Auto-Adjust and Rebalancing Disclosure

A. Auto-Adjust 

Betterment offers an automatically adjusted allocation feature (“auto-adjust”) for investors that automatically modifies client allocations towards more conservative levels as clients approach their goal time horizon. An allocation is the asset mix of stocks and bonds for any investing goal and portfolio strategy composed of exchange-traded funds (ETFs), and in certain cases, mutual funds. The following Betterment investing goals are compatible with the auto-adjust feature: Major Purchase, Education, Retirement, Retirement Income, and General Investing goals, in each case, if the client has provided Betterment with a time horizon for such goal. Emergency Fund investing goals are not compatible with auto-adjust because Emergency Funds are intended for unexpected emergency expenses, which, by definition, have an unknown time horizon. Additionally, Betterment offers cash goals, crypto goals, Student Loan Management, and 529s that are not compatible with auto-adjust.

For goal types that are compatible with the auto-adjust feature, the anticipated time horizon and goal type inform Betterment’s recommended allocation and auto-adjust feature. In general, the longer an investing goal’s time horizon, the more aggressive Betterment’s initial recommended allocation. The shorter an investing goal’s time horizon, the more conservative Betterment’s recommended allocation. A more aggressive allocation is characterized by a greater proportion of stocks as compared to bonds, and a more conservative allocation is characterized by a greater proportion of bonds as compared to stocks. This results in a “glidepath” for each goal type, which is how Betterment’s recommended allocation varies by time. The following table sets forth the glidepath range for each eligible investing goal type:

i. Eligibility

Auto-adjust is available for the Betterment Core, Socially Responsible Investing, Value Tilt and Innovation Technology portfolio strategies, as well as the Goldman Sachs Smart Beta portfolio strategy, in each case if the client has provided Betterment a time horizon for their eligible investing goal. Certain custom portfolios offered through Third-Party advisers are eligible for auto-adjust.

The auto-adjust feature is enabled automatically if a client in an eligible investing goal elects to implement Betterment’s recommended allocation. If the client selects an allocation other than Betterment’s recommended allocation, the auto-adjust feature is disabled. Additionally, if a client would prefer not to participate in the auto-adjust feature, they may also opt out of it by turning off auto-adjust in the online interface of their account. If a client opts out or deviates from Betterment’s recommendations, the client’s allocation for that goal will remain at the client’s selected allocation, and Betterment will not automatically adjust the applicable allocations based on the passage of time.

For participants in Betterment’s 401(k) offering Betterment at Work– and whose employer defers investment selection to Betterment, if participants do not select an investment strategy, their contributions will be invested pursuant to the Core portfolio strategy, which serves as Betterment’s qualified default investment alternative (“QDIA”). The QDIA’s target allocation takes into account the participant’s current age and Social Security full retirement age (based on the participant’s birthday), and is auto-adjusted to follow the glidepath to become more conservative as a participant approaches retirement. If a participant in a 401(k) plan is already an advised-client on the Betterment Advisor Solutions platform, contributions will initially be invested in the Betterment Core portfolio (unless the advisor or participant changes the portfolio strategy), which will be eligible for auto-adjust as described above.

ii. Warnings & Limitations

Although auto-adjust is designed to help clients reach their goals, there is no guarantee that a client utilizing auto-adjust will reach their financial goal. Betterment determines recommended allocations based on projections, which are hypothetical and not guaranteed. For more details on projections, please refer to Betterment’s Goal Projection and Advice Disclosure. For retirement planning projections, please refer to Betterment’s Retirement Planning Advice Disclosure. Additionally, although a more conservative allocation is designed to lower risk and volatility, there is no guarantee that a more conservative allocation will minimize losses or maximize the likelihood that an investor achieves a financial goal. Investing in securities involves risk. Past performance is not a guarantee of future results.

Clients should be aware that the use of the auto-adjust feature in taxable investing goals may result in taxable gains as holdings are sold to rebalance allocations. Auto-adjust is compatible with Betterment’s tax features, including Tax Loss Harvesting and Tax-Coordinated Portfolios. For more information on Betterment’s tax features and advice, please refer to Betterment’s Tax Loss Harvesting+ Disclosure and Tax-Coordinated Portfolio Disclosure.  

B. Rebalancing

 Over time and due to market movements, the value of various holdings within client portfolios move up and down, drifting away from their target allocation. The difference between the target allocation for a portfolio and the actual weights of a client’s holdings in their current portfolio (i.e., their actual allocation) is called portfolio drift.

Rebalancing is a Betterment feature that seeks to reduce drift in client portfolios. Betterment performs two types of rebalancing on clients’ behalf. First, in response to cash flows such as deposits, withdrawals, and dividend reinvestments, Betterment buys underweight holdings and sells overweight holdings. Second, if cash flows are not sufficient to keep a client’s portfolio within its applicable drift tolerance (such parameters as disclosed in Betterment’s Form ADV), automated rebalancing sells overweight holdings in order to buy underweight ones, aligning the portfolio more closely with its target allocation. 
Clients can request to have Betterment only rebalance their portfolio in response to cash flows. Rebalancing requires a minimum portfolio balance (clients can review the estimated balance at www.betterment.com/legal/portfolio-minimum). The rebalancing algorithm is also calibrated to avoid frequent small rebalance transactions and to seek tax efficient outcomes, such as preventing wash sales and minimizing short-term capital gains.

To determine if a goal is eligible for automated rebalancing, for Betterment constructed portfolios and third-party portfolios, Betterment evaluates drift based on “super” asset classes (e.g., U.S. Bonds, International Bonds, Emerging Markets Bonds, U.S. Stocks, International Stocks, and Emerging Markets Stocks), unless overridden by Advisors. For custom portfolios designed by third-party Advisors, drift is evaluated at the security group level.

When Betterment’s trading algorithm evaluates client accounts for tax loss harvesting and rebalancing opportunities, it generally prioritizes identifying potential tax loss harvests ahead of potential rebalancing opportunities, and not all client goals are guaranteed to be evaluated on any given day for either tax loss harvesting or rebalancing.

You understand and agree that rebalancing transactions may affect the market value of your account, and may also have tax consequences.

If your account is advised through a third-party Advisor on the Betterment Advisor Solutions platform, your Advisor may customize drift tolerance thresholds for your portfolio and impose additional constraints that impact how rebalancing works on your account, as described in Betterment’s smart transitions disclosures.

Additionally, the products and the proportions in which they are held in your account may be rebalanced in Betterment’s discretion to resemble the information and preferences that you specify in the interface, including in response to a client’s allocation change or change in portfolio strategy. They may also be rebalanced in the event of any changes to the advice Betterment provides, including but not limited to any changes in the products selected by Betterment for your account. Betterment has discretion to limit or postpone rebalancing in order to prioritize other trading activity on any given day, including days where extreme market conditions produce a higher volume of trading. Betterment also reserves the right to disable automated rebalancing on client goals when it determines that doing so is in clients’ interests, such as to manage potential tax impacts during a portfolio strategy transition.