in the first four years, and since then, no year has had more than 13. In fact, in the 10 years through 2013, a tumultuous time for the financial markets and the financial-service industry, no year has seen more than five proceedings initiated. In 2014, there were none. Customer Protection Claims, 1971-2014 Be Proactive: How to Protect Your Investments SIPC is important when it comes to protecting your investments, but it’s also necessary for you to consider these key safety points when choosing a brokerage firm: Your assets are never commingled with the brokerage’s operational funds. Your holdings are completely transparent at all times. You should be able to review publicly available audits of your firm. If you are being promised something “too good to be true,” there is reason to be cautious. Never Allow Your Assets to Be Commingled With any brokerage you use, your money and the firm’s operational funds (e.g., what the firm uses to pay its bills) should never be mixed. With Betterment Securities, operational funds and customer funds live not only in different accounts, but in separate universes—separated by numerous digital (and human-supervised) firewalls. Regulators require us to file our detailed financials on a monthly basis; we must report both firm capital and any customer cash that we hold. As Betterment Securities is the custodian of our customers’ assets, we must also maintain substantially higher levels of net capital than an introducing firm, which is a broker that delegates custody to a third party. Another guideline is to avoid brokers that engage in proprietary trading for their own account, while also handling yours. On occasion, such a broker might “blow up” over some failed exotic trade made in the house account. As a result, the need to cover a shortfall can create the temptation to “temporarily” borrow funds that are off limits, such as those from customer accounts. Betterment Securities never does any proprietary trading for its own account. That is not our business, and never will be. Always Be Able to Verify Your Assets One of the great pitfalls for Madoff investors was that they could not verify their assets—in fact, Madoff lied about their existence. With Betterment, you have full visibility into your exact positions at any time. You can follow your performance over any time period, directly from your account (on mobile or on the Web). We believe in complete transparency—on any day, after every 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 their clients. Look at the Public Record You don’t need to take your broker’s word at face value—you can and should verify regulatory audits to ensure you’re in good hands. The U.S. Securities and Exchange Commission (SEC) issued an amendment in 2010 (post-Madoff) that applies to investment advisors who custody their clients' assets, or who use a related party to do so. We are the latter case. Betterment LLC, the investment advisor, is an affiliate of Betterment Securities, the custodian. Under rule 206(4)-2 of the Investment Advisers Act of 1940, the investment advisor must be subject to an annual surprise exam from an independent public accountant. We don't know when the surprise exam will happen. The accountants just show up in the office one day. The auditors verify the internal books and records of the affiliate custodian. They reconcile every share, and every dollar we say we have, against our actual holdings. They spot check several hundred random customer accounts. They contact customers directly, and verify that the account statements we issue to them match our internal records for these accounts. They ask questions if something doesn't add up by even a penny. Ernst & Young LP, one of the Big Four accounting firms, performs our annual surprise exam. The firm then issues a report to summarize its findings, and this report must be filed with the SEC. Learn more by reviewing our past reports. Trust Your Instincts: There Are No Shortcuts to Investing Not all brokers deserve your caution in equal measure. It is not a coincidence that Madoff’s fund handily beat the market year after year after year. If something seems “too good to be true,” it probably is. Similarly, be wary of overly complex, exotic strategies that you cannot understand. At best, such complexity creates circumstances for you to be overcharged, on account of perceived sophistication. At worst, it’s a red flag for smoke and mirrors. Betterment is designed for market returns over time, and we make no promises we cannot keep. We buy global index fund ETFs on your behalf, and charge you a