The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way)
Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his ...The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way) Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his successor and new CEO of Betterment. It’s the fall of 2007 on the Lower East Side. My Betterment clock starts not when we launch in 2010 but as I hash out the concept in conversations with roommates and friends. I have a crazy idea: to pursue my happiness via helping Americans pursue their happiness. I write a mission statement: empower customers to do what’s best with their money so they can live better. Investing feels complicated to most people, but the best practices are known and straightforward. Why not take the smart services used by the wealthy and institutions and make them accessible to every American? People like this crazy idea, some join me, and with sweat and sacrifice, a tiny, hungry, customer-impact-obsessed company is born. I pursue Betterment’s mission doggedly. My wife (whom I met in 2006—not coincidentally—her encouragement begets a startup) calls Betterment my “first child.” I say often (usually sincerely): “I’m the luckiest person, I have the best job in the world.” At times, it feels like all of my being, every waking hour, every dream, is intertwined with my company. I am Betterment. There is nothing else. Teammates become best friends (and each other's family: I officiate weddings of Bettementers who later have Betterment babies). I star in TV ads—never imagined that career turn. Early customers email me personally for support (and some still do—love y’all, customers). We grow to $25B AUM, more than 500,000 customers, a team of more than 300, and we move the industry forward. And yet, I know we can achieve more; we have millions more Americans to reach. The Pursuit Of Our Potential For some time, I look to bring in an experienced, dynamic operating leader to help drive the company forward. The search is not initially focused on one specific role to fill; it is about finding amazing talent that could help lead Betterment to realize our full potential. The time at home this year affords more time to devote to the search process, to talk to senior operating leaders and to think about what might be needed for the next leg of the journey. I spend time with hundreds of diverse candidates. I realize that the best way to achieve our mission might be to invite a successor to lead Betterment in the next phase of growth. Due to good fortune and intense effort in a most challenging year, the company has never been in a stronger position. Each line of business is reaching new heights in 2020. We’re beating targets, well-capitalized, with wind at our backs. It’s a good time to hand over the reins. Over the summer, I connect with Sarah Kirshbaum Levy. There is something enthralling about her. I don’t want to jinx or overload it, but outside of meeting my wife, it’s hard, at present, to think of a more consequential introduction. And this is over video conference! The Pursuit Of The One Over the next few months, I spend more time with Sarah and she begins engaging with members of the team and our board. I bring her in full-time as a consultant in a trial run. What a privilege not only to recruit my successor, but to observe her building relationships, to work side by side with her as she iterates on her plan, and to see her making every meeting more open and efficient. I give her my authority to work with the team to architect plans for 2021 and beyond, and she excels. My admiration grows as she starts effectively running the company, with my proxy. My execs tell me they have so much to learn from her. The only thing that is missing is the title—and today, we give her the title. Sarah’s Pursuits Sarah started out at Disney and spent the last 20 years at Viacom, home to beloved brands including Nickelodeon, BET, MTV, and Comedy Central. Through a series of senior leadership roles, culminating in Chief Operating Officer, she’s shepherded global phenomena, from SpongeBob to The Daily Show with Trevor Noah, connecting with audiences in meaningful ways. With her experiences leading large public companies, Sarah is the right executive to lead Betterment now, as we contemplate a transition from private to public in the coming years. For someone with a “big company” pedigree, she’s remarkably down to earth and scrappy. She’s launched and grown businesses, bought and sold businesses, managed the bottom line, and driven consumer brands to win. I appreciate her “outsider” perspective. Betterment is a unique company—not just finance, not just tech, 100% customer-impact obsessed. Take it from one who’s looked: It’d be hard to find someone who’s both spent a career in financial services and can credibly lead the change we envision: to empower customers to do what’s best with their money, so they can live better. The Pursuit Of Happiness I’ve done the best work of my life at Betterment, and I have worked too hard to stop giving it my all to realize this company’s mission, whatever form those efforts may take. From my role on the board, I’ll be supporting Sarah and her team, whether it be via recruiting, investor relations, telling our story, or upholding company culture and values. A dream for me since that Lower East Side fall in 2007 has been to build a sustainable institution, to build something that will outlast me. I’ve never taken a larger step toward that accomplishment than I am today in passing the torch to Sarah. I asked Sarah what mattered most to her in her next role, and she said, without hesitation, “A brand and mission I believe in.” She’s evidenced this for me in every interaction since. I believe that she’ll more fully realize the vision I laid out years ago, and make Betterment the most beloved, most essential financial brand for this generation. And in so doing, she’ll power the pursuit of happiness for millions of Americans.
Betterment’s Employee Demographics And Our Commitments To Doing Better
We share details on the makeup of Betterment’s employees, our initiatives for diversity and ...Betterment’s Employee Demographics And Our Commitments To Doing Better We share details on the makeup of Betterment’s employees, our initiatives for diversity and inclusion, and how we’re encouraging progress within the fintech community. TABLE OF CONTENTS Betterment’s Employee Demographic Data Scaling Our Diversity And Inclusion Efforts Conclusion In June, our CEO and Founder Jon Stein made a statement: “Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country. We will advocate for our Black colleagues, friends, and fellow citizens and work harder to build a nation that’s just for all, where we all can pursue happiness, without fear, oppression, or unequal treatment.” Over the last two months, we’ve been hard at work learning how to live up to that promise and take a stand against racial injustice. We’ve formed a coalition with the broader fintech community, we’re increasing our transparency with our employees and our customers, and we’re investing in resources for our employees of color. We acknowledge that these initiatives are a work in progress, but we want to share them with the Betterment community. Betterment’s Employee Demographic Data First, we’d like to share the demographic data of our full-time Betterment team (293 employees as of July 7, 2020). The demographic data below is collected using the Equal Employment Opportunity Commission (EEOC) questions and selections during an employee’s onboarding process. Because of this, the type of information we collected is limited. Starting in 2020, we will provide optional opportunities for additional demographic selections (including but not limited to gender, race, and ethnicity) that are more inclusive for both employees and candidates. Full-Time Employees Leadership Team* *(defined as Director-level or higher): Product, Design, Engineering, And Analytics Teams Engineering Teams We've made progress with gender representation over the past few years, but we still have a long way to go. And our progress in racial and ethnic representation—particularly within our leadership cohort—is not where it should be. We have work to do here, and are committed to ensuring that our team better reflects the communities and customers we serve across the U.S. Scaling Our Diversity And Inclusion Efforts The conversations we’ve had internally as a community, and with your input, are helping inform and drive the sustained change we’re looking to make. We’re working toward a new normal in several ways: Fintech Coalition We recognize that the fintech industry needs to improve access to jobs, career advancement, and financial services, not only for underrepresented groups, but especially for people in the Black and brown community. To hold us and other fintech companies accountable to making this change, we spearheaded the creation of the fintech coalition. Each company that joins the coalition will publish individual plans and provide regular updates on progress toward our commitments to enhancing access to financial services, as well as job and career advancement for people in the Black and brown community. As part of the coalition, we are committed to publicly sharing our representation data on an annual basis each July. Betterment’s Call-to-Action Initiative Immediately following the murder of George Floyd, our employees formed a Call-to-Action (CTA) group. These employees have been brainstorming and executing a number of efforts to unbias our product, increase community outreach, and begin internal educational forums such as book clubs and speaker series. This group is committed to creating change over time, beginning with the following: Betterment is supporting our Black employees in “Calling Out Black” every Friday throughout the summer. Calling Out Black acknowledges the exhaustion, pain, and emotional weight our Black employees might feel in the workplace, especially during times of civil unrest due to police violence. These days provide space for our Black employees to reclaim their mental, emotional, and physical wellbeing. Beginning in 2021, Betterment will recognize Juneteenth as an annual paid holiday to commemorate the ending of slavery in the U.S. We are running a summer education series for our non-Black employees about racial inequality and anti-racist allyship, featuring guest speakers as well as small-group discussions. We’ll be working with Paradigm for a three-part Inclusive Leadership Training series beginning in late July. All managers will go through these sessions that are focused on objectivity, belonging and voice, and the growth mindset. In August, Netta Jenkins will provide company-wide training with her business Holistic Solutions, which will include a discussion forum for Black and brown employees, a session for people managers on how to manage during Black and brown trauma, and two town halls for the entire company. Improve Our Hiring Process Over the last few years, our Recruiting Team has taken steps to expand our new hire sourcing efforts and diversify our interview process. Some of these steps include: Partnering with Jopwell, the leading career advancement platform for Black, Latinx, and Native American professionals to support targeted sourcing of diverse candidates. Allocating funds on a monthly basis to post on underrepresented job boards (e.g., Women In Tech, Women In Product, Black Women in Tech, /dev/color, The Mom Project, etc.) Increasing our geographic diversity by building a remote workforce. We recognize that these efforts have failed to impact the percentage of employees of color at Betterment. Because of this, we have amplified our commitment to this area in four ways: With an employee population that is 70% white, we acknowledge that most folks refer others who look like them. We're pausing our cash referral bonus program to reallocate those funds to support diversity, equity, and inclusion (DEI) hiring initiatives. Implementing a more streamlined application process where all candidates only need a resume to apply. Continuing to reduce bias in our job descriptions by investing in technology that decodes gendered language; by excluding education requirements; and by including must-have qualities and experience only. Researching and partnering with companies that help us increase our sourcing reach. Increasing Internal Data Collection This summer, we will launch internal surveys to collect broader representation information for both employees and candidates. These surveys will include additional optional self-identification opportunities for racial and ethnic groups, as well as gender. We will share this information with leadership, ERSGs, and our Community Council on a quarterly basis, and will use this information to inform our progress and let us know where we need to focus our efforts. Amplifying Our Employee Resource Strategy Groups (ERSGs) We currently have seven active ESRGs: Black at Betterment, Latinx at Betterment, Asians of Betterment, Women of Betterment, Women in Tech, Betterparents, and Betterpride. Representatives from these groups act as facilitators between their communities and Betterment leadership, as well as participate in our Community Council, a group that meets on a regular basis to further diversity and inclusion initiatives. Through our partnership with Netta Jenkins, we’re investing time in evaluating and improving the structure and reach of our ERSGs. We want to create more open communication between these groups and company leaders, and ensure that these groups are represented as stakeholders in company initiatives. Conclusion Fintech—and Betterment—has been heralded for providing broad and equitable access to financial services, regardless of how much money someone has. While this access is a step forward, it doesn’t directly address the wealth and financial knowledge gaps felt by many people of color—particularly members of the Black and brown community—at the hands of a system that does not treat them equally. We know we haven’t done nearly enough for our community and our employees, and we must do more. Thank you for your feedback and support as we work to do just that.
