Betterment Review – Asset Allocation Made Simple

Betterment
  • Review of: Betterment
  • Reviewed by:
  • Published on:
  • Last modified: July 2, 2015
  • Editor Rating

    Rated 5 stars

In this low-interest rate environment most investors know parking their money in a bank CD is almost a surefire way to lose money against inflation. For the average individual, investing in the stock market can be complicated. So, what is someone to do?

You have to be concerned about high fees, good asset allocation and whether a financial advisor has your best interest at heart. Betterment is one possible solution to make investing easy.

Traditionally, investing and asset allocation require basic finance skills — of which many individuals lack. If you were to use an investment advisor, their fees are quite cost prohibitive. Which is why advisors are usually only available to high net worth individuals. Betterment gives similar investment advice, in an automated fashion and at a much lower annual fee.

How Does Betterment Work?

Betterment is all about the end-game. When saving, we don’t care about investment theory, we care about the end result. We are investing for some purpose, whether saving for retirement, college, home down-payment or for a vacation trip to Hawaii.

Betterment walks you backward in the steps required to meet your end goal. From your initial deposit, monthly savings and time horizon, Betterment will tell you the chances of achieving your objective.

Betterment - Allocation Summary
Allocation Summary

There’s no researching which investments you need to purchase, and at what percentage for each. Betterment does this all for you automatically. This makes investing easy for beginners, and is different than any other discount stock broker we’ve reviewed.

Betterment’s goal is to maximize return but minimize the risk. This sounds like an oxymoron, but it’s not. The question I’m sure you are asking is; how do they do this? They do it via the Modern Portfolio Theory or MPT for short. By investing in a diverse pool of assets, it should collectively lower the risk and yet stabilize returns over the long-term.

Traditionally this type of service was only available with a full-service financial adviser. So this makes Betterment somewhat unique since it’s all done via automated methods.

Betterment was created from the start to make investing as easy as opening a bank account. Though, let me be clear, Betterment is NOT FDIC insured. Your returns are not guaranteed and are subject to market risk. It’s possible your investment could lose principal. Though compared to other investment options which don’t have principal risk, they do have other types of risk. Betterment is a SEC registered broker-dealer and member FINRA/SIPC.

With the service, you don’t own individual stocks or bonds, instead investments are held in the form of an exchange-traded funds (otherwise known as ETFs). The ETFs own a portion of the equities market via indexing. The asset allocation between these various ETFs then ensures your account is not weighted too heavily into one specific area, company, country or sector. While this doesn’t lead to outrageous returns, it prevents putting all your eggs into one basket.

The way Betterment is designed, you have access to a lot of automated options and the process is streamlined so that it requires little day-to-day involvement. It’s kind of set it and forget it, compared to traditional investing options.

Easy Signup Process

The sign up process is easy and takes approximately five minutes. During the process you respond to a series of short questions about your investment needs. There is also a slide bar that allows users to set the allocation of their assets (ie: 60% stocks with 40% bonds). Once the choices are selected, you must then link your personal checking account. Money can be transferred into the Betterment account whenever you desire or you can setup an automated deposit.

Betterment - Portfolio Potential
Bettement graphs possible investment outcomes

When money is moved into the account, Betterment will then automatically purchase exchange traded funds (ETFs). The purchases will be made based on the way you’ve defined your asset allocations. Your investments are very liquid and selling your investments is also made simple. Betterment will perform the sell trades for you. Any dividends earned will be automatically reinvested. Each quarter, any portfolio that is off by more than 5% is rebalanced automatically.

Model Portfolio

When I first reviewed Betterment, their stock asset allocation was slightly different than what is available today. Originally, Betterment did not include international equities and only included TIPS for the bond portfolio. They have since fixed this with the new model portfolio and it was a much-needed improvement.

Stock Portfolio Makeup

  • Vanguard U.S. Total Stock Market Index ETF (VTI)
  • Vanguard U.S. Large-Cap Value Index ETF (VTV)
  • Vanguard U.S. Mid-Cap Value Index ETF (VOE)
  • Vanguard U.S. Small-Cap Value Index ETF (VBR)
  • Vanguard FTSE Developed Market Index ETF (VEA)
  • Vanguard FTSE Emerging Index ETF (VWO)

Bond Portfolio Makeup

  • iShares Short-Term Treasury Bond Index ETF (SHV)
  • Vanguard Short-Term Inflation Protected Bonds ETF (VTIP)
  • Vanguard U.S. Total Bond Market Index ETF (BND)
  • iShares National AMT-Free Muni Bond Index ETF (MUB)
  • iShares Corporate Bond Index ETF (LQD)
  • Vanguard Total International Bond Index ETF (BNDX)
  • Vanguard Emerging Markets Government Bond Index ETF (VWOB)

Betterment’s portfolio is now much more diversified, and includes low-cost, liquid, index-tracking, ETFs. Their tax-efficient algorithm is geared towards maximizing your money’s ability to grow.

