# Betterment for Advisors Goal Projection and Advice Methodology

## Details on how projections work within Betterment for Advisors' client accounts.

Betterment provides allocation, savings and withdrawal advice alongside a projection graph when customers view their goal projection under “Plan.” The graph is intended to show the possible future investment values in order to illustrate the impact of different contribution and withdrawal choices, investment time horizons, and portfolio allocations. Actual individual investor performance has varied and will continue to vary depending on market performance, the time of the initial investment, amount and frequency of contributions or withdrawals, intra-period allocation changes, and taxes.

An indication of “On Track” is not a guarantee of achieving a goal in the future. Acting on savings and withdrawal advice is not a guarantee that goals will be met or that the investment will meet cost-of-living needs throughout one’s life.

**See our Terms and Conditions.**

In the following sections, we’ll provide an overview of our methodology and assumptions for each component under “Plan” in a Betterment goal.

## Projection Methodology and Assumptions

- The expected portfolio returns used in the portfolio value projection results are based on the expected returns and risk-free rate assumptions for your target Betterment portfolio allocation. (See more about how the expected returns are derived). This portfolio is set by the user-selected allocation to “stocks” and “bonds”. The allocation choice corresponds to weights of the underlying Exchange Traded Funds (ETFs), as defined in our Portfolio. The recommended allocation mix is based on user investment profile including age, the goal type, and time horizon.
- Monthly Contributions or Withdrawals, if specified, are assumed to be made at the end of the month.
- We project your balance in monthly increments, never going below twelve months. We project allocation changes on a monthly basis. For users with remaining goal terms of less than one year, our projection assumes that you maintain the allocation at the end of the goal term rather than liquidate.
- We sometimes map external assets to proxy assets.
- For investments with available data, we map holdings to our asset classes to make approximate projections of their expected risk and return.
- In some cases we do not have data for a specific investment, usually because the holding is a non-publicly-listed vehicle, such as a private 401(k) plan. In those cases, we use proxy tickers to determine the appropriate asset class exposures.
- Proxy tickers are provided by Quovo, our third-party data provider for synced external accounts. Quovo uses a proprietary process to identify similar public securities to the unknown ticker using structural information (including security type and fund name) and to qualify the confidence level of the similarity. Betterment uses Quovo’s proxy tickers only for securities that pass a threshold confidence level of similarity. Quovo’s methodology may change over time, and Betterment will continuously evaluate any such changes.

## Fee Assumptions

There are two relevant fees for projections: (1) the Betterment platform fee (“Betterment fee”); and (2) the Advisor’s fee. Both the Betterment fee and Advisor’s fee can be found on the Settings page, under the Account tab.

- Betterment assumes that both fees applicable on the date the projection is displayed will remain the same through the entire projection term.
- For projections, Betterment calculates an effective fee that is a sum of the Betterment fee and the Advisor’s fee.

For projection purposes, Betterment converts each Advisor’s fee into an effective fee rate expressed as a percentage of client assets. This Advisor’s effective fee rate is calculated using one of the following methods, depending on how the Advisor’s fees are structured:

- If the Advisor uses a constant asset based rate as their fee (e.g., 0.25% / year), Betterment uses that rate as the effective fee rate in its projections.
- If the Advisor uses a flat fee, Betterment calculates the effective fee rate as the flat fee divided by the balance of the household assets held with the Advisor at Betterment.
- For example, if a client has $50,000 of advised assets with an Advisor, and that Advisor charges a flat fee of $100 per year, Betterment calculates the effective fee as ($100 / year) / ($50,000) = 0.2% / year.

- If the Advisor uses a tiered fee system with a series of asset-brackets and marginal rates, Betterment calculates the effective fee rate by multiplying the amount of advised dollars in each bracket by the marginal rate, summing those values and dividing by the total advised dollars.
- For example, if an Advisor charges a tiered rate of 0.25% / year for the first $100,000 of advised dollars and 0.15% / year thereafter, and an advised client holds $150,000 with that Advisor at Betterment, Betterment calculates the effective fee as ((0.25% / year * $100,000) + (0.15% / year * $50,000)) / $150,000 = 0.217% / year.