The History of Betterment: Changing an Industry
We launched in 2010. Today, with billions under management and hundreds of thousands of happy ...The History of Betterment: Changing an Industry We launched in 2010. Today, with billions under management and hundreds of thousands of happy customers, Betterment is the largest independent robo-advisor. We manage people’s financial lives so they can live better. We tell you how much to invest and manage your money for you, all throughout your life, in a way that gives you better outcomes. We do it all so that you don’t have to. But not everyone has embraced the idea that it should be so easy. When we launched at TechCrunch Disrupt six years ago, Chris Sacca, a well-known startup investor, TechCrunch judge, and now “Guest Shark” on Shark Tank, challenged Betterment’s ease of use. “I worry that it’s too simple,” he said. “People expect a little bewilderment that gives it credibility. This starts to feel a little like a toy.” Caption: Presenting at TechCrunch Disrupt, May 2010 We faced this challenge then, and we face it now: When it comes to investing, people expect not to know what they're doing. They expect to be confused, simply because the traditional players have made it, well, confusing. Many people intuitively think that the way things are is the way they should be, or that there's something inherently good about the status quo. It's what we're used to, after all. But it shouldn’t be that way. My college behavioral biology professor, Irv Devore, who I often talk about, taught me, "Is isn't ought." Just because things are a way, doesn't mean they ought to be that way. He taught us this in the context of bio: Just because men are biologically on average stronger than women, doesn't make that right. I apply this philosophy everywhere, including to the financial industry. Just because the financial system is designed a certain way, doesn't mean it's right. It's not necessarily the best it could be, or doing what anyone intended it to do—it's just evolved this way. We can approach it with intention and design something better, like Betterment. Betterment launched at TechCrunch Disrupt, where we were up against the reservations of Sacca and others like him. Their reactions were understandable—even expected. But the resistance to the future is starting to soften. Since then, hundreds of thousands of customers have joined the Betterment mission. They’ve invested billions of dollars with us, making us the largest independent robo-advisor. People are starting to catch on. They’re starting to understand that “is isn’t ought.” Sure, we’ve got a long way to go, but we’re ready for the climb. Our Mission: Help People Live Better I started from a place that many entrepreneurs likely do: wanting to make people’s lives better. That was always my mission. Caption: Over the years, our company has grown because of hard-working people who are dedicated to sharing our product and mission. My grandfather taught me, “To those whom much is given, much is expected.” I’ve always felt lucky—blessed from the start, in a sense—and that I owe it to give back. What’s more, when researching happiness, I found that happiness comes to those who don’t seek it, but seek something else of higher purpose—and they find happiness along the way. So I seek to help others, and hope to find happiness in so doing. I started Betterment when it occurred to me that the concepts I'd learned while studying behavioral economics and biology in college could actually apply to the many mistakes I was making in managing my own investments. While economics is good at explaining the world at a macro level, it fails to explain human behavior. At a micro level, economics assumes that humans are rational, and they’re far from rational. Especially when it comes to their money; people heavily discount the future, they withdraw when markets crash, and it’s because our emotions drive our decisions. As the example of bad investing behavior, I was investing my money through seven different brokerage accounts. I was constantly monitoring my accounts (bad behavior) and trying to time the market (worse behavior), and the result was wasting time, taxes, and transaction costs, without making any more than I would have in an index fund (bad outcome). I wanted a service that did all of this for me: told me what to do with my money, and then did it. I realized that the only way I was going to get something like that was to build it myself. The Original Team Behind Betterment There was a time when I thought I would build Betterment all by myself. Embarrassingly, my first business plan had no employees other than me—I would code the site, do the marketing, the customer service, the design, all of it—because it would be that automated. To validate the idea I was working on, I told the idea to anyone who would listen. This inevitably included Sean Owen, my roommate at the time. He was a software engineer at Google, 1600 SAT, 800 GMAT, CS at Harvard, and he is a great engineer—incredible, even. I thought, “If I can get Sean excited about this thing, then it’s a good idea.” I knew he’d be valuable, but I didn’t know how much I would need his help. To build the site, I’d have to teach myself to code. Starting from scratch is tough—starting with a roommate who knows more than 99% of engineers is a lot easier. Sean gave me the guidance I needed to get started: The reading list and the right tools for the job. While I focused on the front end of Betterment, building it in Flash and Flex (which at the time were reasonable engineering decisions—it was 2008!) Sean built everything else. He set up Apache and Tomcat servers for the website, built the MySQL database, and a Java application to run the core backend stuff. Simultaneously, I needed to understand the regulatory landscape, a complicated but inevitable part of developing an entirely new way to invest. This world was foreign to me. I purchased a legal library about the securities and investing industries. This became several encyclopedias worth of reading, on everything from trusts and estates to mutual funds to banking to derivatives, just trying to understand the legal opportunities and risks of various structures. That’s when I started conversations with Eli Broverman, who was at the time a securities attorney and is now the President of Betterment—and thank goodness I did. Caption: Betterment's President and Co-Founder Eli Broverman and me in 2012 Eli and I met over a weekly poker game we played in 2003 and 2004—Eli took my money enough times that I eventually gave up playing, but we remained friends. The timing worked out for us, as he was interested in starting his own company, too. We had lunch at a Dominican restaurant on Amsterdam Avenue, near Columbia University where I was in business school in 2007, and we sketched out a working arrangement. Suddenly, we were in business together. Our passive, goal-based, and automatic investing philosophy was clear; it’s the way I’d learned to invest from college, my financial services career, my classes in business school, and my Chartered Financial Analyst (CFA) certification. We had a genius engineer to build the service. We had an entrepreneurial lawyer to own and understand the regulatory landscape. My girlfriend (now wife) at the time, Polina Khentov, was a graphic designer, and I asked her to help us design the prototype. We had weekly meetings together in my apartment to brief on progress—we were a going concern. We fully understood the process to file as an SEC-registered investment advisor. What was missing was our status as a broker-dealer (BD): The thing that was going to allow us to take so much of the frustration out of the process of managing people’s money, and around which we wanted to build a lot of technology. Sean, Eli, and I flew to a few BD conventions and had dozens of conversations with potential partners to understand the industry. It was a thuggish space: opaque, relationship-driven, and priced to exclude any upstarts. It’s not like there was a book you could buy on how to set up a broker-dealer. We talked to everyone we knew who knew anything about how clearing and custody worked. And then we met Ryan O’Sullivan. Ryan impressively grew a retail clothing line called Le Tigre and sold it to Kenneth Cole. He was also a serial entrepreneur with broker-dealer resources at his disposal. He could connect us to the right people and help us get our BD set up. He understood the idea for Betterment and believed in the market opportunity. He was immediately excited about joining us. We had our BD partner. In August 2008, Sean, Eli, Ryan, and I signed an operating agreement as the founding members of Betterment LLC. Sean was chief technology officer, Eli was chief operating officer, Ryan was president, and I was chief executive officer. After helping us get started, Ryan moved on to pursue other business ventures, but he was on Betterment’s Board of Directors from 2010 through early 2016. We had an ambitious plan to launch in one year. As it turned out, setting up as a broker-dealer was a two-year process that included building Betterment’s core trading and custody technology, setting up operations, and gaining approval from the Financial Industry Regulatory Authority (FINRA). In January 2009, Anthony Schrauth joined as chief product officer. He was my former colleague at First Manhattan Consulting Group, and had deep experience in product development, building online banks for major global financial institutions. He was passionate about the idea of building a better, more customer-focused product, with fewer constraints than you’d have to deal with at large banks. In 2009, Sean decided to permanently relocate to London (and has since gone on to become a leading expert in the field of machine learning, as Director of Data Science at Cloudera). Shortly thereafter, we met Kiran Keshav; he ran Columbia University’s Center for Computational Biology, and heard about Betterment through the Columbia Ventures network. He took over for Sean as CTO. Our TechCrunch Launch We worked on Betterment for another year. Then, on May 26, 2010, we launched at the first-ever TechCrunch Disrupt. The stakes felt so high. And the competition felt unfair. We’d bootstrapped and forgone salaries, while others of the 500+ entrants had already raised more than $7 million (something like $25 million in 2015 fundraising dollars). Our future depended on making a positive impression. We had to perform. TechCrunch Disrupt was held in the old Merrill Lynch building on the west side of New York, 570 Washington St. It was a vast warren of austere, stained, and abandoned hallways, and looked as if no one had entered the office in the 10 years before the conference. Toward the back, behind the Red Bull booth and through one windowless room, there was an even smaller windowless room, no bigger than a janitor’s closet, for us to practice our pitch. I remember pacing back in forth in there, stumbling through my speech a hundred times, in what was the most wonderful and nerve-wracking day of my life to that date. Everyone on the team had a job. Anthony and I presented on stage, Eli and Kiran answered customer support calls from the audience, and Adam Langsner, our then-intern, manned the exhibit booth in the lobby—it was his second day of summer work. Caption: Chief Product Officer Anthony Schrauth and me onstage at TechCrunch Disrupt, May 2010 We presented, and we won Biggest New York Disruptor. Then, moments later, we went back to work—all of a sudden we had real customers (400 brave souls who trusted us with their money), and so much more to learn and build. Betterment Today, and the Road Ahead Launching there, in that old building, at the most influential technology conference in the country, was a pivotal moment for us, and we knew it. I’m not sure we would have gotten off the ground without doing it. Since then, we’ve become the largest independent robo-advisor. Our promise is to invest your money at a low cost, and manage it in a way that gives you a better outcome. Caption: The team celebrating Betterment’s 10,000th customer in November 2011—we now serve over 175,000 customers who invest more than $5 billion with us We advise you on what to do with your money based on your personal financial situation—we tell you how much to invest each month, how much risk to take on in your portfolio, and what type of investment account you should have. Then, we do it all for you. We invest your money in our globally diversified portfolio of low-cost exchange-traded funds (our investment team carefully selects these ETFs based on a variety of criteria). And we manage your money over time so that you get the best possible expected return. That means we do things like automatic rebalancing and tax loss harvesting—investment strategies that are typically time-consuming and tedious for average DIY investors to do on their own. Our customer support team (which no longer consists of just Kiran and Eli) is available everyday to help you with your account. It’s clear we’ve come a long way since that launch. It was a pivotal moment for us then, but it’s also a pivotal moment for us now. We’ve gained traction in the financial world; people are starting to understand that this is where the future of finance is headed; that “is isn’t ought.” Traditional financial institutions are starting to follow suit, and the startup investor who challenged us so many years ago is likely rethinking his point of view. But we’re not quite there, yet. We have a lot of work to do. We have to continue improving our service so that our customers can truly embrace Betterment as their central financial relationship. We have to continue growing our team to build more products, to educate more people, to give more advice. And we can’t do it without you. Thank you to the thousands of you who’ve tried Betterment, referred your friends, and trusted us to serve you for decades to come. We’re motivated by your feedback. We know that Betterment matters to you. And you can count on us to continue improving, so we can keep our promise to help you live better.
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Betterment Raises $160 Million in Growth CapitalBetterment Raises $160 Million in Growth Capital Today, we're announcing that Betterment has secured $160 million in growth capital comprised of a $60 million Series F equity round and a $100 million credit facility. This moment comes as Betterment is the largest independent digital investment advisor with $32 billion in assets under management and nearly 700,000 clients. The Series F round was led by Treasury, with participation from existing investors, including Kinnevik, Bessemer Venture Partners, Francisco Partners, Menlo Ventures, Anthemis Group, Globespan Capital Partners, Citi Ventures, and The Private Shares Fund, as well as new investors Aflac Ventures and ID8 Investments. The financing valued the company at nearly $1.3 billion. The $100 million credit facility was established with ORIX Corporation USA’s Growth Capital group and Runway Growth Capital. ORIX’s Growth Capital group acted as lead arranger and agent. The additional funding will be used to accelerate the record growth Betterment has delivered year-to-date across its core retail investment products and advisor solutions, and particularly its rapidly growing 401(k) offering for small and medium sized businesses. “From day one, Betterment’s mission has been to make people’s lives better with easy-to-use, personalized investment solutions. The record growth and demand for Betterment products and services proves how well we deliver,” said Sarah Levy, Betterment's CEO. “We are thrilled to have the support of new and existing investors who believe in our business model and are excited by the opportunity to support our growth. We’re using these funds to further cement our category leadership with rapid innovation on top of our already differentiated product suite and unique, multi-pronged distribution model that serves retail investors, advisors and small businesses.” “I’ve seen first hand the strength of Betterment’s business model since its founding over a decade ago. Participating in Betterment’s next chapter as an investor is an exceptional opportunity,” said Eli Broverman, a co-founder of Betterment and a founder of Treasury. “I believe in Betterment’s team and vision, and we are thrilled to support the company’s future success.” To all of our customers, we couldn't have achieved this without you. Thank you!