small management fee. It’s that simple, and when it comes to assessing risk, simplicity is your friend. While SIPC insurance and regulatory oversight can help protect you from mismanagement by all but the most devious frauds, it can’t save you from yourself. President Richard Nixon, of all people, made that clear when he signed into law the Securities Investor Protection Act, the bill that created the SIPC. “Just as the FDIC protects the user of banking services from the danger of bank failure, so will the SIPC protect the user of investment services from the danger of brokerage firm failure, he said. “It does not cover the equity risk that is always present in stock market investment.” Of course, all investing comes with risk, but that risk is the price you pay for return. Fortunately, you can take only the risk necessary to achieve your goals, by staying properly diversified to smooth out volatility and cushion the impact of bear markets as you invest for the long haul. That is what Betterment is designed for. All blog posts and investment advice are produced by Betterment LLC. 1SIPC insurance does not cover commodity futures, fixed annuities, foreign currency—none of which are part of the Betterment portfolio. SIPC also does not cover losses associated with market fluctuations. You can learn more at www.sipc.org. 2SIPC Annual Report 2014, page 8  3 SIPC Annual Report 2014, page 30 4 SIPC Annual Report 2014, page 9  5SIPC Annual Report 2014, page 30 6SIPC Annual Report 2014, page 9

FDIC Insurance: What It Is And How It Works Deposit insurance was created in 1933 by Congress to restore faith in the U.S. banking system. Learn about how deposit insurance works and what it can mean for your cash. Money that’s been deposited into a bank is generally thought of as safe. This is partly because the FDIC insures bank deposits. But what exactly is FDIC insurance, and how does it work? First, we need to know how banks make money from deposits. Please note that Betterment is not a bank. When you put money in a deposit account at a bank—let’s say in a checking account or a CD—the money doesn’t just sit there. Instead, the bank turns around and lends it out to other parties who are in need of loans. The parties that borrow from the bank repay those loans over a longer period of time: think mortgages or lines of credit for businesses. The bank earns money by charging a higher rate of interest on the loans it offers than the interest it pays you on your deposited funds. The bank usually owes you the money that you’ve deposited sooner than the bank’s borrowers owe what they’ve borrowed back to the bank. This is because many deposit accounts that banks offer provide depositors with immediate access to their funds at any time. This process is called maturity transformation, and it’s at the heart of our modern economic system. It usually works out well for all of the parties involved. You get a place to stash money that you don’t need to spend immediately, other parties get loans to finance productive economic activities, and the bank earns a profit. Bank Runs and the Great Depression What happens when the arrangement doesn’t work out so well? Because the bank keeps only a fraction of customers deposits on hand at any given time, there isn’t enough money on hand to allow every single account holder to withdraw their money from the bank at the same time. If too many people want to access their cash at the same time—known as a “run” on the bank —the bank won’t be able to satisfy every withdrawal request. This can happen during times of economic stress. If there’s a recession or a downturn, and borrowers from the bank have trouble making their regular principal and interest payments to the bank, depositors at the bank may start to get concerned about being able to get their deposits back. The depositors might all try to withdraw their money at the same time. This is exactly what happened during the Great Depression. Borrowers had trouble making payments back to the bank, depositors became concerned that the bank wouldn’t have their money when they needed it, and the depositors all tried to withdraw their money at the same time. This created a vicious cycle, and many banks failed. What is deposit insurance? To restore confidence in the banking system, which had suffered from thousands of bank failures over the preceding few years, Congress created the Federal Deposit Insurance Corporation (“FDIC”) to insure bank deposits. When Congress created the FDIC in 1933, the insurance limit was only $2,500. It has been raised steadily since then, and was