In their terms it sounded like if they close your account for whatever reason, you can still go directly to the banks and recover your funds. They did say the funds would be temporarily uninsured at certain points while in transit (deposit/withdrawal, redistribution, etc) but that seems like a relatively small risk
Is it possible they'd try to claim first-dibs on your funds that are living in other banks if they went under and had to pay back shareholders?
Typically when companies/banks do this sort of pass through banking, the money isn’t actually held in a personal account at the host bank. It’s usually held in one giant account that had a “managed on behalf of many” type structure. This is legal from an FDIC perspective, but it’s held in the not-banks name (aka betterment). So if betterment goes into debt, it’s a grey area if they could use that money.
They could also mismanage money during that “temp uninsured” period. Again, they’re not a bank so they don’t necessarily comply with banking regulations so you don’t know how long that period is or what’s happening.
There are real regulated entities (banks brokers credit unions etc) that offer good rates and less risk. I don’t know why you’d expose yourself to any risk for 0.x% APR. Even Goldman Sachs (the underlying bank of apple) lets you get a good interest rate on savings directly.
> Typically when companies/banks do this sort of pass through banking, the money isn’t actually held in a personal account at the host bank. It’s usually held in one giant account that had a “managed on behalf of many” type structure.
Here's what their terms say:
> Upon Betterment’s instruction, Betterment Securities, acting as your agent, will open one or more Demand Deposit Accounts (“DDAs”) at Deposit Banks. Betterment Securities, as your agent, may also open one or more linked money market deposit accounts (“MMDAs”) at the Deposit Banks as indicated on the Deposit Bank List. Deposit Accounts are non-transferable.
> ...if you decide to terminate your participation in the Program, you may establish a direct relationship with each Deposit Bank by requesting to have your Deposit Accounts established in your name at each Deposit Bank, subject to each Deposit Bank’s rules with respect to establishing and maintaining deposits accounts.
This makes it sound like separate bank accounts are opened for each customer, though possibly not in the customer's name initially (with Betterment Securities acting as the customer's "agent"). So maybe better than thought?
Is it possible they'd try to claim first-dibs on your funds that are living in other banks if they went under and had to pay back shareholders?