Our Customers Donated Over $2 Million Dollars To Charity in 2020Our Customers Donated Over $2 Million Dollars To Charity in 2020 In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. 2020 was an unprecedented year in many regards, with the COVID-19 pandemic leaving millions of Americans out of work as businesses were forced to close and many states issued shelter in place orders and other restrictive measures. It was also an unprecedented year for Betterment’s Charitable Giving feature, with new records in both the number of donations and the amount donated by our customers who chose to give back to those who are most in need. Many of our customers make generous gifts to charities in a variety of ways—whether it’s by spending their precious time, or by donating their hard-earned money. Our customers also have the choice to donate their invested securities to charities through their Betterment accounts. When securities are donated, the value of those assets is transferred directly to the charity. This is advantageous because the donor doesn’t pay taxes on the gain, and the recipient organization generally doesn’t pay taxes on the gain, either. In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. Skip to the instructions for how to donate. Since launching our Charitable Giving feature in 2017, our customers have donated over $7.5 million dollars in appreciated shares to support causes near and dear to them. We are proud to support a community of smart investors with big hearts. This year, consider a smart giving strategy that can help you maximize your gifts while minimizing your tax liability. We’ll walk you through how it works. Donating securities should be as easy as donating cash. You’re trying to make a positive difference, so we believe you shouldn’t have to do any math or sign any forms. We want to keep it easy—as easy as giving cash. No snail mail, and no walking into an office. Here is a behind-the-scenes look at how we help make it easy. On your behalf, we track how much of your account is eligible to give to charity. You typically should only donate assets that you’ve held for more than one year, but we don’t expect you to sort through all the assets and pick which ones you can give. We’ll track those assets for you. We’ll estimate the tax benefits of your gift. Before you complete your gift, we’ll let you know the estimated tax benefits, including the expected deductible amount and potential capital gains taxes saved. We move assets from your account to a charitable organization’s account without any paperwork. With a traditional broker, a charitable gift has to move from your account to the organization’s brokerage account, which can take time and paperwork. Betterment is offering charities investment accounts without any advisory fees—on up to $1 million of assets—to make the gift process seamless. After the donation is complete, we provide a tax receipt. The receipt is emailed to you, and it will also be available in your Betterment account at all times. What’s more, we take much of the heavy lifting in reporting off of our partner charities. This means they can devote their resources more efficiently to the causes you are supporting, rather than to administrative tasks. Donating securities helps maximize your charitable impact. There are two tax advantages investors may be able to take advantage of when donating eligible shares. Eliminate capital gains taxes on donated shares. Deduct the value of the gift on your annual tax return. As long as you itemize your deductions, the entire value of your donated securities is deductible on your income tax return, just like any cash donation would be—as long as you’ve held the securities for more than one year. As an example, let’s say you make $150,000, are single, and live in New York. Your income places you into the current (2021) 15% long-term capital gains bracket, the 24% federal bracket, and the 6.41% state bracket. If you donate $3,000 worth of shares to a charitable organization, and you bought those shares two years ago for $2,100, then you would save $192.69 in capital gains taxes. The full $3,000 could then be deducted on your tax return, saving you an additional $912.30. Overall, you end up with $1,104.99 in tax savings, which is about 21% more than if you had just donated the cash and taken the deduction. You can then use the extra tax savings towards future donations, helping to further maximize your impact. Value now Purchase value, two years ago Capital gains tax saved Deductible amount on tax return Total potential tax savings Donating shares $3,000 $2,100 $192.69 $3,000 $1,104.99 This is 21% more than a cash donation. Donating cash $3,000 n/a n/a $3,000 $912.30 The table above assumes the following about a hypothetical person donating to a charity: (1) The person itemizes the deductions on their tax return, and (2) The federal Alternative Minimum Tax does not apply to the person. Charitable giving works in tandem with our other tax-smart strategies. Our charitable giving capabilities automatically work in tandem with our other tax-smart strategies, such as Tax Loss Harvesting+. Imagine you started using Betterment two years ago. If any holdings in your portfolio took a loss in the first year—which is common—Tax Loss Harvesting+ (TLH+) would kick in, if you have it turned on. TLH+ would benefit you by harvesting those losses and selling the assets, which allows you to deduct up to $3,000 from your income at tax time. This practice essentially defers the tax liability from any future gains to a later date. If by the calendar year after the harvest, those same shares appreciated above the original purchase price, then they would be eligible to donate to charity. You could then avoid the taxes altogether because you will not owe the standard capital gains taxes you would otherwise be subject to. Donate while also keeping your financial goals on track. Once you donate shares from an investing goal, your goal’s overall account balance will naturally be lower. Immediately after you donate, we will ask you if you’d like to make a new cash deposit to promptly replenish your investment goal. If you redeposit, we can smartly rebalance your portfolio and help keep it on track to meet its goal. If you think of your replenishing deposit as the cash you otherwise would have given to charity, the process of giving and then redepositing ends up serving as a tax-optimized and cost-efficient cycle for transferring funds to charity. The graphic below, which visually represents this cycle, is for illustrative purposes only. If you do not redeposit after your donation, your account balance will, of course, remain lower—and we may rebalance your account as usual. Smart Investors + Big Hearts = Effective Altruism. You may already be familiar with effective altruism, which is the simple idea that you can increase how much value you create when you help others if you more thoughtfully apply your resources. We offer access to a dozen charities, including GiveWell.org which carefully vets and directs donations to the most impactful causes, and Against Malaria Foundation, which protects low-income families from one of the largest killers in the world—mosquitos that carry malaria. See a full list of supported charities. Please note that we give no special preference to or endorse any one charity in particular, and the activities of each charity are not directly associated with or connected with Betterment. How to Donate Shares From Your Betterment Account To donate shares from your Betterment account, simply navigate to “Transfers” on the left and select “Give to Charity” under “Transfers from Betterment.” If your account has appreciated shares that have been held for more than a year, you can specify an amount to give, and then select which charitable organization(s) will receive your donation. Shortly after the transfer completes, you’ll receive a tax receipt via email. You can choose from the following charities: Against Malaria Foundation Big Brothers Big Sisters of NYC Boys and Girls Clubs of America Breast Cancer Research Foundation Brooklyn Community Bail Fund DonorsChoose.org Feeding America GiveWell Hour Children NAACP Empowerment Programs Save The Children The Trevor Project UNICEF USA World Wildlife Fund Wounded Warriors Family Support Don’t see your charity? See below... If you don’t currently see a charity you’d like to donate to, you can request a new charity be added. When you’re instructed to select a charity, there is an option to request a new one at the bottom of the page. In time, we will work with the requested charities to try to add them as an option. Qualified Charitable Distributions Qualified charitable distributions can be made from most IRAs (excluding SEP and SIMPLE) if the owner is age 70½ or over. These distributions can be used to satisfy part or all of your required minimum distribution and these donations will not be counted as taxable income. Betterment can support QCDs from IRAs if you meet certain criteria. Please reach out to our team for further instructions. 2021, Here We Come Let’s maximize our ability to give back together, and help support those who are most in need this year. Our altruistic and tax-smart customers have donated over $7 million dollars to charity, with over $2 million dollars donated in 2020 alone. Can we beat that for 2021? For more information, see IRS Information for Charitable Contributions. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.
The Fiduciary Rule Is on Life Support – We Must Act NowThe Fiduciary Rule Is on Life Support – We Must Act Now Whether or not the fiduciary rule survives could directly impact you. Because if it dies, and your money manager is no longer required by law to act in your best interest...are they going to anyway? You give your retirement money to a money manager. You expect them to look at all the investment options out there and make decisions based on what’s best for you, your portfolio, and your money’s growth over time. You expect them to act in your best interest—to do the right thing for you. You expect them to charge reasonable fees, try to minimize taxes, and make decisions that are going to get you the returns you deserve. You expect all of this because it’s their job. It’s what they’re paid to do. They’re the expert, the professional. Surely they’re going to advise you on the best investment decisions for you...right? I wish it were that simple, and I can’t believe it isn’t. But today, many money managers are not doing what’s best for you. They recommend funds because they make money selling them. They charge confusing fees that you can’t see. They push you into investments that are in their best interest—not yours. And the one thing that was going to help stop it might not survive. President Donald Trump on Feb. 3 signed a memorandum directing the Department of Labor (DOL) to reconsider its fiduciary rule, which would require money managers who provide retirement advice to act in their clients’ best interests. The rule was set to go into effect on April 10, but the DOL on Feb. 10 reportedly filed for a 180-day delay, putting the rule at risk of being diluted beyond recognition or, worse, thrown out completely. Whether or not this rule survives could directly impact you. Many companies were planning to make positive changes in response to the rule and publicly supported it, back when they were going to be required by law to do what was best for their clients. But now that the Trump administration is threatening the rule’s existence, we expect many of those institutions to remain silent, indicating that their former support was solely for public display. We believe that, in some ways, silence from those institutions is as bad as lack of public support. Because if your money manager is not openly supporting the rule, then they may not be willing to fight for you. And once the rule is gone for good, it could mean reverting to business as usual. We encourage you to reconsider your money manager or, at the very least, push them to clarify their stance. Because if the rule dies, and they’re no longer required by law to act in your best interest...are they going to anyway? The State of the Industry (Also Known As “Why This Rule Must Live”) The fiduciary rule’s six-year history has coincided with a secular shift in the industry that has felt promising and good. We’ve seen positive evolutions, like easier access to low-cost investments (e.g., exchange-traded funds) and heightened awareness of how financial providers are compensated. As the Washington Post’s Barry Ritholtz put it, “The fiduciary rule is not shaping investor behavior, it is now catching up with it." But now that the rule has the potential to be thrown out, we have to reexamine the conflicts of interest that are costing American workers and their families $17 billion a year—and that could persist without the proper regulations in place. Many money managers (brokers) are not currently required to make investment recommendations based on your best interests, and instead only need to pick “suitable” investments. They are allowed to consider whether a particular recommendation will result in a higher commission or kickbacks to them. As a result, you are likely to end up in a less-than-ideal portfolio—one that’s higher-cost and lower-return than it should be. This Is What Firms Are Allowed To Do. Is It Happening to You? Here’s the Way It Should Be We believe in low, transparent fees. We believe that when you give your money to a money manager, they should choose funds based on what’s best for you, the customer—not your money manager. A Defective Argument: The Fiduciary Rule “Limits Investors’ Choice” There have been various arguments opposing the fiduciary rule. The most recent came from Gary Cohn, the White House National Economic Council Director, who said that the rule would limit investors’ rights to choose their investments. He told The Wall Street Journal in an interview: “We think it is a bad rule. It is a bad rule for consumers…. This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” It’s an interesting analogy, but it’s flawed. The rule isn’t about limiting choice (all the choices are still there); it’s about empowering consumers with information to make better decisions and forcing advisors to give straightforward advice. The right analogy would be both options are still on the table—you want to eat a cheeseburger instead of a salad, you can still do that—but you’ll know exactly how many calories are in it and how much it’ll cost you. In the case of financial services, if you want to put your money in a worse investment product, you can still do that—and the advisor has to disclose all the fees associated with it, and can’t tell you it’s the best option for you (unless it truly is). The text of the rule itself is clear on this point; it simply requires advisors to make an investment recommendation that they can demonstrate is in an investor’s best interest. Sure, that may be the lowest-cost option, but not necessarily. If advisors are not able to defend the investment products they are recommending, including their cost, investors will not suffer from their absence. If you want a good analogy for what this rule could do for financial services, consider the medical industry. Doctors aren’t allowed to get paid by drug companies for pushing drugs on you. That would be ridiculous, right? Why should it be different in financial services? Why should so-called financial advisors be allowed to be compensated for pushing certain products on you? It’s ridiculous! They shouldn’t. And, if we have our way, they won’t. Former Rule Champions, Where Are You Now? We’ve been closely following which big financial firms are committed to the positive changes represented by the fiduciary rule. Last fall, when it was expected that the rule would go into effect this April, many firms publicly trumpeted their support. Merrill Lynch came out with an ad campaign that declared, “We’re committed to your best interest. Not the status quo.” Other firms, like J.P.Morgan and Commonwealth Financial Group, announced they’d be cutting commissions in their retirement accounts to comply with the rule. Now that the rule’s future is in doubt, Merrill Lynch is retreating from its support of the rule and has indicated it may not complete the changes it previously committed to making. Many other firms have likewise gone silent on their support for the rule and their intent to follow through on earlier commitments. Some firms are even gloating over the fact that they didn’t take a position on the rule or commit to changes. AdvisorHub.com quoted UBS Chief Financial Officer Kirt Gardner saying, “There is some indication that [the DOL Rule] will, at a minimum, be delayed and potentially not be implemented at all. And because we delayed our announcement…that’s proved to be very effective given some of the commitments that our competitors have made.” It’s become extremely difficult to get individual firms to commit to a clear public position on the fiduciary rule. In January, Sen. Elizabeth Warren, D-Mass., a longtime supporter of the rule, sent a letter to 33 financial institutions that had already begun making changes designed to satisfy the rule’s regulations. She warned them that the rule was under attack, while also questioning whether they supported it and would continue to work toward implementing changes. This was an opportunity for these firms to speak out in support of the rule. Twelve firms ignored the letter. Of the 21 that responded, many provided a general statement about the importance of the rule's objectives, but declined to make a clear commitment to its actual implementation. Make no mistake, though, the fiduciary rule is the only realistic hope for prompt action to improve the quality of retirement advice. If firms genuinely support the rule's objectives, they should also support the rule. In the coming weeks, we encourage you to watch closely to see which firms are willing to take a clear public stand on behalf of investors, and which are silent or hide behind trade groups. What You Can Do to Protect Your Right to Honest Financial Advice Today, I’m sad for retirement savers. I’m disappointed that so many of us have trusted people we’ve chosen to manage our money, to prepare us for the future, and yet we still can’t be sure if they’re doing the right thing for us. I’m angry that the one ruling that could make us feel confident again is under attack. Why would anyone want to get rid of something that could do so much good? We encourage you to advocate for yourself and your future by submitting a public comment in support of the fiduciary rule here. You can also contact your elected representative and/or financial provider to share your support for the rule. Then it might be time to ask your money manager these questions: Why are your services and investments right for me and my situation? Who makes money from my account—and how much? Do you make more money recommending some investments over others? Are you committed to acting in my best interests for all my accounts, at all times? We’re not giving up on this. We stand for our customers and their best interests, and we always will. We don’t take political sides, but we are fighting for this rule until all investors receive advice they can trust. Because if the rule dies, whether it’s quick or slow, it’s sure to be painful. A version of this article originally appeared on CNBC.
