Product News

Portfolios Now Include Municipal Bonds We added a municipal bonds asset class to make your non-IRA portfolio even more tax efficient.In our ongoing efforts to create the most tax-efficient portfolio possible for our customers, we have added a new asset class, represented by a tax-exempt national municipal bond fund, the S&P National AMT-Free Muni Bond ETF (MUB), for primary domestic bond exposure. It will replace the US High-Quality bond index fund (AGG) in taxable portfolios. Dividends paid on this ETF are exempt from federal taxes. We will continue to use AGG, the core bond fund, in IRA accounts, where tax-free dividends do not provide the same advantage. Improved after-tax returns with municipal bonds Municipal bonds are expected to increase after-tax returns by more than 1.0% per year, as compared to the asset class they replace. Below, you can see the pre-tax yields of the two asset classes side-by-side. MUB is currently yielding significantly more than AGG even before taxes, but that could change. What won't change is the advantage built into MUB once you factor in federal taxes. At the highest possible federal rates (single, income of $400k+), nearly half of AGG's dividend is lost to taxes, while MUB's yield is unchanged. Even assuming a more common tax bracket (earning roughly $100-200k), the advantage is clear. Ticker Pre-tax yield After-tax yield (43.4%) After-tax yield (28%) MUB 2.90% 2.90% 2.90% AGG 2.20% 1.25% 1.58% The only drawback for investors is that munis are often thought to carry greater default risk than US Federal government debt. The US has yet to default in modern history, and has the ability to literally print money, which state and local governments do not. So while municipal defaults are not unheard of, they are actually quite rare as compared to corporate bonds, and relatively benign when they occur. This is because municipal bonds are often either insured privately, or have the backing of the state in the case of a default. It’s also worth noting that when a municipal bond defaults, it tends to mean you get $0.80 back, rather than $1—rather than lose all your principal. Most importantly, MUB comprises more than 2,000 muni bonds across 44 states—diversifying away any default risk for a particular issuer. Due to these factors, municipal bonds tend to have relatively high credit ratings—comparable in quality and long-term performance to the US High-Quality Bond index. What do you need to do? Nothing. Existing customers’ portfolios will automatically be transitioned to the new asset class over the coming months. We will replace AGG with MUB and reduce the weight of LQD and BNDX; we will also then increase the weight of MUB in the portfolio in order to maximize its tax-exemption benefit. Customers using our new Tax Loss Harvesting+ service will have MUB as the primary ticker for the asset class, and Barclay’s Municipal Managed Money (TFI) as the alternate.

Introducing Betterment’s Cash Management Products Betterment helped redefine investing with automated guidance built for you. Now, we’re reshaping another part of your financial life: your cash management. When I started Betterment, the goal was to help people answer a basic, but universal, question: “What should I do with my money?” In my early career as a bank consultant, working for large banks across the United States, I noticed fundamental conflicts in the financial industry that made great financial advice inaccessible to most Americans. In creating Betterment, I sought to change the industry and to build the most customer-centric smart money manager. That desire for change evolved into our mission: To help you make the most of your money so that you can live better. And we focused all of Betterment’s efforts on that mission. We listened diligently to our customers. Developed personalized retirement guidance. Built our suite of Tax Smart tools. Incorporated personal choice into our investment options. Built and evolved our mobile app. Across our work, we listened and learned from you. We heard that while investing is a major challenge, it’s often not your first one—instead, it’s saving. For many of our customers (whose average age is 37), having more money tomorrow means managing your money better today. You want tools that make you confident you’re doing the smart thing: Increasing financial security for you and your family by setting savings goals and creating a plan to achieve them. To not worry about whether you are incurring unnecessary fees that might take advantage of you at inconvenient times. Ultimately, we believe that managing your everyday cash is essential to realizing your long-term goals. This is why we built cash management products: for your money today that can help you save and earn more for tomorrow, all in one place. Cash Management: A Solution That Helps You Save The problems we see in the banking industry today are the same fundamental flaws we saw in investing when we started Betterment: Companies aren’t customer-centric. Rather than suggesting what’s right for customers, they’re instead encouraged to do what makes the company the most money (which can often be a poor financial decision for the customer). Instead of investing for the long term, trade on the short term, some say. Instead of saving for your goals, spend what you make and borrow money later, others say. We’ve designed our cash management products to meet you where you are in your financial journey and to encourage saving that grows over time. Our first step is Cash Reserve, a high-yield cash account that can help you earn a variable rate of 0.10% *, is FDIC-insured for up to $1,000,000 once deposited at our program banks (or $2,000,000 if using a joint account)†, has no minimum balance, and only requires a $10 deposit to get started. Our second step is Checking—meant to help you manage the heartbeat of your financial life, your everyday cash flow. With this checking account, users will receive a Betterment Visa Debit Card and all ATM fees, worldwide, will be reimbursed; you won’t see any monthly maintenance fees or minimums and you’ll get access to advice on your full financial life. The same reason that we don’t put our own ETFs into portfolios is the same reason Betterment is not a bank—because we can offer you value and help you build a better life as your advisor and advocate. We want to help you make the most of your money, and a high yield cash account is an important part of that. With Checking, we’re taking a similar approach. No checking fees‡, and all ATM fees reimbursed worldwide. A partner that works for youーeveryday. We’re pushing the boundaries of how finance serves you, helping you save more with less hassle, so that ultimately, you can live better. We’re on the path to building your self-driving wallet. When I think about what the future holds for my two young daughters and children across the United States, I can’t imagine that they’ll ever have to spend time figuring out how to intelligently allocate their paychecks across various accounts—I want them to have easy access to the right answers, from a trusted advisor. I want them to know that they’re on-track to meet goals important to them—and if not, how to get on track. I believe that technology will help make smart money management accessible to all Americans. To get there, come join us. Tell us what you want to do with your money. We can make it easy, then help you automate the most frequent, distracting, and tedious (but nevertheless valuable) tasks—just as we have with investing. With our cash management products, we bring our role as your financial advisor into your everyday life, turning your daily choices and transactions into saving for the future. We’ve built the framework for where we believe the industry can (and should) move. We believe the future is smart money management, and we’re helping lead the way. Months ago, I described why the financial industry fails to help people save: We place the responsibility to save more money on the customer, rather than taking on that challenge as investment managers and banks. Ultimately, I believe institutions that survive into the future will be accountable for what real people struggle to do: Automate their savings. We are striving for a future of smarter financial behaviorーfor a stronger middle class, empowered to thrive and pursue happiness, with the true peace of mind that comes from having a smart money manager always working for you. This brings us a significant step closer to that goal.