Betterment - Portfolio
Get a detailed listing of your ETF portfolio and weighting

The percentage of the ETF allocation is no longer fixed either. Depending upon your allocation of stocks-to-bonds, Betterment adjusts the allocation of each individual ETF to meet the efficient frontier. In plain English: this means Betterment has optimized the portfolio to give you the best performance possible.

All the ETFs Betterment has selected are great picks. They all follow their respective index very closely, are very liquid (which lowers the bid/ask spread), tax efficient and low annual fees.

Even with these recent changes in their asset allocation, I would like to see some additional asset classes (such as commodities and REITs).

Though Betterment’s portfolio should be more than adequate for someone investing less than $100,000. Betterment no longer offers custom portfolios if you have over $100,000 in assets. Betterment now requires $500,000 for custom portfolios. Though based upon the new portfolio mix the need for customization (except as I mentioned sectors above) is almost now nil.

Tax Loss Harvesting

Betterment has Tax Loss Harvesting helps boost your after-tax returns and is twice as effective as other TLH strategies. Basically, an investor with Betterment can improve their after-tax returns by capitalizing on investment losses.

This service doesn’t require any action on your part and is fully-automated for Betterment customers. The extra growth within the investment portfolio has been studied and found that it offers no additional risk or cost. See the graph below:

betterment tax loss harvesting

Is tax loss harvesting right for you? According to Betterment, tax loss harvesting is best for the majority of investors who can write off losses against capital gains, and have up to $3,000 of ordinary income. If you’re in a high tax bracket, and start using tax loss harvesting now, the more beneficial this service will become over time.

Previously you needed more than $50,000 to gain access to this service. Though now all taxable accounts have access to this feature. No minimum deposit is required. In reality, only larger accounts really see the benefits of TLH.

New SEP IRA Feature

Betterment recently announced the option to invest your SEP (Simplified Employee Pension) IRA with them and get up to 12 months completely free. Right now, this offer is only valid only for new Betterment individual accounts.

Betterment’s SEP IRA process is quick and easy setup with minimal paperwork and offers a high contribution limit of up to $53,000 for 2015. In addition, your earnings grow tax-free earnings and include tax-deductible contributions. Currently, Betterment does not support SEP IRA plans with more than one participant, but they plan to offer this soon.

RetireGuide Calculator

As an answer to the other retirement tools available online that are too “simplistic, inaccurate, and didn’t help predict my income in retirement,” the Director of Advice Products at Betterment, Alex Benke, created RetireGuide.

RetireGuide gives you personalized retirement planning advice on points like, your income in retirement based on your savings, when and where you can retire, how much you should be saving per year, and where exactly to invest your money.

This feature takes a look at all of your accounts, whether they’re invested with Betterment or not, to give you a snapshot of your entire financial picture. Unlike other retirement tools, Betterment’s RetireGuide also estimates the amount of spending you’ll do once you reach retirement age.

After filling in your personal information, you can then calculate how much spending you plan to do during retirement, in order to calculate the exact figure you need to be saving for. This feature is able to closely project what retirement will look like, by assuming what other kinds of income streams you’ll have (like Social Security benefits), your age, and amount of savings to per year.

This tool is a game-changer as it allows you to not only use Betterment’s service to save for the future, but also have a better understanding of what you’ll be spending during retirement, as well as other income factors.

Betterment Fees

Betterment - Annual Fees
Start investing in Betterment with no minimum deposit

The great thing about their service is you can start with little money to invest and the fees are quite low (0.35%). Once you get past $10,000, they decrease the annual fee to 0.25%. Past $100,000 invested with Betterment and it lowers to 0.15%.

While you can start with no money, they do request you deposit at least $100/month. Otherwise you get charged an additional $3 per month, if under $10,000. I do think it’s a great idea on their part. It does create some forced savings and I have no issue with their pricing. This fee structure translates to about $17.50 a year on an account with a $5,000 balance.

The Good

  • Simple Asset Allocation – Betterment teaches the ropes to investing and more importantly, proper asset allocation. This, in my opinion, is very good as too often I hear about inexperienced investors with poor, or no, asset allocation.
  • Low Management Fees – Their fees are low enough that if you have a less than $10,000 to invest that it won’t eat away much of your investments.
  • Perfect for Young Investors – Betterment make investing accessible for young investors by automating the investing process. It leans heavily towards dollar-cost averaging which is the perfect long-term investing solution for inexperienced or young investors.

The Bad

  • Not the Best for Higher Net Worth Individuals – For the more advanced investor or higher net worth individual, Betterment might not be the perfect fit. If you can roll your own asset allocation and know investment theory, there’s little need for using a service like Betterment.

When we first reviewed Betterment, we gave them three and half out of five stars. This was mainly because of their high annual fees and limited asset allocation. But with the decreases in their fees and some improvements in their asset allocation, Betterment is an almost perfect investment service. We now rate them five out of five stars.