Meet $VOTE: Channeling Our Values Through Shareholder EngagementMeet $VOTE: Channeling Our Values Through Shareholder Engagement We're adding the new $VOTE ETF to our Socially Responsible Investing portfolios. Here's why it gives investors more power to advocate for their values. Today, we are excited to announce that we will begin integrating the $VOTE ETF, recently launched by Engine No. 1, into all of Betterment’s Socially Responsible Investing portfolios. This new ETF invests in 500 of the largest U.S. companies, weighted according to their size, with a management fee of only .05%. You might think that this sounds a lot like a garden variety index fund tracking the S&P 500—a commodity for many years now. So, why the excitement? In short, $VOTE represents a highly innovative approach to pushing the economy towards sustainability via index fund investing. It may be “passive” in the traditional sense—buying shares in companies purely based on an index—but it is “active” when it comes to engaging with those companies as a shareholder. Beyond Divestment: What’s Shareholder Engagement? Historically, values-aligned investing has often been synonymous with avoiding the purchase of certain stocks—a practice often referred to as “divestment.” The alternative to divestment is “engagement.” By owning a stock, and using your rights to vote on shareholder resolutions, you can attempt to change the company’s activities from the inside. Vanguard, BlackRock, and State Street—the “Big Three” largest fund managers—are collectively the biggest shareholders in most companies, but have historically been reluctant to rock the boat and aggressively challenge management. As a result, when it comes to investing through index funds, the full potential of shareholder engagement to drive change hasn’t been tapped. Engine No. 1’s new $VOTE ETF promises to change that. To understand why, it helps to understand the mechanics of how shareholders can push for change. Proxy Voting Purchasing stock in a company grants you not just a share of its profits, but also the right to influence its decision-making. This process is called “proxy voting,” which can be a powerful tool with the potential to transform the entire economy, company by company. Publicly traded companies operate like quasi-democracies, accountable to their shareholders. They hold annual meetings, where shareholders can vote on a number of topics. Shareholders who disagree with some aspect of how a company’s business is conducted can engage with management, and if they feel they aren’t being heard, can present an alternate course of action by making a “shareholder proposal.” If they can persuade a majority of all shareholders to vote in support of the proposal, they can overrule management. When more drastic change is warranted, such “activist” shareholders can seek to replace management entirely, by nominating their own candidates for the company’s board of directors. Shareholder Activism: Social Change Through Engagement Social change via shareholder activism has a storied history. As early as 1951, in a seminal case, civil rights leader James Peck took the fight to the proxy arena, by filing a shareholder proposal with the Greyhound Corporation, recommending that the bus operator abolish segregated seating in the South. Seventy years later, on May 26, 2021, activist hedge fund Engine No. 1 stunned the corporate world by winning a proxy battle against the current leadership of ExxonMobil, persuading a coalition of shareholders to elect three of its own candidates to the board—the first ever climate-centered case for change. Engine No. 1 argued that Exxon’s share price was underperforming that of its peers because the company was unprepared for the transition away from fossil fuels. It nominated candidates for the board that would push the oil giant to embrace renewable energy. Against all odds, holding just .02% of Exxon’s stock, Engine No. 1 prevailed. Corporate boardrooms across the entire S&P 500 are buzzing, asking what the Exxon coup means for them. Where will environmentally and socially conscious investors strike next? These questions are warranted: The Exxon campaign was a first, but it surely won’t be the last. “Index Activism”: Bringing Power To The People Individual investors are increasingly aware of proxy voting as a domain by which their portfolios can channel their values. In a recent Morningstar report, 61% of those surveyed said that sustainability should be factored into how votes attributable to their 401(k)s are cast. However, most Americans, including Betterment customers, don’t buy stock of companies like Greyhound or Exxon directly, but through index funds. When you buy a share of an index fund, the index fund manager uses your money to buy stocks of companies on your behalf. As a shareholder of the fund, you benefit financially when these underlying stocks rise in value, but the index fund is technically the shareholder of each individual company, and holds the right to participate in each company’s proxy voting process. As more investors tell the industry that they want their dollars to advance sustainable business practices, the Big Three have been feeling the pressure to work these preferences into their proxy voting practices. This year, they are showing some signs of change. Notably, the Big Three ultimately joined Engine No. 1’s coalition, which could not have prevailed against Exxon without their support. However, even if the Big Three, who manage trillions on behalf of individual investors, continue to side with the activists, what’s missing is a way for individuals to invest their dollars not just to support these campaigns, but to spearhead them as well. What Makes $VOTE Special Activist shareholder campaigns are generally led by hedge funds, and what happened with Exxon was no exception. However, by launching an ETF that anyone can invest in, Engine No. 1 is looking to break that mold. In 2020, investors poured $50 billion into sustainable index funds—double that of 2019, and ten times that of 2018. The $VOTE ETF should bring even more investors off the sidelines, and into sustainable investing, for two reasons. First, rather than dilute its efforts, $VOTE intends to spearhead a handful of campaigns, pushing companies to improve their environmental and social practices. A focus on the highest impact, and most powerful narratives, will continue to raise awareness for the power of shareholder activism. Second, $VOTE is designed for mass adoption, not as a niche strategy. With a management fee of only .05%, and tracking a market cap weighted index, $VOTE is designed to ensure no trade-off to long-term returns. It is also well-suited for those investing for retirement—and as of today, it will make its way into its first ever 401(k) plan, via Betterment for Business. What Does $VOTE Mean For Investors? We know that many of our customers want to invest for real impact, especially if they can do so without sacrificing their long-term financial goals. If you’re investing through any of Betterment’s three Socially Responsible Investing portfolios, $VOTE will have a target weight equal to 10% of your exposure to the U.S. stocks. With $VOTE in your portfolio, you’ll know that your dollars are directly supporting whatever engagements Engine No. 1 launches next. As their subsequent work unfolds, we will be monitoring their efforts, and updating our customers on the impact their investments are driving. Now that $VOTE exists, anyone—not just Betterment customers—can invest in it, which is a great thing. The bigger it gets, the more it can drive change, and you, as an investor, get to help write the next chapter.
Taking Action Against Racial InjusticeTaking Action Against Racial Injustice Betterment shares with our customers how we’re taking action against systemic racial injustice.
If We Aren’t Changing The System, We’re Perpetuating ItIf We Aren’t Changing The System, We’re Perpetuating It Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country.
Jon Stein: Thoughts on 2020's Volatile MarketJon Stein: Thoughts on 2020's Volatile Market Much of what Betterment has worked toward the past 10 years has been purpose-built to endure all the worst and the best the market has to throw at us. I started today like I imagine a lot of people around the world might have: Wondering about the latest news. Helping my wife come up with new ideas to entertain our two young daughters. Thinking about how fortunate we are to be together and healthy, and about those most vulnerable during these uncertain times. Connecting with coworkers remotely (and missing our in-person interactions). I’ve also been thinking about my family’s and our customers’ finances. I’ve been thinking about how we all can make smart decisions to make the most of our current situation. Relatives (who are also Betterment customers) have told me brokers are calling them, saying, “Now’s the time to buy,” and “Let’s transition your portfolio,” and, to all of them I reiterate the same thing I always say: “Invest appropriately for your goals. Invest regularly. Stay the course (aka, don’t try to time the market).” Betterment was born in the aftermath of the last financial crisis. Our vision, a smarter way to manage money for everyone, was based in no small part on what I saw during that time: Too many people making rash (often bad) financial decisions and struggling to make sense of the economic turmoil, because of a lack of good, outcome-oriented, fiduciary advice. Much of what Betterment has been working toward over the past ten years—the services we’ve built, the products we’ve launched, the customer-outcome-obsessed company we strive to be for you—has been purpose-built for times like these, to endure all the worst and the best the market has to throw at us. How we’re working for you in these challenging times. Betterment has migrated to fully remote operations, and our teams are all up and running. We are fortunate that we were well prepared for this; in 2019, we opened new offices in Philadelphia and Denver and onboarded a dozen remote employees living across the country. This experience has served us well in our current environment, and made it relatively easy for us to institute a mandatory work from home policy early on. Today, all of our team, all over the U.S., is working for you. Just like you, we have parents juggling meetings with at-home kids, and supportive teammates picking up extra work to allow those who need it to take time to care for loved ones. They’re answering your calls, building and launching our new checking account, or analyzing our trading, advice, and operations, and working hard to give you the service and advice you expect and deserve. That we’ve seen record call volumes might be no surprise. Our call hold times have been elevated: ~30 minutes in the recent, dramatic days of market volatility. For me, this was a positive surprise. It’s longer than I’d like it to be, but better than the busy signal I might have feared after hearing about it elsewhere. Our services have remained open and up through record trading volume. We’ve harvested billions of dollars of tax losses and rebalanced hundreds of thousands of customers smartly, and tax-efficiently, working to make the most of even down days. We’re also launching new ways to answer your questions and connect with you, including advice videos and live Q&A on platforms like Twitter and Reddit. We hear you, and we’re working as hard as we can to respond to your feedback and concerns. “Empower people to make the most of their money so they can live better.” That’s our mission at Betterment—the reason each of us joined and what brings us together. It’s our mission when the market is up and when it’s down. One of the things about working at Betterment is that every single one of us is a customer as well. It means that we’re working for you, and we’re working for our families. We celebrate with you when we reach our financial goals, and we hurt with you when the markets are in turmoil. We’re with you, working hard to help navigate spending, saving, investing, and retirement with confidence. We’ve known from the start that there will be good days and bad days in the market, as in life. We are invested in the world and with the world, in a global portfolio. As the world goes, so we go. Smart investing is the confidence to endure. On average and over time, being broadly and globally diversified is wise, today and every day. Historically, it has led to the most consistent returns, with the least amount of risk, of any widely available investment strategy that we have identified. Implementing it well requires discipline, smart automation, and appropriate identification of goals and time horizons. This approach and our advice are designed to help you make smart decisions today that help you reach your goals in the long-term. Everything we do is built with the intention of helping you achieve better results than you could without us, than anyone could without us. Just as importantly, everything we do is built to help you have peace of mind. But just because some may be better off, or more fortunate, doesn’t make anyone immune to the pain going on around us. As friends and loved ones are vulnerable or exposed and the worldwide economy goes through a rough patch, we feel it, too. Smart investing is not the absence of dark days, or the absence of fear, it’s the confidence to endure. We will get through this, and the economy will be stronger in the long run. Things will get better, for the world, our customers, our team—and you. Invest appropriately for your goals. Invest regularly. And stay the course. We’re here for you, should you want a hand to hold (or, better make that, a person to talk to), and we’ll get through it better, together.
