On a humid day earlier this month, Betterment CEO Sarah Levy sat in front of an exposed-brick wall in a conference room at the company’s New York headquarters. The industrial-chic offices were full of startup-life hallmarks: A small dog shuffled along in the hallway, and employees grabbed drinks flowing from taps.
Levy was recounting her early days there. When she arrived in early 2020, she took stock of the two business lines Betterment is hardly known for. They’re not very glamorous, after all — but Betterment is staking its future on them. One is geared toward selling retirement plans to small and mid-size businesses, and the other caters to financial advisors and their wealth-management firms.
“Building something durable and sustainable ultimately takes a long time,” she said in an interview. “But we felt that just being what we historically called ‘the robo’ probably wasn’t enough to be a stand-alone entity long term.”
Levy, a former longtime Viacom executive, replaced Jon Stein, a Betterment cofounder, in late 2020. It marked a new era for the original mainstream “robo-advisor,” which made a name for itself by offering investors cheap, automated portfolios in an app.
Betterment, the largest independent digital wealth-management startup that as of March managed about $33.8 billion for more than 730,000 customers, faces existential challenges. Its basic product has now been replicated by every big bank and startup offering do-it-yourself investing, leaving Betterment a lot less novel than it once was.
Seeking to set itself apart from its many competitors and make more money, the 12-year-old company is aggressively building out its business-to-business channels for financial advisors and other companies. Betterment now fits in well with the legacy firms it sought to upend.
Years ago, the industry believed robo-advice was the pure alternative to financial advisors. Time has shown: not so much, Gabriel Denis, a senior analyst at Morningstar, said.
“In most of our conversations with these robo-managers, they were saying that was kind of the emphasis in the first few years,” Denis said. “But really, what they found from a behavioral-finance perspective is that when your situation gets more complex — the majority of investors like to talk to a human.”
There are reasons for Levy’s team to be optimistic. Executives say the company, which has about 450 employees, has not conducted layoffs, a measure other financial-technology companies have taken this year as the market has turned sour. Betterment raised capital in the fall — a Series F round that valued it at $1.3 billion — before startup valuations and funding took a nosedive. And clients’ passive portfolios, which have favored so-called value stocks, have fared relatively well in the sell-off.
“A year ago, we were selling, ‘Eat your vegetables.’ Some of our competitors were selling, ‘Here’s a piece of cake,'” Levy said. “Now those people are fat, and our people are saying, ‘Actually, I’m going to live longer because I’ve been eating my vegetables.'”
With a ramped-up focus on doing business with other businesses, not just consumers, Betterment has made changes to its key engineering organization. At least 30 software engineers, including those in senior roles, have left in the past 12 months, according to former employees and a LinkedIn analysis by Insider. Management has also shifted considerably, with much of leadership changing in the last year and a half.
“There were a lot of hopes and dreams of disruption by Wealthfront and Betterment,” but “it became much more a story of adoption,” said David Goldstone, the manager of research at Condor Capital Wealth Management and publisher of The Robo Report. (UBS acquired Wealthfront, long Betterment’s primary competitor, this year for $1.4 billion.)
“Robo-advice definitely changed the industry,” he said. “But some of the winners of that were incumbents who adopted the product — and not necessarily all the spoils went to Betterment.”
From a ‘side hustle’ to the ‘center’ of Betterment
Betterment, cofounded by Stein and Eli Broverman, made a splash when it launched. As the US dug itself out of the financial crisis, the new investing startup presented its big ideas in May 2010 to an audience of investors and media gadflies at an event TechCrunch held in Manhattan.
Investors lobbed critiques and questions at Stein, then the CEO, as he pitched the company as an app to help regular people invest in portfolios using algorithms — a robo-advisor.
“I think they’re going after a real problem,” the investor Chris Sacca said at the time, according to TechCrunch. “But I think people expect some complexity in these kinds of services.”
“I like it a lot,” Don Dodge, a longtime startup investor, said at the time. He said Betterment should focus on retirement plans. Millions of people are “forced to be investors” through 401(k) plans, and “many of them are totally clueless,” he added. Stein agreed.
The exchanges from that day, filled with skepticism about lofty ideas to change which tools people used to invest, would serve as a sort of corporate blueprint for what Betterment had planned. Analysts say expanding into services where Betterment can charge higher fees comes down to surviving as a business. It has long been difficult for robo-advisors to turn a profit because the services are cheap and the cost of attracting customers is high, Goldstone said.
Levy declined to specify whether Betterment is profitable. But HSBC analysts found in a 2019 report that by using a fee of 0.25%, robo-advisors needed between $11.3 billion and $21.5 billion in assets under management to break even. Just Betterment and Wealthfront, with $14.1 billion and $11.5 billion at the time, respectively, were in that range.
Betterment charges 0.25% of customers’ assets for basic portfolio management and 0.40% for access to financial planners. Betterment portfolios allocated to 65% stocks and 35% bonds are down about 15.4% this year through June 30, according to Goldstone, who tracks the robo-advice industry. The S&P 500 lost about 21% over the same time period.
Levy said that for the first time, Betterment was adding as many new customers in its 401(k) offering, called Betterment at Work, as in its retail business. In an effort to trim costs during the market downturn, Betterment has also cut marketing spend directed at retail investors. The typical retail customer is a millennial in their mid-30s with six figures of investable assets and a six-figure salary.
“When I arrived, the Betterment at Work business was a little bit more of a side hustle,” she said. “I think we’ve moved it really to the center of the company.”
