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Vertical Integration: Better Business, Better Returns

We are the first and only online investment advisor to take this ultra-efficient approach.

Articles by Jon
By Jon Stein Founder, Betterment Published Mar. 13, 2014 | Updated Mar. 03, 2020
Published Mar. 13, 2014 | Updated Mar. 03, 2020
4 min read
  • Vertical integration allows us to lower costs and improve products and customer experience.

  • With our end-to-end service, we can give you more personalized advice and help you stick to it.

When I set out to improve investing nearly a decade ago, I knew it was ambitious to try and fix every aspect of the process at once. I wanted to use technology to delight people, to improve transparency and performance, all while bringing down the costs. Ultimately I knew that the breakthrough would be in the very structure of our company.

In the first days of Betterment, we looked at multiple structures to assess which would be most efficient to deliver the ideal customer investing experience. We’d seen too many people do just advice, or be just a brokerage, and fail to create compelling products. We knew we could do both—and do it better.

We wanted to control the full stack as a way to ensure that our customer experience would be seamless—much like what Apple has done with computing. (Others took note: we’ve been called “The Apple of Finance“.)

That’s why we chose a vertically integrated structure—another way to say that we handle the entire investment process end-to-end for customers, from advice, to executing trades, to generating account statements. If this full-stack structure sounds familiar—it is because it’s the core to many successful online-native companies, such as Netflix and Warby Parker, that are disrupting old models by simultaneously improving products and lowering costs.

We have done the same for investing. Betterment delivers an estimated 1.48% of additional investor returns and a faster investing service that costs one-tenth of what a traditional investment manager charges.¹

Better integration

To accomplish this, we first collapsed the divide between advice and trading into one single point of entry for customers. We built a web and mobile platform which offers personalized advice based on specific inputs from customers—including their time horizon and purpose for investing.

We also built a custom trading system that is optimized for establishing and maintaining buy-and-hold portfolios of index-tracking ETFs. This is a distinct departure from the incumbent institutions, like Fidelity or Vanguard, which are forced to maintain legacy platforms that remain compatible with the full historical backlog of traditional trading products and services, and must support older, less efficient instruments, such as mutual funds. Betterment’s trading platform was built specifically to serve as a dedicated execution tool for a personalized, automated advice platform.

This structure is the heart of the Betterment model, as it allows us to (1) where possible, eliminate “business as usual” inefficiencies endemic to the financial services industry, but also (2) leverage economies of scale when we execute on your behalf. We use sophisticated algorithms to both manage your account and make the back-end processes–all the things you don’t see–equally sophisticated and efficient.

What this means for you

Lower prices. There is no middle man to take a cut of your money – you deal only with Betterment’s lean technology and processes. There are no extra services that add more cogs in the machine. Your investing costs are simply the average expense ratio of the underlying funds, plus our low management fee of .15% (for accounts $100,000 or larger).2

Better execution. Better execution By aggregating trades across our customer base, we access economies of scale for your benefit, and limit the impact of the bid-ask spread.

Better advice. We handle your portfolio ourselves so we can give you better, more exact advice—many investment tools at other institutions are based on high-level guesses on portfolio contents or historical returns, not your actual dollars. We can take into account your trading history and that of other customers like you for giving real-time, personalized feedback.

Total security. We oversee all customer funds at all times, which means we have less exposure to third-party risk. As the custodian of your investments, Betterment Securities, the broker-dealer servicing Betterment customers, is regulated and audited just like the incumbent institutions, including Fidelity and Schwab. Learn more about our security and safety measures.

More efficient. Our structure allows for fractional shares down to 1/1,000,000 of a share, allowing our algorithms to promptly invest every customer dollar at all times, with extreme precision to their target allocation. We can use every cash flow and dividend, no matter how large or small, to dynamically rebalance your portfolio.

Total automation. We automate every aspect of the investing process in-house, from deposits and withdrawals, to rebalancing and dividend reinvestment, to statements, confirmations, and tax reporting. We are the first broker-dealer that is built from the ground up to be 100% paperless.

More delightful. With vertical integration, we can improve customer experience throughout the entire investment process—helping you onboard into your account, keeping you on track with your goals, alerting you when something is happening and making taxes easy to complete. There is no paperwork coming from third-party companies or other outside entities that’s out of sync with your needs.

Faster transactions. Due to Betterment’s automated cash processes, we offer next-day deposits to get your money into the market as quickly as possible— and access to your funds for liquidity is as fast as it gets in the industry.

Lean operations. Betterment has one office location, with low overhead and lean operations—we only spend to develop products for you, not build out an expensive brick-and-mortar infrastructure.

More product innovation. With an eye to the entire investment life cycle—income to outflow—and with direct contact with our customers, we are developing products down the entire stack, which will service investors by life stage, by geography, by tax need and more.

Better returns. The aggregate of all these features and efficiencies is that we ultimately deliver additional investor returns, estimated at 1.48%, as compared to a typical DIY portfolio.


Investing made for you

With our vertical integration, we have completely re-imagined the way individuals can invest—no longer do you need to tailor your needs around what’s available from traditional investment firms. Betterment created a product that can be tailored for your individual needs. And of course, it’s also designed to delight you with a seamless user experience, whether on a computer or mobile device.

Now, eight years after the very first inkling of an idea that would become Betterment, I like to think what we have accomplished is to create an investment service made for you—automated to save you time,  personalized for your financial goals, and optimized for better returns.


2We’ve updated our pricing structure since this article was published. Learn more at betterment.com/pricing.

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