Betterment Encourages SEC to Adopt Investor-Friendly DisclosureBetterment Encourages SEC to Adopt Investor-Friendly Disclosure As the SEC considers new rules to better protect and inform investors, Betterment formally suggests ways to improve a new disclosure, Form CRS, based on actual investor research. Recently, the Securities and Exchange Commission (the SEC) proposed a package of rules designed to improve the quality of investment advice. This is a subject that we care passionately about, so we carefully studied the SEC’s proposals and filed a public comment explaining how the rules could be strengthened. We focused in particular on the SEC’s proposal for a new disclosure document intended to provide investors with simple, easy-to-understand information about investment firms. Here at Betterment, we aim to make investing advice clear and straightforward. We think investors make better decisions when they have a clear idea of what they’re getting from a financial services provider—and what they’re not. The SEC’s proposal inspired us to think critically about how the entire investment industry could better inform investors. We decided that we could have the greatest impact by designing our own disclosure document and testing it with actual investors. It is our hope that the SEC will find suggestions supported by this type of data to be particularly worth considering. Our comment letter sets out our specific proposals, and the supporting research, in detail. We’ll provide the highlights and some additional perspective below. Our letter to the SEC is part of Betterment’s continued efforts to support smart regulation that helps individual investors make better decisions for their money. We were a vocal advocate for fiduciary standards for advice on retirement accounts as proposed not long ago by the Department of Labor—and in this comment to the SEC, we make similar points. Individuals deserve to know which investment firms are aligned with their interests, especially given the high stakes of investing well. Our comment focuses on a document called Form CRS. We began our comment, addressed to the Secretary of the SEC, by explaining who Betterment serves: our clients, all of whom rely on the SEC to help safeguard the quality of investment advice. Dear Mr. Fields: We are writing on behalf of Betterment LLC, an SEC-registered investment adviser that manages over $14 billion for nearly 400,000 clients, the vast majority of whom are individuals. We applaud the Commission’s efforts to improve the quality of advice provided to retail investors and investors’ understanding of the options available to them. The stakes are high. Millions of Americans need to invest, and invest well, in order to fund essential financial goals, including retirement. If the Commission is successful in this rulemaking, more retail investors will receive the right professional guidance for them ...which should lead to better outcomes for their lives. This rulemaking has the potential to enhance individual financial security and alleviate the country’s broader shortfall in retirement savings. In this comment letter, we: (1) explain why we believe that this rulemaking is critically important, and (2) offer our views on specific ways that the proposed rules could be strengthened. In particular, we describe our efforts to improve the Commission’s new disclosure document, Form CRS, which is intended to provide retail investors with simple, easy-to-understand information about investment firms. To provide the SEC with more than just our opinion on Form CRS, our comment provides evidence about how our proposed version of Form CRS performed with real investors. That testing showed that our proposed changes to the form, designed to make it clearer, more focused, and more visually appealing, could help improve its overall effectiveness. We also explained our position that Form CRS should explain all the ways that firms are making money from their clients so that investors have a better understanding of how financial conflicts can impact the quality of advice they receive. At Betterment, we strive at every turn to build a business that aligns our interests with our clients so that they can trust that our recommendations of particular investments are not compromised by our financial interests. We explained the stakes: Investors deserve quality investment advice. Before diving into the data and our specific suggestions, we wanted to remind the SEC exactly what’s at stake for the finances of individual Americans. As SEC Chairman Clayton recently observed, it is “more important than ever that people save and invest for their own futures.” Many Americans face a significant shortfall in their retirement savings, exacerbated by soaring health care costs and longer life expectancies… In this environment, access to personalized investment advice is crucial. Indeed, not only can advice help Americans decide how to invest, it can play a critical role in getting them comfortable investing in the first place. As a recent Treasury report observed, “[e]stablishing a pattern of saving and investing during the early period of an individual’s career can significantly increase the probability of long-term success in accumulating wealth and building retirement savings.” At Betterment, we spend considerable time ensuring that we are explaining financial concepts simply, designing (and testing) appealing user experiences, and effectively serving both seasoned and first-time investors. As if it weren’t challenging enough for Americans to meet key financial goals like retirement, conflicted advice can make things worse. ...Conflicted advice imposes a significant drag on the economic security of millions of American households. While it is difficult to fully pinpoint the financial impact of conflicted advice on retail investors, both in the form of higher fees and lost returns, estimates are in the tens of billions of dollars each year. This would be bad enough if investors actually understood key differences in firms’ conflicts, obligations, and revenue streams. If that were the case, at least investors could consciously decide whether to do business with particular firms, fully aware of the attendant risks. Unfortunately, countless studies have shown that investors’ current awareness of these considerations is limited, such that they are poorly equipped to protect themselves. The current disclosure system allows firms to hide their revenue streams and conflicts. It also does not effectively communicate that less conflicted options are available. We encouraged the SEC to raise the legal standards for advice and protect the public from misleading marketing. Although we believe that Form CRS could help investors make better choices and drive positive changes in the market for financial advice, disclosures are not enough. We explained that the SEC should raise the legal requirements for broker-dealers, who are currently allowed to favor their own financial interests when they make recommendations. That is, they can recommend investments that make them more money, even if another investment would better fit your needs. We also explained that the SEC needs to enforce clearer rules for how financial firms market themselves to consumers. ...we agree with the Commission's proposal to prevent broker-dealers from describing themselves with the terms “advisor” or “adviser.” Broker-dealers who use these terms cause significant confusion regarding the nature of the services they provide and the standards of care to which they are subject. But the Commission should go even further and preclude broker-dealers from holding themselves out in a manner that is inconsistent with the nature of their services and obligations, whatever specific words they are using. Absent such restrictions, misleading marketing may well drown out any additional clarity provided by more effective disclosures. We provided suggestions for improving Form CRS, supported by evidence We summarized our position as follows: The form should more clearly highlight how firms differ with respect to conflicts arising from product-level revenue and should clearly identify all forms of revenue associated with particular accounts. The form should be better organized, streamlined, and clarified. The form should better implement design principles that have been shown to facilitate visual appeal and comprehension. We don’t just believe that these changes would make Form CRS more effective, we’ve confirmed it through our own investor testing. That testing indicates that our proposed form, which makes the enhancements listed above, materially improves the form’s value to investors. We explained how these suggestions would support the SEC’s goals and build upon their proposal: We also agree with many of the fundamental principles that inform the Commission’s approach to the design of Form CRS. For example, the Commission seeks to provide concise information regarding certain fundamental characteristics of a firm in a clear and easily digestible format. That is, rather than simply replicating existing--and potentially sprawling--disclosure documents, the Commission has set out to create something new that is more focused, more compelling, and more digestible. The Commission has publicly emphasized its desire to standardize the format of Form CRS and certain aspects of its content to facilitate high-level comparisons by investors. Finally, the Commission has explained its desire to incorporate design principles and to test the effectiveness of its disclosure with real investors. We explained that our suggested improvements to Form CRS were intended to help focus investors on three fundamental distinctions among investment firms: Obligations: (1) Fiduciary (investment adviser), or (2) “Best Interests” (broker-dealer) Fee Methodology: (1) Asset-based, or (2) Transaction-based Alignment of Interests: (1) Level-fee, or (2) Variable-fee To anchor the document on this framework, we designed a summary module that succinctly conveys these key distinctions and serves as a roadmap for the rest of the document. In our view, this should facilitate both comparisons and comprehension. It is effectively an application of the concept of layered disclosure referenced by the Commission in its proposal. We then reorganized the structure and content of Form CRS around these three key distinctions, stripping out certain information less critical to the core objectives articulated by the Commission (or that could effectively be addressed in other disclosure documents). As a result, even though our proposed form retained the “Additional Information” and “Key Questions to Ask” sections in roughly their original, proposed state, our form had 30% fewer words. We also attempted, where possible, to more clearly define key terms and avoid unnecessarily complicated language. The comment further explains how we tried to improve the form and the testing that we did to support our suggestions. As with our other advocacy, our goal is to help advance the state of financial advice for Americans today and going forward. We’ll leave you with the sign off we provided to the SEC. If you’re a customer, partner, or close follower of Betterment, we encourage you to make your own voice heard about the importance of regulatory action to improve the state of investment advice and the usefulness of disclosures. We are strong supporters of the Commission’s efforts to improve the quality of advice delivered to retail investors, as well as investors’ understanding of the options that are available to them. This is critically important work, and we hope that the Commission finds our input helpful as it finalizes its proposals, particularly our efforts to enhance and test Form CRS. We look forward to continuing to engage on this rulemaking, including with respect to any summaries of investor testing that the Commission releases in the coming weeks. Sincerely, Jon Stein, Founder and CEO Ben Alden, General Counsel Seth Rosenbloom, Associate General Counsel
The Senate Is Planning a Tax Hike on Retail Investors. It Should Be Removed.The Senate Is Planning a Tax Hike on Retail Investors. It Should Be Removed. The Senate’s current tax bill includes a mandate that would be punitive for everyday investors. Without a doubt, the FIFO mandate should be removed from consideration. Congress is currently working on a massive overhaul to our tax code, and the Republican-led majority appears committed to signing a bill into law before the end of the year. While the proposals have far-reaching impact, one provision proposed by the Senate would be particularly punitive for retail investors: the so-called “first in first out” (FIFO) mandate. This provision mandates that when retail investors sell a portion of an investment, they must sell their oldest shares first—that is, the first shares “in” must be the first shares “out.” While this technical change may sound innocuous, the FIFO mandate would dramatically harm millions of retail investors. It would raise taxes in unintuitive ways, distort investment behavior, and deprive investors of the opportunity to plan efficiently for retirement. Investing would become more complex and more time consuming—disempowering and disenfranchising everyday people who need to invest for their future. The Senate has already recognized that the FIFO mandate is bad news. In the first draft of the bill, the FIFO mandate applied to investments made by investment funds, but the Senate exempted them after an intense lobbying effort. As a result, investment companies will continue to have the freedom to decide which shares they want to sell. Retail investors unequivocally deserve the same opportunity. What a FIFO future could look like Imagine an investor who, for the last 20 years, has been putting $100 each month into an hypothetical index fund that has returned 10% on average. After 20 years, her deposits from the first year are now up approximately 600%. Say the market has been down this year, but she smartly continues her monthly investments, knowing that in the long term, consistency is the best strategy. Now assume that, before the index fund has recovered its value, our investor has an unforeseen expense of $600. She covers it by withdrawing from her portfolio. Under current tax law, she would be able get the $600 she needs by selling the shares that she purchased earlier in the year. Since these shares are currently trading at less than what she paid for them, she wouldn’t owe any taxes because she actually lost money on those shares. In fact, she could use her losses on the shares to offset other income, reducing her overall tax burden. In contrast, under the proposed FIFO mandate, she would not be able to sell her most recently purchased shares. Instead, she would be forced to first sell the shares that she purchased 20 years ago, which would mean that $500 of the appreciated value would be considered taxable gains. Assuming a combined federal/state long-term capital gains rate of 25%, she will owe $125 in taxes. In trying to withdraw $600, she will be left with $475, net of the tax she owes. To get the full $600 out of her portfolio, she would have to sell about $760 worth of shares, even though the most recent $600 she invested has actually lost value.1 The FIFO mandate might cause her to attempt complex and burdensome strategies to avoid this harsh result. Or, more likely, she would simply decrease her investments in the market, impairing her own investment goals and the growth of the overall economy. FIFO triple-taxes investment income and distorts investor behavior According to the GOP Tax Reform Framework released earlier this fall, tax reform seeks to establish a “simpler, fairer” tax code “built for growth.” The FIFO mandate will actually undermine these goals by distorting investing behavior as investors take extraordinary measures to avoid taxes or avoid investing altogether. Middle-class savers and retirees will fare the worst. By depriving investors of the freedom to choose which shares they want to sell, the FIFO mandate effectively raises taxes on investment income, resulting in a new era of triple taxation for retail investors. Under current law, retail investors already pay personal taxes on investment returns, and the companies they invest in pay corporate taxes. By greatly increasing the impact of the capital gains tax, which could otherwise be deferred (or possibly avoided) under current law, the FIFO mandate essentially imposes a third layer of taxation. Under the FIFO mandate, investors would have to take extraordinary measures, divorced from economic reality, to avoid a large tax bill. Decisions made decades earlier could lead to potential tax consequences that would prevent investors from making what would otherwise be the best investment decisions. Investors would have to maniacally focus on the tax lots they purchase and sell. They might be encouraged to purchase countless versions of similar funds to preserve the ability to access their money in response to unplanned needs. They could seek to open a multitude of accounts at different financial institutions to avoid the FIFO mandate. But, these complicated strategies are likely to be impractical for ordinary retail investors, many of whom already struggle to find the time to properly manage their finances. Only wealthy investors are likely to successfully avoid the FIFO mandate; others are more likely to pay higher taxes—or worse, invest less. Thus, the FIFO mandate will be particularly punitive precisely for middle class savers who have done everything right: picking an investment strategy and sticking to it consistently. They are the ones who would find themselves with fewer and more expensive options when they need to access their savings, including in the face of an unplanned emergency. This is plainly unfair. Retirees would suffer disproportionately. In a world where corporate pension plans have largely disappeared and Social Security benefits are set to be increasingly uncertain (the Social Security Administration says it is “three quarters funded for the long term”), saving for retirement is already a challenge for most Americans. FIFO further complicates retirement savings because older investors will disproportionately face higher taxes early in retirement, as the first shares they will be required to sell will likely have the largest gains. In a future where retirees are personally responsible for their retirement, every penny matters and depleting retirement savings is counterproductive. Furthermore, the many unanswered questions about the mandate could have major consequences for investors. For example, would the FIFO mandate apply across spouses, meaning there might be a marriage penalty? Would it apply across different brokerage accounts, leading to complex accounting or gaming by opening multiple accounts? Would the FIFO mandate apply to charitable giving? Depending on how these questions are answered, the FIFO mandate could inflict additional harm. FIFO clearly hurts investors. But it doesn’t really help Congress either. So, given all the consequences of a FIFO mandate, why is it in the Senate’s tax plan today? The probable answer is, of course, the mandate’s potential to raise revenue—$2.7 billion over 10 years, according to the Joint Committee on Taxation. That $2.7 billion will come primarily from middle-class investors early in retirement. Yet, the revenue generated from the FIFO mandate is miniscule compared to the Senate tax plan of $1.5 trillion in overall deficit spending. The FIFO mandate’s paltry revenue generation is hardly a solution to Congress’ larger budgetary problem. It would cause collateral harm and create unfairness that is not nearly justified by the additional revenue. If Senate Republicans are truly looking to establish a “simpler, fairer” tax code “built for growth” they should eliminate the FIFO mandate. Given that it adds relatively little revenue in the overall scheme of the tax plan, and is extremely punitive to individual investors, removing FIFO should be a straightforward fix everyone can agree on. Citations 1 The tax rate on the capital gains could end up being much higher due to the capital gain being a component of AGI (Adjusted Gross Income). A higher AGI may reduce tax credits, limit tax deductions, and increase the portion of Social Security subject to income tax. This editorial was originally published on Investment News.