last raised during the financial crisis of 2008 to the current limit of $250,000. The concept of deposit insurance is relatively simple: if a bank fails, the government will step in and pay back up to a certain amount of deposits that otherwise would be lost. This helps to ensure confidence in the banking system and helps to prevent bank runs. If we can all rest assured knowing that the government will step in to insure our deposits if our banks fail, it’s less likely that we’ll all panic and try to withdraw our money from the bank at the same time. In turn, banks are more likely to survive economic downturns without failing. Deposit insurance prevents the vicious cycle from occurring in the first place. How Deposit Insurance Works Deposit insurance isn’t free, but the good news is that there is no direct cost to you as a consumer. Banks themselves pay the premiums to the FDIC in order to receive the insurance coverage. See if your bank participates in the FDIC program by searching your bank’s name on the FDIC website. FDIC member banks also typically display their membership information prominently on their own websites. The table below lists the most common types of banking products and indicates whether or not they are typically covered by deposit insurance through the FDIC—as long as the institution is a member firm. Source: FDIC and SIPC Note that investment products generally aren’t covered by FDIC insurance. Instead, they are protected by SIPC up to a certain limit, which covers losses due to failures of member broker-dealers in certain circumstances. What are the limits? There are limits to the FDIC insurance coverage. The FDIC insures only up to $250,000 of deposits for:         a) a single depositor,         b) at a single banking institution,         c) in each account ownership category. Examples of a single depositor include an individual, a business held as a sole proprietorship, or an estate. Examples of ownership categories include individual accounts, joint accounts, retirement accounts, and trusts. You could receive more than $250,000 of FDIC insurance at a single bank, depending on how your deposits are spread among multiple ownership categories. In the example below, a depositor has an individual checking account holding $100,000, and a joint checking account at the same bank holding $200,000. Even though the total between the two accounts is $300,000, which is over the standard limit of $250,000, the full balance would be covered because it’s split across two types of account ownership categories.   You could also receive more than $250,000 of FDIC insurance if your deposits are spread across multiple banks, as long as the banks are truly separate and not just continued branches of one single bank. In the example below, Bank A holds $250,000, Bank B holds $250,000, and Bank C holds $50,000—all in individual accounts. Although the total across all three banks is $550,000—well beyond the standard limit of $250,000 for the individual account ownership category at a single bank—each separate balance is still fully covered due to the fact that the funds are held at three separate banks. What if my bank fails? The FDIC and state banking regulators monitor banks on an ongoing basis to ensure that they are financially able to meet their obligations. If an FDIC member bank is determined to be unable to meet its obligations because it is insolvent, the FDIC will close the bank and put it into a status known as receivership. In receivership, the FDIC will settle the bank’s debts and sell the bank’s assets—typically to another bank. In addition to overseeing the receivership, the FDIC also will pay out the insurance to depositors of a failed bank. If your bank closes, the FDIC will reach out to each customer by sending a letter to the address it has on file. You might also hear of your bank’s failure on the news, or on notices either at the bank’s physical location or on their website—especially if you use an online bank. After your bank closes, the FDIC aims to pay your deposits back to you within 2 business days. If you had more money deposited than what is covered by current FDIC limits, you could then file a claim against the bank’s estate for any non-insured funds that were lost. After the bank’s assets are liquidated and sold as part of the receivership process, you may be entitled to a portion of those assets, if anything is left over. The FDIC was created to restore faith in the banking system. We hope that our explanation of how deposit insurance works helps you to feel confident as you manage your cash.

