Name: Betterment, LLC

Estimated valuation: $700 million

Product: Automated investment service

IPO Timeline: TBD

Date founded: August 25, 2008

Betterment is an automated investment advisory service that provides portfolio management to investors through the use of computer algorithms and research. Its program can create a personalized investment plan for retail, IRA, Roth IRA and 401(k) rollover investors. Headquartered in New York City, Betterment also provides personalized financial advice at a comparatively low cost. The company's fees range from 0.15% to 0.35%, and its mobile app allows customers to view, track, access and share their account information as well as make deposits and withdrawals at any time from any place.

Betterment's Offerings

Betterment's trading platform incorporates the use of tax-loss harvesting in order to offset capital gains and other forms of investment income. It also offers an online service called RetireGuide, which is a series of surveys that can help users to determine their investment objectives and risk tolerance. The company boasts on its website that its global portfolios and rebalancing programs can deliver returns that are 4.30% higher than the typical do-it-yourself investor. Its portfolios are constructed using Nobel Prize-Winning research and are constructed from global stock and bond exchange-traded index funds. Their selection methodology is designed to maximize after-tax returns and minimize expenses through the use of low-cost ETFs. These funds are chosen based upon their total annual cost of ownership (TCO). This scoring method is used to calculate the total cost of owning an exchange-traded fund, including the cost of its transactions as well as liquidity costs and costs associated with holding funds.

Betterment was originally founded by Eli Broverman, Jon Stein and Jonathan Stein. It has received $205 million in funding from 14 investors, including Citi Ventures, Kinnevik AB and Bessemer Venture Partners. The most recent round of funding was for $100 million from Kennevik AB in March of 2016. On Oct. 18, 2013 the company acquired Impulsave, a banking platform that allows people to conduct their banking via mobile app.

Betterment has recently entered the business market with its Betterment for Business platform, which facilitates the management of 401(k) plans for businesses. The company announced in December 2016 that it currently has about 300 customers using this platform, and that its total assets under management (AUM) have surpassed the $6.2 billion mark, an increase of $1 billion over the previous eight months. The company is aggressively courting technology startup companies with this new platform and has partnered with Uber to provide their drivers with benefits in August of 2016. Betterment claims to charge lower fees than traditional 401(k) legacy plan providers, many of which are too expensive for smaller businesses. Given that 99% of all U.S. businesses are small or mid-sized, this represents a substantial market. Betterment's decision to target businesses will likely give it a greater edge when the traditional legacy plan providers introduce their own robo-advisory plans to the market, as this approach can enable the company to capture larger numbers of clients and a greater amount of assets.

An Exploding Market

Betterment also announced a partnership with the Financial Planning Association (FPA) in December 2016, which plans to integrate Betterment's resources into the association to support its network of CFP Practitioners. In a released statement, FPA Executive Director Lauren M. Schadle said, “Our members and all CFP professionals are increasingly interested in learning how digital investment advice can augment the robust financial planning services they are providing clients while staying true to the high-touch level of advice they are already providing. This partnership is a step in the right direction to educating and supporting the financial planning community.”

The future looks bright for the robo-advisor industry, which has the potential to substantially impact and disrupt the traditional money management industry in many ways. Business Insider recently released a report detailing the future of these automated programs, and some of the key takeaways conclude that startup companies like Betterment and Wealthfront will not upend traditional money managers, which are rapidly rolling out their own robo-platforms and scaling their businesses accordingly. Consumers of all types seem to be receptive to using these programs for at least a portion of their money, including the wealthy, almost half of whom said that they would consider investing at least a portion of their assets in a robo-advisor.

Betterment currently has no plans for an initial public offering (IPO) and is choosing instead to focus on growing its customer base. But robo-advisors will continue to increase their market share in an increasingly competitive environment. In April 2017, Betterment's co-founder and president Eli Broverman announced he would be moving on from the business. Co-founder and CEO Jon Stein will remain in charge. (For related reading, see: How the Fidelity Go Robo-Advisor Will Compare.)

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