The Fiduciary Rule Should Be Fully ImplementedThe Fiduciary Rule Should Be Fully Implemented Major provisions of the DOL’s fiduciary rule are going into effect this month, but the provisions that enforce the rule are under attack. It’s up to all of us to make sure the fiduciary rule stays a rule, not a loose guideline. After years of research, deliberation, commentary, and delay, the Department of Labor’s fiduciary rule raising the standards for retirement savings advice is finally starting to go into effect. Tomorrow, two key provisions of the rule finally become applicable: One governs who qualifies as a fiduciary for retirement accounts, and the other requires fiduciaries to adhere to what are called impartial conduct standards. At Betterment, we were delighted by the news that implementation is starting. For more than a year, we’ve been pressing lawmakers to make good on the promise of the fiduciary rule. When it comes to advice on retirement saving, we think much of the financial industry is just plain backward. Too many financial companies today profit by putting their financial interests ahead of their customers, and that’s a problem not just for their customers’ accounts but for how we, as a nation, manage retirement. The Financial Industry Faces a Pivotal Moment If part of the American Dream is to be able to retire without worry, the United States needs the financial industry to look out for future retirees—not just for maximum profit. By implementing the fiduciary rule in full, the Department of Labor can help the industry reorient itself toward aligning with customers’ needs. Instead of profiting from commissions and kickbacks that have very little to do with customer needs, investment managers under the fiduciary rule will be paid more directly for their service to clients. In effect, the DOL has the opportunity to chart a new vision for how our nation manages retirement. But in order for us to achieve a new era in the way retirement is managed in America, It’s going to take some muscle to bring the product-pushers of the industry into alignment. The DOL provisions going into effect this week don’t yet include the legal enforcement mechanisms designed to make sure companies who provide retirement advice comply with the law. And without that accountability, improved standards for fiduciary advice may not mean much for actual investors. The Fiduciary Rule Needs Muscle The primary enforcement mechanism in the fiduciary rule, as it was initially drafted, is termed the “best interest contract” (BIC). This contract, which is supposed to be a requirement for money managers that give conflicted advice, would allow IRA holders to sue providers that take advantage of them. Without the requirement for a BIC, the rule provisions going into effect this week may have limited effect on how many financial firms actually behave. Just imagine hiring a broker (or money manager) who is effectively able to say that they're acting in your best interest, but there is no actual threat of consequences if they don’t deliver. It would be akin to letting food brands advertise being “FDA approved” without actually being analyzed by the FDA. If—as an industry—brokers, fund companies, banks, and financial advisors are all going to be called retirement fiduciaries under the new rule, then we should have well-enforced provisions for making sure fiduciaries act as fiduciaries. If the DOL chooses not to fully implement the rule, including the BIC requirement, come January 1, 2018, then there’s a chance that the already frequently confused distinction of being a fiduciary becomes even more misunderstood over time. Americans deserve a crystal clear distinction between advisors who actually follow a fiduciary standard and those who do not. A fiduciary rule without the BIC would result in an empty and unenforceable legal standard. To make the gains of the day still more tenuous, it’s clear that even as financial incumbents fight against the fiduciary rule’s enforcement, they’re also trying to roll back the provisions going into effect tomorrow. Just this week, newly appointed Secretary of Labor Alexander Acosta said that the financial industry’s concerns were ignored when the rule was drafted and explained that the DOL is reviewing the rule in its entirety. If that process leads to a rollback of the provisions going into effect tomorrow, the positive progress represented by the fiduciary rule will be lost. Fiduciary Rule Progress Is Good, But Americans Need to Be Diligent With the fiduciary rule’s enforceability in question, Americans have to continue to be diligent about their relationship with financial advisors. It’s important to understand how your advisor is paid, what their underlying conflicts of interest might be, and why they advise you the way they do. Think of your advisor like you might a doctor. When you see a physician, you trust them to be an expert in their field and to do what’s best for your well-being. Yet, that trust is also earned: It emerges from how they answer your questions, provide various treatments, and explain what outcomes you can expect next. The same form of trust-building should happen with your financial advisor, regardless of how the fiduciary rule shakes out in the end. Whether you work with an online investment advisor, like Betterment, or an in-person advisor, focus on being diligent: learn to ask the right questions, don’t settle for surface-level answers, and stay active in your financial future. You don’t have to be a financial expert to be a good financial services customer.
Betterment Hosts Roundtable on Fiduciary Rule’s Bygone Start DateBetterment Hosts Roundtable on Fiduciary Rule’s Bygone Start Date If it hadn’t been delayed, the Department of Labor’s fiduciary rule would have taken effect this week—a game-changing shift for individual investors. We hosted members of the press and investor advocates for a roundtable discussion on how to achieve better standards for retirement advice. What do you do when a new administration delays regulation that would dramatically improve how people receive financial advice for retirement? Our answer this week: Bring together industry experts and financial journalists for an in-depth discussion on what’s at stake in delaying the Department of Labor’s (DOL) fiduciary rule. Monday, April 10 marked the day the fiduciary rule would have taken effect had the DOL not delayed the rule. Instead, parts of the rule were delayed until June (and other parts until next year) while the DOL considers whether to change or withdraw the rule. The rule would require all financial professionals who provide retirement planning advice to act as fiduciaries for their clients. In recognition of all that’s at stake in the fiduciary rule’s delay, Betterment hosted a breakfast with members of the media and rule experts, highlighting the historic decision currently in limbo. Explore our recap of the roundtable discussion and Betterment’s ongoing support for the rule below. Experts and Advocates at the Roundtable After publicly supporting the fiduciary rule for months, we wanted to collect and highlight other industry voices advocating for the fiduciary rule. The roundtable was led by: Micah Hauptman Maureen Thompson Seth Rosenbloom Jon Stein Financial Services Counsel, Consumer Federation of America (CFA) Head of Policy, Certified Financial Planning Board (CFP Board) Associate General Counsel, Betterment Founder & CEO, Betterment April 10, 2017: The Day the Financial Industry Was Waiting For Prior to the fiduciary rule’s delay, April 10 was to mark a huge shift for the financial industry. For financial advisors—particularly non-fiduciary brokers and insurance agents—the day would have resulted in more responsibility, more disclosure, and changes to unfair compensation structures. For RIAs and other existing fiduciaries, April 10 represented the start of a more level playing field where customers and their retirement savings come before advisors’ profits. Our roundtable discussion started by recognizing the simple fact of the matter: As the DOL delays a fiduciary standard for retirement planning, real people—and their future livelihoods— continue to be negatively affected. CFA representative Micah Hauptman noted that every day the delay continues a portion of financial professionals are maximizing their own profit by guiding their customers toward high-fee investments. Any delay of the fiduciary rule furthers such practices that hurt the average investor. What Does the Delay Reveal? Every panelist in the roundtable agreed that the fiduciary rule’s delay can largely be attributed to potent lobbying efforts from the financial industry’s most established players. And in the pause created by the delay, several important issues are revealed: Both Hauptman and Thompson provided examples of financial products that went into development after the rule was proposed but have since stalled in light of the delay. This slowed progress demonstrates the financial industry’s lack of commitment to products that would better serve customers. The fiduciary rule’s opponents may find it difficult to completely do away with the rule, based on the apparent research that went into justifying the rule in the first place. Most participants in the discussion agreed an aggressive “watering down” of the rule seemed more likely than an all-out scrapping. The debate over the fate of the fiduciary rule has generated unprecedented public awareness of what it means to receive fiduciary advice. The media attention on the fiduciary rule—and its impact on consumers—may make the notion of complete reversal less politically feasible. What’s Next for the Fiduciary Rule? Speculating on what the future holds, the roundtable turned to what could happen to the rule after the delay and what firms like Betterment will do to support it. The DOL will accept comments regarding its reconsideration of the rule until April 17, after which there will be additional discussion of whether changes should be made. We at Betterment remain dedicated to engaging the DOL on why the rule is important for Americans’ retirement future. Fiduciary rules and guidelines have been considered by other government agencies, but, as our discussion explored fully, the DOL is currently the best avenue for establishing stronger fiduciary standards on retirement planning. Fiduciary rules and guidelines have been considered by other government agencies, but, as our discussion explored fully, the DOL is currently the best avenue for establishing stronger fiduciary standards on retirement planning. Over the coming weeks, a new Labor Secretary will be confirmed, and the DOL will review further comments on the rule. In the last round of comments, those in favor of the rule (or opposing delay) outnumbered opposing comments more than ten to one. Nobody in the roundtable forecasted the result of this new comment period being any different. It’s difficult to forecast what shape the rule will ultimately take. As Betterment CEO Jon Stein remarked, the outcome will not change Betterment’s work. We are already a fiduciary and are committed to acting in the best interest of our clients. However, we believe it’s important to work to move the financial industry forward to be more responsible to all investors.
