Sacra estimates that Betterment grew revenue to $153M in 2023, up 69% from $91M in 2022. The primary cause of Betterment's revenue acceleration, after growing just 11% year-over-year in 2022, was increased AUM via deposits both to their core robo-advisor product and to their Betterment Reserve high-yield cash account.

As interest rates rose from the spring of 2022 through the summer of 2023, the effect was to significantly increase the amounts that neobanks like Betterment and Wealthfront could earn on their deposits, creating a way for them to acquire customers by passing some of those earnings on.

Betterment grew its AUM from an average of $30.7B in 2022 to an average of $38.35B in 2023, while at the same time benefitting from the improved unit economics of their cash accounts vs. their traditional robo-advisor accounts. Cash accounts allow Betterment to earn about 0.40% per dollar of AUM vs. 0.25% per dollar of AUM on their robo-advisor product.

Betterment is a robo-advisor that automatically decides an investor's asset allocation based on their preferences, financial goals, and risk appetite. The investment experience is offered from within its app and website, with an investor-friendly user interface. Unlike other investment firms, Betterment only invests in ETFs, which coupled with automation and digital-only service, allows them to charge a low management fee.

Betterment found product-market fit by providing DIY investors with a cost-effective investment service. These consumers typically found traditional investment firms too expensive. Later, Betterment added products for seasoned investors, SMBs, and investment advisors. It also offers neobank-like products such as interest-bearing cash accounts and debit cards to draw in young customers who are not interested in investing. 

It has five revenue streams:

Portfolio management fees: This is the largest component of its revenue. It has two plans: a digital-only investment service with a 0.25% fee and no minimum balance and hybrid investment service that provides calls with investment advisors at 0.4% fees and a $100k minimum balance.

Interchange: Betterment earns an interchange fee every time its debit cards are used. It offers a Visa debit card through nbkc Bank.

Partner banks: For Betterment's cash reserve product, it deposits funds with partner banks for which it earns a commission.

Advice packages: Betterment sells phone consultations with investment professionals that start at $299.

Employers: Betterment offers a 401(k) product to SMBs for their employees, for which it charges SMBs a SaaS-style monthly fee.

Betterment’s products can be categorized into three buckets based on who uses them: individuals, SMBs, and advisors.

While the individual-focused products are designed to help them invest, SMB and advisor products are intended for them to offer Betterment as an investment service to their employees and clients. 

When onboarding customers, Betterment asks for their preferences and goals (retirement planning, buying a home, kids' college tuition, etc.), then sets up their monthly investment and matches them with its pre-built portfolio options. Once set up, its algorithms automatically invest monthly deposits and rebalance the portfolios to match customers’ financial goals.

Pre-built portfolio options

Investor dashboard

The US investment management market is becoming saturated with fintechs and legacy players offering their customers low-cost, robo-advisor investment services. The number of robo-advisor account holders grew to 3.5M in 2021, 2X from 2018, but their growth is expected to slow down to 10.4% YoY to reach 5.2M by 2025. 

Betterment competes with traditional players like Charles Schwab and Vanguard, which started rival robo-advisor services after the launch of Betterment. By leveraging their vast network and offering lower fees than Betterment, they have become the two largest robo-advisors by AUM. Apart from other robo-advisors such as Wealthfront and Personal Capital, Betterment also competes with fintechs such as Acorns (financial wellness), Chime (neobank), and Robinhood (DIY investment). Then there are specialist robo-advisors such as Ellevest (robo-advisor for women) and Blooom (IRA and 401k) that cater to specific use cases. 

New products

One of the ways for Betterment to grow is to offer more financial products to scale its AUM. It recently started offering student loan management service to SMBs for their employees post its acquisition of Gradvisor. Similarly, it acquired Makara, a robo-advisor for cryptocurrencies to give individuals and advisors access to crypto portfolios. Apart from investment products, it can consider credit cards, lending, and insurance, either directly or acting as a distributor for others. 

New automation features

Another way for Betterment to grow is to expand automation beyond investment products to cash management products. It can scan customer’s bank accounts to remove non-useful subscriptions, pay bills automatically, manage their budgets, and help them improve their savings. While this may not directly increase AUM, it creates a stickier customer experience, which can reduce churn and help Betterment attract new customers. 

Lower interest rates

Betterment is one of the neobanks that benefitted greatly in 2023 from the rise in interest rates driving up the yields that they could both collect from deposits and offer to their users. Betterment's 69% revenue growth in 2023 was a testament to this—but the problem is that interest rates won't stay high forever. By the time they come back down, Betterment will either have to have new lines of business that can pick up the slack, or they will have to convince their new users to stick around and invest and spend with them in the long-term.

Lack of differentiation

Betterment acquired users rapidly in the early years by offering a low cost investment service to DIY investors who found traditional investment management firms too expensive. However, now with traditional investment firms, neobanks, and other robo-advisor firms offering nearly identical products at similar management fees, there isn’t much to differentiate one robo-advisor app from another. As the product becomes more commoditized, Betterment may struggle to acquire customers for its core investment service business.