FDIC vs SIPC—What’s the difference? FDIC. SIPC. NCUA. There’s a good chance you’ve heard of most of these acronyms at some point while dealing with your finances. But what exactly does each mean when it comes to your money? Take a moment to think about all the different types of insurance you currently have. You may have insurance for your car, renter’s insurance for your apartment, and life insurance for, well, yourself. These days, some of us might even have pet insurance, or better yet—wait for it—alien abduction insurance. Just like other aspects of your life, your money may be insured, or otherwise protected, as well. At a high level, you can think of FDIC and NCUA as providing insurance for banking products, and SIPC as providing protection for funds held in a brokerage account in the event that the brokerage fails. FDIC and NCUA generally cover bank deposits up to $250,000 per account holder, per bank, per ownership category. SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings, and the coverage applies per each account of a separate capacity. It is important to note that there are risks associated with owning securities, and SIPC does not protect against a loss in the market value of your brokerage account. Part of having a solid financial plan is knowing whether or not your financial assets are insured—whether they’re in cash or investments—and how coverage limits may affect your accounts. Please note that Betterment is not a bank. FDIC: Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) was created in 1933. Does that date ring a bell? In the mid-1930’s, the Great Depression was in full swing. The public needed a reason to trust banks again, especially after seeing hundreds of banks fail in the span of just a few years. The FDIC monitors its member banks, oversees the process of winding down banks if they fail, and insures deposits at member banks. You can easily tell if your bank is a member of FDIC by reviewing your bank’s website, looking for signs in your bank’s local branch, or by searching the FDIC’s website. Accounts Covered: Types of accounts covered by FDIC insurance include checking accounts, savings accounts, savings account alternatives, money market deposit accounts (MMDAs), certificates of deposit (CDs), cashier’s checks, and money orders. Coverage Limits: The FDIC generally insures deposits up to $250,000 per depositor, per banking institution, for each account ownership category. We’ve previously written more in-depth about FDIC insurance here. NCUA: National Credit Union Administration Products provided by credit unions are typically referred to in terms of shares because credit union members are buying shares of credit union ownership when they make their deposits. Even though credit unions are owned by their members, rest assured that they are still regulated. The National Credit Union Administration (NCUA) was created by the U.S. Congress in 1970, and its purpose is relatively self-explanatory. It oversees credit unions and insures the shares that consumers purchase. You can determine a credit union’s NCUA membership by checking its website, seeing if there is a sign at a physical branch, or by searching the NCUA’s website. Accounts Covered: Types of accounts insured by NCUA insurance include regular shares (similar to savings accounts), share drafts (similar to checking accounts), money market accounts, and share certificates (similar to CDs). Coverage Limits: The NCUA generally insures deposits up to $250,000 per depositor, per credit union, for each account ownership category. SIPC: Securities Investor Protection Corporation The Securities Investor Protection Corporation (SIPC) was born when the Securities Investor Protection Act was signed into law in 1970. Its purpose is to protect consumers from the loss of cash and securities held at brokerage firms that go bankrupt. It’s important to distinguish that “loss” in this context doesn’t include a loss due to the market going down. Markets go up and down, and that’s just a fact of investing. Investments can lose value—we all know that. “Loss” in the context of SIPC insurance refers to missing assets or an investment that becomes unaccounted for when a brokerage fails. Think of the classic ponzi scheme where a broker accepts funds to invest, except instead of investing the funds, the broker turns around and pays previous investors so that they believe they are receiving investment returns. A simpler example would be a brokerage firm that improperly commingles operating funds with customer funds and then goes bankrupt. You can determine if a brokerage firm is a SIPC member by checking its website, looking for a sign at the brokerage’s physical branch, or by searching the SIPC’s website. Accounts Covered: Types of accounts and investments generally protected by SIPC include stocks, bonds, mutual funds, money market mutual funds (MMMFs), certificates of deposit (CDs), annuities, government securities, municipal securities, and U.S. Treasury securities (Treasuries). Coverage Limits: SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings. These limits apply to each account of a separate capacity. Learn more about how an account capacity is determined and what some examples might look like. Because of these limits, you might think that you shouldn’t hold more than $500,000 in a single brokerage account, but remember that SIPC coverage applies to the assets that are ultimately missing, which may not be reflective of the entire account balance. Chances are good that you’ll never end up needing the coverage at all, because fewer than 1% of SIPC-member brokerages were ever subject to SIPC proceedings. Of the claims that were investigated, 99.9% of them resulted in investors being made whole. You can read more about these figures and learn more about SIPC insurance here. Conclusion The financial system in the U.S. is primarily built on trust. The availability of various types of financial insurance and protection helps to assure customers that they can trust the institutions they are placing their hard-earned money with. I can assure you that it is safer to keep your money in a reopened bank than under the mattress. – President Franklin Roosevelt, 1933 Part of any comprehensive financial plan includes examining how each of your accounts are insured or protected, and being aware of any coverage limits that might affect you. If you have questions or concerns about your financial plan, consider speaking with one of our financial advisors. Learn more about how our advisors can help you with your financial plan.