What We’ve Heard From Our Customers About Our New Pricing Plans Your comments to us were thoughtful, heartfelt, and moving; they reaffirmed your high expectations of Betterment as a brand and partner to you. Earlier this week, we announced that, along with launching two new packages with different amounts of human advice, we were flattening our prices for our digital offering from three tiers (0.35%, 0.25%, or 0.15%) to one: 0.25%. This meant that prices went down (immediately) for the majority of our customers, and would go up (in June) for those in the 0.15% tier. When we made the announcement, we heard a lot of feedback from our customers, much of it expected. What we didn’t expect was that some customers would criticize us for not being transparent about the pricing change. This affected me personally, deeply. What bothered me most was that these customers who said we should have been more transparent were… right. The pricing change was not as clearly called out in the email we sent as it should have been. The email just said, “Your Digital plan will be 0.25% per year.” It should have said, “Your fee was 0.15%, and is going up to 0.25%.” And it should have continued to explain why we’re doing this and how we feel about it. Customers are right to demand the highest level of transparency from us. We are a company that is all about transparency in everything—in fees, in how we work and give feedback internally, in our investment process, and in working in the best interests of our customers, always. I said the same to our team—and I take personal responsibility for this mistake. The email was from me. I am so excited about the plan changes that I buried the lede for these customers. We’ll send a clearer email about the fee change to those customers who will see an increase, well before the change goes into effect. We've also prepared FAQs that clearly outline how our service plans and pricing have changed. Thank you for reminding me what you expect of us—and I assure you we expect that same exceptionally high level of transparency of ourselves. Back to your feedback: I responded to as many of you personally as I could—and read through far more emails than I could respond to myself. I heard a few common themes. Some were ecstatic, thanked us for lowering their fees, and shared their aspirations for what’s next. Some were excited about the new human advice plans we’re offering. And some of the customers for whom this will represent a price increase were, understandably, angry. Even if they felt 0.25% was a fair price to pay for Betterment’s services, they wondered what our motives were, and what they could expect from us going forward. Some asked whether they should now anticipate frequent changes to our pricing plans: No. We've been in business long enough now to know at what price we can appropriately service customers, and it was hard to provide all the services we provide today for our customers at 0.15%. When we introduced that tier, five years ago, we did very little of what we do today, and our offering was simple. For instance, our trading costs were much lower, because we didn't yet do automated asset location or tax loss harvesting. Customer service costs were lower, too, as people had fewer questions about simpler offerings. We've negotiated our trading costs down as we've scaled, of course, and improved explanations on the site to make servicing more efficient, and we are sure to find further efficiency over time. As we do, my hope is that we can drive fees down, not up. I'm certain that we'll drive value up—we’re working all the time to increase your net returns, and the new plans allow us to do even more for you. Our model—transforming the financial services industry for the better—is a shared experiment we are working on, together, with you. And when you are doing something new, you sometimes don’t get it exactly right the first time. You then have a choice of making adjustments, or not succeeding. So we are making an adjustment. Some customers thought that we’re raising prices to cover the cost of that human advice. Far from it—those customers who want human advice pay for that separately from the 0.25% for digital advice (0.15% extra with our Premium plan, or another amount for a dedicated advisor, depending on how they prefer to get advice). We’re using the digital plan revenue (and at least a like amount from all plans) to continue to invest in more automated services that will be accessible to everyone on our platform. That’s the core of our business, where most of our customers will always be, and our competitive advantage over the old way of investing. Of course we’ll continue to build that out. I’m convinced, beyond a doubt, that we offer the best investment value in the industry for most investors, and that we are working harder than anyone to maximize our customers’ money, net of fees. Some wondered why we would raise our prices on our highest-balance customers. Because all of our customers are smart, it’s not lost on them that for a majority of our customers, this move amounted to a fee reduction. Knowing that those who were getting a fee cut were not our highest-balance customers, and that we'd be raising prices on those with more invested at Betterment, tortured us as we discussed and evaluated the new plans. But the reality is that our lower-balance customers call us much less than higher-balance customers, their trading costs are less, and so on. So they're less expensive to serve. We want to be open to everyone—it's part of the promise of our company. And, while we knew some would be unhappy, this move, flattening the fee, felt most fair, while allowing us to invest in more return-enhancing services, for all of our customers. Some asked whether we changed prices because we’re preparing to sell: No. We're preparing for the long haul—as always—and we aim to make this a public company. The first large, public financial services company with fiduciary advice at its core—not a mutual fund manufacturer trying to sell its own funds, not a broker trying to sell whatever pays the highest commissions, but an advisor, doing everything in our power to maximize the money of our customers. That vision remains core and is the driver behind this move, which sets us up to better execute and achieve our long-term vision. We are grateful that so many of you cared enough to reach out, to share your support, your thanks, your frustration, your hopes for the future, and what you want to see us do next. We’ve never been more excited to be on this journey with you.