DOL Public Comment: Protect Investors’ Right to Honest Financial AdviceDOL Public Comment: Protect Investors’ Right to Honest Financial Advice The Department of Labor’s fiduciary rule is at risk of being delayed or repealed. We recently submitted a public comment in support of the rule because we believe that all investors have the right to trustworthy financial advice. No matter what happens, we will continue to put our customers’ interests first. In April 2016, after years of study and public debate, the Department of Labor (DOL) finalized the fiduciary rule. The rule, which was supposed to be effective this April, requires money managers who provide retirement advice to act in their customers’ best interests. At Betterment, we have long been supporters of the rule. In 2015, we first submitted a public comment in which we explained the rule’s benefits and took issue with the misleading arguments advanced by financial firms fighting the rule. After this fall’s presidential election, there was widespread speculation about whether the rule would be rolled back. We publicly asked then-President-elect Donald Trump to keep the fiduciary rule intact and sent a letter to Sen. Elizabeth Warren, D-Mass., explaining our support for the rule. On Feb. 3, President Trump signed a memorandum directing the DOL to reconsider the rule, signaling that it was at risk of being delayed or withdrawn. On March 2, the DOL formally proposed a 60-day delay of the rule and stated that it was beginning the review called for by the president. Now, we’ve submitted the below official public comment to the DOL, expressing our concerns that a delay would needlessly harm investors and, even worse, could be used as an opportunity to weaken or repeal the rule. We encourage you to advocate for yourself and your future by submitting a public comment in support of the fiduciary rule. In the meantime, you can read others’ comments, and ours below. Betterment’s Letter to the Department of Labor Ladies and Gentlemen, I am writing on behalf of Betterment LLC, an SEC-registered investment advisor, in opposition to the proposed delay of the Department of Labor’s fiduciary rule. As an automated investment service that provides fiduciary advice to more than 220,000 clients, we are strong supporters of the rule. The fiduciary rule is necessary to ensure that Americans receive investment advice that is in their own interests, instead of conflicted sales pitches for high-fee products. For years, the financial industry has put its own interests first, costing investors billions of dollars. The fiduciary rule, which is currently slated to go into effect on April 10, would change that. We believe that any delay would needlessly perpetuate conflicted advice at investors’ expense. Betterment has consistently supported the fiduciary rule and submitted a formal comment expressing our support in September 2015. Before finalizing the rule, the Department of Labor considered an extensive factual record and thousands of comments. The Department of Labor also significantly adjusted its initial proposal to accommodate the legitimate concerns of impacted firms. Since then, the industry has had nearly a year to prepare for the rule’s applicability and has expended significant resources in doing so. The fiduciary rule may not be perfect—no regulation ever is. But the fiduciary rule is the only realistic hope for prompt action to improve the quality of retirement advice. A delay would be bad enough, but it would be even worse if the delay is used as an opportunity to dilute the rule or remove it altogether. We are extremely concerned about this possibility. If the Department of Labor wishes to further consider or revise aspects of the fiduciary rule, it can certainly do so once the rule is actually in effect. That is, the Department can take another look at the rule without imposing a delay that would imperil the rule itself. Some firms that have opposed the rule claim that a “unified best interests standard,” which would also cover non-retirement accounts, would be preferable. That sounds great in theory, but it is not realistically happening any time soon—and these firms know it. The fiduciary rule has already let to positive changes in the investment industry, such as reductions in fund fees and changes to conflicted service models. If the rule is delayed or watered down, these positive changes could disappear. For the benefit of the millions of Americans saving for retirement, we ask that the Department of Labor allow the fiduciary rule to go into effect this April. Sincerely, Jon Stein Founder & CEO
DOL Public Comment: No More Conflicted AdviceDOL Public Comment: No More Conflicted Advice In support of the DOL proposal to extend the fiduciary standard, we submitted an official comment this week. We support the DOL’s proposal because we believe it will accelerate this shift toward an unambiguous public good. Over the last several weeks, we at Betterment have been vocal about our decision to support the Department of Labor’s (DOL) proposal to extend the fiduciary standard to anyone offering advisory services for retirement accounts. We submitted the below official comment, and I wanted to share it with our customers and others interested in the conversation. Everyone is entitled to unconflicted fiduciary advice, and at Betterment, we are hard at work building the next-generation service that is making this possible. We support the DOL’s proposal because we believe it will accelerate a shift toward an unambiguous public good. Betterment’s Letter to the Department of Labor Ladies and Gentlemen, We are writing on behalf of Betterment LLC, an SEC-registered investment advisor, in support of RIN 1210-AB32. Much commentary has already been publicly submitted in response to Department of Labor’s proposed rulemaking change published in the Federal Register on April 20, 2015 (“Proposed Rules”). As an automated investment service that provides fiduciary advice to more than 110,000 clients, we have closely followed the debate. The main argument against the proposal seems to be that forcing those who provide services to retirement accounts to abide by the fiduciary standard will make servicing lower-balance accounts economically unappealing. As a result, given that such investors do not meet the minimums of traditional fee-only fiduciary advisors, they will have no access to “advice” at all. We take issue with this misleading characterization of the status quo. The implication that “suitability”-governed salespeople are giving investors “advice” deserves forceful and repeated debunking. Conflicts of interest should be prominently disclosed, and investors should be made fully aware of how their service providers are actually compensated. Meanwhile, the rapidly growing category of automated investment advice is emerging as a clear rebuttal to those who worry that small accounts will be left unserved. Modern technology allows for fiduciary advice to be delivered at unprecedented scale, with the expected quantum leap in affordability. We believe that these services, offering lower, transparent prices, fiduciary advice, and superior experiences, will prevail in the market against heavily conflicted, legacy business models. Behind all the rhetoric is an age-old dynamic; there are those who are busy building innovative services to better serve consumers, and then there are the rent-seeking incumbents who are busy deploying their formidable resources lobbying to preserve the status quo. On a recent visit to Washington, D.C., a team from Betterment had the opportunity to witness this propaganda offensive. We were struck by the deep cynicism of these efforts, and we feel compelled to weigh in, for the public record. We join the chorus of voices in support of expanding and strengthening the fiduciary standard. More specifically, services such as ours have been pulled into the conversation, and we want to take the opportunity to address some misrepresentations being leveled at automated advice. Fiduciary Advisor Is to Doctor as Stockbroker Is to Pharmaceutical Rep One opposition talking point that has gotten traction is that the DOL’s proposal is akin to Obamacare for retirement savings. Rep. Sean Duffy, R-Wis., who ran a recent House subcommittee hearing on the proposal, made the explicit comparison, arguing that the proposal “is yet another attempt by the administration to perpetuate a 'government-knows-best' regime,” adding that “Americans should be able to make the investment choice that is right for them.” Leaving aside the merits of the Affordable Care Act, we happen to agree that when it comes to the modern retirement landscape, the health care comparison is apt. By relegating the majority of Americans over to a defined contribution model for saving for retirement, we’ve given them full responsibility for determining how much to save, and how to invest their savings. This is not unlike telling them: “Here is every medicine ever made. You decide which ones to take, and how much.” No doctors included. What’s worse, we’ve allowed the securities industry to fill the void, by essentially letting pharmaceutical representatives to masquerade as doctors. Over the decades, stockbrokers (i.e., salespeople) have increasingly adopted the “advice” label, and consumers simply do not understand that there exists a higher standard for fiduciary advisors. Most consumers cannot rationally choose a fiduciary advisor over a salesperson because they do not know there is even a choice to be made. Research shows that more than 75% of investors are not aware that two different standards exist for those recommending investments. They often assume that all service providers (including those under the “suitability” standard) have their best interests at heart. A recent report issued by the PIABA demonstrates this point succinctly. The authors contrast the language used by major national brokerages in their marketing, with the positions these brokers take in arbitration proceedings when sued for losses caused by their misconduct. Broker A’s marketing: “Until my client knows she comes first. Until I understand what drives her. And what slows her down. Until I know what makes her leap out of bed in the morning. And what keeps her awake at night. Until she understands that I’m always thinking about her investment. (Even if she isn’t.) Not at the office. But at the opera. At a barbecue. In a traffic jam. Until her ambitions feel like my ambitions. Until then. We will not rest.” Broker A’s position in arbitration proceedings: “[A] broker does not owe a fiduciary duty to his customer in a non-discretionary account.” Broker B’s marketing: “It’s time for a financial strategy that puts your needs and priorities front and center.” Broker B’s position in arbitration proceedings: “Respondents did not stand in a fiduciary relationship with Claimants.” These brokers are household names: institutions that radiate trust and security through decades of shrewd marketing. The DOL’s proposal has already done a tremendous service to the public interest, simply by elevating this issue to prominence. In our experience, many observers have only become aware of the distinction between the “suitability” and “fiduciary” standards because of this debate. Services to Qualified Plans Are Uniquely Broken Those saving in employer-sponsored retirement plans are especially vulnerable, because a principal-agent problem prevents better outcomes. The decision makers (e.g., plan sponsors’ human resources executives) are not the ones bearing the full cost of suboptimal choices. Accordingly, brokers structure their offerings to target the incentives of the decision makers—lower upfront cost to the company—while making money in less apparent ways off the participants. That often leaves participants captive to a limited selection of overpriced (but still “suitable”) funds that charge several times what a comparable index fund should cost in the open market. This is classic market failure, potentially costing investors hundreds of thousands in excessive fees over their lifetimes. Smaller plans are particularly affected. While Betterment has offered automated investment advice to individual IRAs under the fiduciary standard for more than three years, we always intended to tackle the unique challenges of qualified plans. Accordingly, we recently launched Betterment for Business, a turnkey 401(k) offering, extending Betterment’s fiduciary advice to employer-sponsored plans of all sizes, at industry-leading low fees. This makes Betterment the first automated investment service to offer its services to the full range of accounts used by most Americans to save for retirement. It is also the first affordable 401(k) plan that includes personalized fiduciary advice for all participants. What “Robo-Advice” Is, and Isn’t These developments have been noted by policymakers at the DOL, who have rightfully pointed to offerings such as ours to rebut arguments against the proposal. This recognition has given entrenched industry opposition an opening to launch a concerted effort to spread misinformation about the nature of automated fiduciary advice. Until automated investment services were pulled into the discourse, lobbyists largely resorted to vague protestations, calling the proposal “unworkable.” The term “robo-advisor,” often used by the press to describe services such as ours, has given opponents an easy path to mischaracterize the nature of the rapid innovation taking place in the industry. Bereft of intellectually compelling arguments, and given a clear target, lobbyists have jumped at the opportunity to play on the fears of the public. The reassuringly named lobbying organization Americans To Protect Family Security, Inc. has been running a television campaign featuring a couple lamenting that “these new regulations they’re pushing in Washington” will make it hard to get help from “Anne,” their “financial advisor.” The alternative will be “to pay a lot more,” or alternatively, “we’ll be talking to a robot on the phone.” The juxtaposition of the familiar and human “Anne” (who is not obligated to put her clients’ interests first) and the unmistakable reference to cold and impersonal “robo-advice” is effective. But what’s striking is how little resemblance the allusion bears to the automated advice offerings actually serving clients today. Casual observers can be forgiven for assuming that algorithmic advice cannot possibly involve interaction with a human being. At Betterment, precise, consistent and unconflicted algorithms make recommendations to clients on how to reach their goals, tailored to each client’s personal circumstances. Incorporating insights from behavioral finance, our award-winning user interface surfaces only the most relevant data to clients, mitigating human tendencies to make poor decisions. Yet from its inception over five years ago, Betterment has always featured live, human customer support. In 2015, Consumer Reports named Betterment in its top five for customer service, alongside industry giants that have been around for decades. Far from being mutually exclusive, technology and customer experience go hand-in-hand. The algorithmic advice is efficient, scalable, and unbiased, but should they choose to call, our clients will speak only with a human. Observers have also speculated that automated investment services are for the young, and therefore cannot serve as the panacea for retirement savers at large. This has not squared with our experience; more than 25% of Betterment’s business comes from customers over the age of 50, and the segment is growing fast. While younger investors tend to be earlier adopters of new products, we have observed no generational preference for the convenience and value of better technology. How Clients of Automated Investment Services React to Volatility A related anti-robo shibboleth has opponents bemoaning the inevitable demise of “hand-holding” during market downturns, ostensibly available to clients to “suitability”-governed brokers. This benefit is sure to be lost as clients migrate over to automated fiduciary advisers, the argument goes. Color us skeptical as to the extent and value of any “hand-holding” actually offered by commission-driven salespeople. These professionals are not inherently bad people, but they are incentivized to encourage you to “do something” as often as possible. One should expect their “advice” during a downturn to result in unnecessary trading, rather than doing absolutely nothing, which is what long-term investors should be doing. What we can offer to the debate is empirical data on how 110,000 clients of an automated investment service actually react to volatility. On Monday, Aug. 24, markets opened 5% down from their Friday close, and over 10% down from recent peaks. While this is far from the worst drawdown investors have, or eventually will experience, it was significant nonetheless, and press coverage through the day was pervasive. The markets recovered somewhat by Friday, but the week continued to see substantial volatility. The chart below shows movement of the S&P 500 spanning these seven days. S&P 500 Movement During Market Volatility We did experience a small increase in customer logins during the market volatility. Betterment’s approach during periods of volatility is to proactively communicate only with clients who log in, rather than to contact all clients indiscriminately.1 Those who did log in were presented with advice which put the volatility into context, and encouraged them to focus on their long-term goals. The data show that less than 1% of our customers reacted to the market activity with an allocation change or withdrawal. As discussed above, Betterment clients can contact customer service by phone or email, each of which results in the creation of a case in our CRM system. Betterment’s customer service saw a pretty typical Monday, with just 5.58% more cases than usual. Tuesday was actually considerably slower, 25.6% below normal volume. Betterment Customer Service Activity During Market Volatility Everyone Deserves Unconflicted Retirement Advice We do not blindly support regulatory changes that are certain to have a disruptive impact on the industry. But the opponents of the proposal have an intellectually weak position. And there is so much badly in need of disruption when it comes to helping Americans reach their financial goals. Everyone is entitled to unconflicted fiduciary advice, and at Betterment, we are hard at work building the next-generation service that is making this possible. We support the DOL’s proposal because we believe it will accelerate this shift toward an unambiguous public good. Sincerely, Jon Stein, Founder and CEO Eli Broverman, Co-Founder and COO 1 Behavioral research shows that bringing anxiety-inducing events to the attention of those who might otherwise ignore them is expected to lead to worse decisions.