As a unified example, let’s assume that the Betterment fee is 0.25% per year. Further assume that an Advisor charges a flat fee of $500 / year and that the advised client has $100,000 of assets held with the Advisor on Betterment’s platform. The overall effective fee assumed for projections is then 0.25% / year + ($500 / year) / ($100,000) = 0.75% / year.

## Savings Advice Methodology and Assumptions

- The monthly contributions estimate is based on a 60% likelihood of the portfolio value reaching the goal target at the end of the investment term.
- Calculations assume the current portfolio. If the portfolio changes over time or has different expected returns, outcomes may be adjusted. Calculations will always be updated based on the current portfolio held.
- Savings advice and graphs are in nominal terms.

## Withdrawal Advice Methodology and Assumptions

- The monthly safe withdrawal is based on a 96% likelihood of having $0 or more at the end of the time horizon, assuming the following assumptions hold true.
- The safe withdrawal amount assumes the user adjusts the withdrawal rate and allocation according to our advice at least once per month.
- The safe withdrawal amount assumes the user does not live past the specified time horizon (“plan-to-age”).
- Calculations assume the current portfolio. If the portfolio changes over time or has different expected returns, outcomes may be adjusted. Calculations will always be updated based on the current portfolio held.
- Withdrawal advice and graphs are in real terms, using an inflation rate of 2%.
- The default time horizon (“plan-to age”) is 90 years of age, or age + 50 years if younger than 40, or age + 10 if older than 80. The model will use this value or the value entered by the user.

## Graph Explanation

The Graph exhibits the possible range of projected portfolio values using color.

- The dark line indicates the projected portfolio value under average market conditions. This means that there is a 50% likelihood of portfolio values greater than this and a 50% likelihood of portfolio values less than this.
- The lighter, shaded region indicates the range within which there is 80% likelihood of the projected portfolio value. This means that there is a 10% likelihood of portfolio values greater than the top of this region, and a 90% likelihood of portfolio values at least as high as the bottom of this region.

## Goal Status (Savings Goals) – On Track or Off Track

The Betterment Savings Advice tool constantly tracks the portfolio performance and indicates the ability of the portfolio to reach the Goal target, assuming average market performance. The portfolio performance is categorized as “On Track” or “Off Track”, and Betterment makes recommendations to increase the likelihood of reaching the Goal target.

- The portfolio performance is “On Track” when the total projected portfolio value exceeds the Goal target assuming average market performance. This is equivalent to a likelihood of 50% and above of reaching the Goal target.
- The portfolio performance is “Off Track” when the future projected portfolio value (i.e. current balance plus future contributions, plus investment growth) is not sufficient to reach the Goal target assuming average market performance. This is equivalent to having less than 50% likelihood of reaching the Goal target.

Betterment provides advice for bringing the goal back on track in three areas – either increasing the amount of future monthly contributions, or increasing the term of the investment or increasing the current balance in the account by making a one-time deposit. These recommendations are based on a relatively conservative stance, e.g. a 60% likelihood of projected portfolio value to reach the Goal target, compared to the 50% chance used by other models.

## Limitations

- The Goal target is a user input and may not be sufficient to provide income for actual spending or retirement income needs.
- The model does not account for any taxes, except for retirement goals. All non-retirement goal values are assumed to be pre-tax.
- The model does not account for forced withdrawals such as Required Minimum Distributions that must be taken from pre-tax qualified retirement accounts after a certain age.
- The model does not account for auto-deposits that are skipped.
- The savings model is in nominal terms and therefore does not have a direct inflation assumption. (The withdrawal model is in real terms, and uses a 2% inflation assumption).
- The withdrawal model does not take into account other sources of income outside the Betterment account. A full income plan should include all sources of income and a spending needs analysis.
- Past performance is not indicative of future results. These projections do not guarantee investment performance.
- Extreme market conditions, sustained high inflation, or other unforeseen events may reduce portfolio value and withdrawals. Income is not guaranteed.