The competition is stiff for the areas where Betterment is newly refocusing. More well-established firms are looking to seize on themes like the fast-growing independent advisor industry and new laws pushing small businesses to offer retirement plans as part of a wider emphasis on what’s become known as employees’ financial wellness.
Levy, who previously served as the chief operating officer of the ViacomCBS division that housed MTV and Comedy Central, said she didn’t think of an initial public offering for Betterment “as the destination.” Her vision is pushing into business-to-business offerings to “position this business to be diversified and stable as a stand-alone entity.”
‘I think the company lost its DNA’
The changes have rattled some employees. A combination of changes in leadership and a hot job market last year, with tech talent in high demand across industries, led to some engineers leaving, two former employees said. The former staffers who spoke with Insider for this story were granted anonymity to speak freely about a former employer, and their identities are known to Insider.
“I think the company lost its DNA. It’s not fun anymore,” a senior software engineer who left in 2020 said. “You’re just catching up. You’re not innovating.”
Last summer, Betterment hired Evol Greaves, a longtime engineer, as its vice president of engineering to bolster its capabilities in selling to other businesses. He brought that experience from JW Player, which sells online video-playing technology to other companies.
“I could bring some of that knowledge and experience here and help us to mature as a B2B organization. We’ve already hit that from a B2C perspective,” Greaves said in an interview, referring to business-to-business operations and business-to-consumer functions, respectively.
Levy said Betterment has now tripled the size of its engineering team focused on the 401(k) business. It formed a team dedicated to sales to other companies and brought in marketers and customer-experience-focused employees with distinct business-to-business backgrounds.
Greaves, who hired four leaders under him, chalked the exits up to the “Great Resignation.” A spokesperson said the product and engineering teams have together grown 20% in the past year through June to represent one-third of the company, or about 150 people. The spokesperson declined to specify how many engineers are at Betterment.
Still, the company responded to the exits. Betterment hiked employee pay in the fall by double-digit percentages, Levy said. She declined to specify by how much.
The face of the company has shifted, too. As Betterment has focused on what have historically been noncore business lines, and Levy steers the company through its next phase, a third of the executive team is new.
Since early 2021, Levy and her team have appointed a new marketing chief, chief compliance officer, communications chief, head of investing, chief people officer, vice president of engineering, and a chief of staff who also leads strategy. Three longtime public-relations spokespeople left. Executives including the chief technology officer, president of retail, general counsel, general manager of Betterment at Work, and finance chief are all longtime employees.
Betterment is also making changes to its eight-person board, where Stein remains chairman. The board has no people of color, Levy said, and a search for a new member is underway. When Levy arrived in 2020, there were also no women on the board; there are now three women, including Levy. Some banks will not work to bring a company public unless its board has racial and gender diversity.
Betterment has raised a total of $337 million in equity. As part of its $160 million fundraise in the fall, it secured a credit facility of $100 million. Its investors include Citi’s venture-capital arm, Bessemer Venture Partners, Menlo Ventures, and Francisco Partners. It set out to use the money to ramp up what it sells to companies.
Before Levy joined, the sense among some employees was that leadership viewed the Betterment for Advisors and Betterment at Work offerings as ways to differentiate the company. That message came across in marketing and company statements, a former senior employee said, but not in the resources management dedicated to them.
Eventually, “they wanted to turn it around and see it as a revenue engine,” the person said, adding that the company then replaced a former senior leader in its 401(k) business with a head of revenue who brought in many more years of relevant experience.
“Before Sarah joined, we were hyper focused on our retail business and B2B businesses were incubated but not fully resourced,” a spokesperson said, adding that Betterment has accelerated investments in those units.
It wasn’t easy marketing Betterment for Advisors, where the company offers services such as custody options and portfolio customization, before Levy took the reins. A spokesperson declined to specify the unit’s assets under custody.
A challenge was wealth-management firms seeing the robo-advisor as their enemy, Mike Reust, the president of Betterment’s retail business, said in an interview.
“There was a very big reticence to partner or work with us because that’s how we were seen,” Reust, who joined the company nearly a decade ago, said. “It’s only in the last couple of years where, I think, it’s hit a little bit more of critical mass.”
A former manager said the advisory business was deprioritized around 2016 because Betterment was overextended and doing too many things at once. The former employee added that it would have been best to use cash flow from the retail business to build out the advisory unit, but the retail business wasn’t “humming along yet.”
“Jon’s great strength was that he saw around every corner,” Levy said, referring to Stein. “Jon’s great limitation was he may not have had the capital to go pursue around every corner.”
Adding crypto and mulling the next deal
Since Levy joined Betterment in December 2020, she has overseen Betterment’s first two acquisitions. In February, it bought Makara, a Seattle crypto startup, just as digital assets started melting down. And it acquired the US accounts of the Canadian digital wealth manager Wealthsimple last year.
Previous leadership was apprehensive about adding crypto, but under Levy, that changed, a former employee who left this year said. Stein was more averse to offering a crypto product, and it was never much of a priority in previous years, the person said. Reust said Betterment’s board was torn when it came to offering crypto products.
“If you had asked them, even before we connected with them, what were they building? They would often say, ‘We’re building a Betterment for crypto,'” Levy told Insider in February, referring to Makara.
Betterment is now open to other deals, Levy said, but her team does not have a target in mind. There are a handful of “small Series A, Series B companies” in the financial-wellness space that might make sense to add, she added.
“For the right opportunity, we would be a buyer right now because I do think we continue to be a little bit subscale for what I believe to be a successful stand-alone entity, long-term public company,” Levy said. “And we’re patient. Or, at least, I’m patient.”