The SEC and FINRA Get It Right on Automated InvestingThe SEC and FINRA Get It Right on Automated Investing What is automated investing? Government regulators focus on automated investing and ways consumers should evaluate a service. Here's what you need to know. The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently released a joint investor alert about automated investment companies—and the investment industry’s primary regulators got it right. The alert highlighted that investing tools have limitations, and people need to be keenly aware of where they are putting their money. This is not a recent issue—new investing tools have been introduced for decades. But now something different is happening. Faster, cheaper computing has allowed for rapid innovation with personal investing—making it easier for all consumers to invest in low-cost, diversified portfolios. The joint alert is one of the first publications from either the SEC or FINRA that recognizes the category of automated investing, which we created when we launched in May 2010. What is automated investing? If you’re new to Betterment, we are the leader of the automated investing revolution. We use smart technology to manage and optimize your investment portfolio. The result is more transparency, more access to your money, and less stress. Best of all, we have brought to everyone a level of investing sophistication that was once only available to the super wealthy. Since we welcomed our first customer in 2010, we have grown in size to nearly 100,000 customers and today manage more than $2.3 billion of their money. It’s validation that consumers want and are using the kind of investment automation we provide. As with every new and popular technology, there is a period of consumer education and trust building. The joint alert recognizes many of the benefits of automated investing, including low costs, ease of use, and broad access. The alert also rightly points out important limitations of some automated investing services of which consumers should be mindful. While there are several tech-based investment companies out there that are considered automated investment services—or robo-advisors—no other service is quite like Betterment. Our technology is different than any other company’s. When we built our smarter technology five years ago, we worked from the ground up, creating a vertically integrated system where we handled both the advice and brokerage portions of investing. By handling both aspects, we mitigated many unnecessary fees and functional inefficiencies that exist at other investment management firms. We are, in fact, the largest major automated investing service to be structured in such a cost-efficient way, and we pass those savings on to our customers. Betterment is different than other investment managers Betterment’s advice is free of conflicts: We don’t operate our own funds, advise a cash asset that we earn returns on ourselves, or receive compensation from any of our fund providers. There are no middle-men or incentive structures at Betterment that add extra friction or costs for trading. Our investment selection process is transparent, and we strive to always use the lowest total cost of ownership and most tax-efficient funds available. Our management fees are straightforward, based on a percentage of a customer’s balance. Betterment allows investors to customize multiple goals, each with personalized allocation for their needs: The joint bulletin highlights an issue we love to talk about—personalized investment advice—mentioning in several places that automated investment tools are limited in the degree to which they accommodate individual circumstances. Every customer who signs up for an account at Betterment can personalize multiple goals with an allocation of stocks and bonds that is modeled exactly for his or her age, time horizon, and goal type. If you have any questions about the SEC’s guidance and the extent of our advice, we always make our advice methodology transparent and readily available for every investor to read. Betterment’s underlying assumptions are always updated to current data points: Advice is not a static event; it requires constant assessment and reassessment. We use technology to continuously update our advice to investors based on their balance and how they are saving so that it continues to incorporate each individual’s current realities accurately. We also update our risk-free interest rate forecasts quarterly, using data provided by the U.S. Department of the Treasury. The underlying algorithms are tested, modeled, and constantly monitored. This means our savings advice and outlook are always tracking to the most current figures. As automated investing grows as an industry, there will be more companies vying for consumers’ attention. We are happy that the SEC has recognized what we have believed all along, and we support the SEC’s efforts to educate consumers. Betterment is setting the standard for what automated investing should be: transparent, personalized, without conflicts of interest, and aligned with customers. Everyone should have access to low-cost and smart investing advice—Betterment is providing exactly that. It’s ‘Investing Made Better.'
Betterment Raises Another $60 Million for Smarter InvestingBetterment Raises Another $60 Million for Smarter Investing We are quadrupling the cash we have on hand with the addition of $60 million in new funding, bringing our total funding to $105 million in company history. To our customers: Thank you. You amazing pioneers. You sent us 160 million of your hard-earned dollars last month, and it looks like you’ll send us even more this month. Don’t you know we’re just a bunch of data nerds and coding geeks? Yes, and a few cool designers, some of the country’s most impressive PhDs, CFA® charterholders, and CFP® professionals, and maybe a couple of Kanban masters and growth hackers. But why do you have so much faith in us? Oh, you trust our transparency and algorithms, you say? Do you really trust a computer to manage your money for you? Will the computer hold your hand when the market drops? Well, not literally, but it’ll give me useful feedback and help me make better objective decisions, you say. And it might harvest some choice tax lots. Oh, you Betterment customers. You’re so smart. Have you read the investment industry press lately? In case you don’t follow it closely, I’ll tell you: They’re either loudly dismissing us as irrelevant and destined to fail, or they’re praising us as the future, the inevitable, the what-we’ve-been-waiting-for technology. But they’re all talking about us. The attention is flattering, whatever they say, even when they deride us as “robo-advisors.” We’ve created a whole new way to invest and a derogatory nickname! Every inventor faces this. I believe our automated investing service will someday be as ubiquitous as automobiles are today—and calling us “robo-advisors” will sound as antiquated as calling cars “horseless carriages.” Today, we manage nearly $1.5 billion for almost 70,000 of you. I love you—I hardly know you, and I love you. I think about you every waking minute of every day. I answer all your emails personally, still (with help). Thank you for having confidence in me and my team to better manage, grow, and protect your wealth. I promise that we are doing the hardest and highest-quality work of our lives, building the best team ever assembled, and engineering the smartest and most secure financial technology imaginable to keep delivering more value to you. Why? Because we want this awesome service for ourselves, for our families, for our loved ones. Because it feels good to build something good for the world. Because from those to whom much is given, much is expected. It’s our privilege to serve you. I started Betterment to better align with customers. In my prior career working with the largest banks in the country, I saw generic and thoughtless products being cranked out by aging financial institutions that had lost touch with their customers. They encouraged complexity when it led to higher fees because customers made mistakes. The best strategies were only accessible to a few, and they weren’t scalable. The legacy platforms make money when you generate a lot of trading commissions or simply buy and hold their funds, even when neither of those strategies is optimal for you. They are doing that today even though we live in a world of zero trading costs and cheap, personalized diversification. They play games with fees, making money on you in ways you don’t understand. They’re no longer aligned with you. The old-guard behemoths are full of bright and well-meaning people, but their innovative years are behind them. Now, it’s our turn and responsibility to press forward, to apply smart technology, for the good of you, our customers. Seven years ago, virtually everyone I told about Betterment advised me to try something less ambitious. Today, we are the leader in a category. As I like to say to the team, “Clear eyes, hot space, can’t lose.” Today, we are the leader in a category. As I like to say to the team, “Clear eyes, hot space, can’t lose.” What’s next? The question I hear most often from the press today is, “Congratulations, now what are you doing with the money you raised?” This is what we’re doing: Saving you time: Give us five minutes and we’ll give you complete financial peace of mind. That’s our promise. The hard part is engineering everything faster and with more automation. And now doing all that on mobile, because that’s where so many of you are. Personalizing your investment strategy: Each Betterment customer has a unique portfolio that is personalized and optimized for maximum expected returns, net of tax, net of costs, net of risk, and dynamically adjusted for your situation. We are building more ways to personalize your strategy as you tell us more about your assets and life. Saving you taxes: We have one of the most tax-efficient portfolios and trading platforms ever created. We’re making the tax-reduction strategies once only available to the wealthiest available to all. Creating more financial security: We are bringing back the comfortable feeling of defined benefits, in a dog-eat-defined-contribution world. You can rely on evidence-based investment strategies to grow your money—and when it’s time, provide you with income—and eliminate any doubt about whether you’re on track. Expanding Betterment for Advisors: We’ve seen great early results from enabling registered investment advisors (RIAs) to make Betterment’s smarter technology accessible to millions of additional clients. It’s time to double-down. To our financial advisor partners: Welcome aboard. For those who are unsure of what we do: We’re not replacing advisors; we often work with advisors. We are enabling financial advisors to make Betterment’s smarter technology accessible to millions of additional clients with Betterment for Advisors. What we are replacing is the old way of individuals doing lots of frustrating, expensive busy work to manage investments. We replace the do-it-yourself “discount” brokerages that cost more and don’t let you implement all the clever trading techniques and tax-reduction strategies we do automatically for our customers. We compete with Schwab, E*TRADE, and the like, as well as some of the business-side platforms that advisors use to perform the same tasks on your behalf. An advisor is useful for when your financial situation becomes complex—for estate planning, alternative investments, and more. You simply don’t need to hire an advisor for portfolio management—savvy advisors and investors use Betterment for that. The Big Picture These days, we’re all living a lot longer than we did a few decades ago. But, as humans, we aren’t well equipped evolutionarily to think long-term and save for our old age. And yet, because it’s extremely expensive for governments or companies to provide for our future comfort and if we want to have comfortable, long lives, with time for family and friends and money for schools and travel—we have to save. A lot. Investing is something we’re all required to do, in the absence of good public or private pensions, and yet there hadn’t been an obvious best way to do it. There was no great product that would tell you how much to save, in what accounts, and whether you’re on track. It’s as if there’s no public transit, and we all have to walk farther and farther to get to work, because no one has built cars. Until Betterment. Betterment is the more comfortable, more efficient, increasingly self-driving car. That’s how I see it. You’re going to love the ride. If you haven’t already, join us. P.S. Some members of the Betterment team encouraged me to share the email I sent to the office last night, after we closed our recent round of funding: Today didn't feel different from any other day, for most of us. Big (record?) day for net deposits, solid day for signups, meetings meetings meetings, little bit of work, tasty team lunch, trivia night @ Storehouse. But something big happened today, something great for our company. There was the material impact: Our bank account grew 4x in a day. $60mm is a big score - even for a professional crew. Although it's almost impossibly large in human terms, difficult to fathom ($3mm seemed like a lot when we raised our first round in 2010... $60mm doesn't seem 20x more significant), and more than I imagine I could spend in 3 lifetimes - I do have some means by which to measure it - my own recent past - the best 5 years of my life. To those remaining on the 3rd floor after dinner this evening, I joked, "We now have 4x more money in the bank than we have spent building this company over the past 5 years... Should we start 4 new companies?" But the bigger deal than the new funds in our account is that we're now poised to build a transformative and influential company, to give form to our visions and dreams, and to improve millions of lives. We've long thought that we were up to the task, and reveled in the challenge - why else do we work long nights and weekends to make this company grow faster - but now we have validation, support, and materiel to make the world as we want it to be. We don't make a big deal out of fundraising at Betterment, because fundraising is not an end in itself, but a means to an end. Raising money is never our goal. But raising money is necessary work to attain our goal: to help present and future generations of our families, peers, and compatriots live happier lives. To align with our hard-working, smart customers and give them the kinds of advantages previously only afforded to the privileged. To give peace of mind and financial security via providing an all-encompassing, best answer to the question, "What should I do with my money?" I believe it is important to mark occasions, to recognize the milestones we pass, to take a look back as we travel and see how far we've come. So we will celebrate this milestone next Friday. Remember that what we are celebrating is the opportunity to do more, to work harder, to push faster, to build a better company. As I said to you in team meeting last week - now we have to EARN IT. ... It is such an enormous privilege, building this fine company with all of you fine folks for five years, and we're just getting started.
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