Summary

Betterment’s service makes it super easy to implement a savings plan. You can setup a new taxable account in minutes, or transfer an existing 401(k) or IRA account.

Without question, the fees are much lower than if you were to hire a professional money manager. If anything, with a professional money manager you would get similar or lower returns but pay much more in management fees.

Their goal setting feature makes their service somewhat unique and perfectly visualizes the steps required to meet your objectives. Though this feature is available in some personal finance apps (like Quicken), Betterment’s is one of the best available either online or offline.

The more advanced investor will do better with a more diverse asset allocation selection and save money in annual fees in the process. Individuals with more than $100,000 and do not want to do it themselves, Personal Capital might be a better option.

Typically individuals with that level of net worth or greater have a much more complex investment portfolio. Unlike Betterment, Personal Capital has access to see your entire net worth. This allows them to get more holistic view of your life. Betterment’s asset allocation is cookie cutter and makes it somewhat limited for more advanced needs. Keep in mind Betterment does not know about or have access to other accounts outside of their service.

Disclosure: I have over $21,000 invested with Betterment’s service since August 2012.

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Reader Comments

    • says

      Hi Michael. If you like Betterment you might want to look at Personal Capital’s portfolio management as well. They are similar to Betterment, but they get your entire portfolio picture (whatever you enter into their site). So your assigned financial advisor can look at the entire picture and not just a typical narrow view.

      • says

        I just talked to them last night. I’m coming off a pretty bad experience with a money manager and I’m not sure I want to put all my eggs in one basket again. Their minimum is 100K to get assets under their management and charge 0.95%. They do offer more in terms of assets classes compared to Betterment, for instance REITs will be part of your portfolio. Sometimes I think I should just dollar cost average Vanguard’s VTI and call it a day.

        • says

          I haven’t had direct experience with Personal Capital’s financial advisors other than speaking with them, so I can’t say how good/bad they are. What I CAN say is you can speak to them with no obligation.

          Keep in mind too with Personal Capital they are not exactly an index (unlike Betterment). They closely mirror the index by the asset allocation into various individual stocks and ETFs. That lowers your annual fees.

          With the price changes Betterment is now much cheaper.

  1. says

    While this may be a good short term strategy for someone trying to learn; but the fact Betterment is based on Modern Portfolio Theory makes it risky. Modern Portfolio Theory has largely been discredited. While it’s theory’s provide interesting investment lessons; markets are not efficient.
    It does not make sense have the same asset allocation when stocks are expensive as you do when stock are bargains. Should you have had the same allocation to equities in 2000 as in March of 2009? That does not make sense!
    Investing is hard work and those that are willing to put the effort into investing can beat the market averages just by being wise shoppers and not follow “easy” rules such as Modern Portfolio Theory would have you believe work.

    • says

      Ken,

      While I don’t disagree with you, you make the assumption that a novice investor would know when stocks are cheap or expensive. What most beginner investors or average savers is a hodge-podge of investments with no asset allocation.

      MPT while not perfect it is better than what most investors have currently which is nothing. For the audience this service targets hiring a financial advisor will cost them more than in fees than sticking with MPT. So that route is inefficient and would cost much more.

      So while for higher net worth individuals and/or individuals with investment experience what you suggest makes sense.

      Someone with a few thousand dollars and just starting off, IMHO this is a much better route than most other options.

        • Robocop says

          I always get a chuckle when I hear people talking like they can tell when a stock is cheap. Study all you want, that won’t give you insight into the future. Trying to time the market is nice as a hobby but it is not prudent if you are trying to make money in the long run.

          • Chris Gagner says

            I agree with Robocop. Changing asset allocation due to the current or presumed future of the stock market sounds too much like market timing. It’s easy to look back to March 2009 and say, “Darn, I should’ve changed my asset allocation.” Considering that market prices adjust rapidly to news, you have to know tomorrow’s news today if you want to time the market efficiently.

  2. says

    Hi Larry, this is a very insightful review with some key points about the pros and cons of the service. Its great that you are reviewing these types of services and exposing them to the public. The overriding intention of all these services is to help individual investors achieve better outcomes, and the more awareness about these services, the better.

    best regards,
    kevin

  3. Ishwar says

    Betterment does NOT use a third party custodian to hold customer assets.

    Can Betterment withdraw money from any customer account?

    Most advisors use a thrid party custodian such as Interactive Brokers, Fidelity, TD Ameritrade, Schwab, etc.

    A thirty party custodian provides a higher level of comfort to the customer.
    Can Betterment withdraw money from any customer account?

    • says

      Hi @Ishwar,

      Katherine from Betterment here. You ask a great question about security, and I’m happy to provide more color around how we put our customers’ security and trust first.

      At Betterment, we developed a vertically integrated structure as a way to deliver a premium customer experience. As a custodial firm like Fidelity or Charles Schwab, we are responsible for handling customers’ funds and keeping all records of their assets.

      Betterment has two separate arms: the first, Betterment LLC, is an SEC-registered investment advisor, which operates the advice and investment platform customers experience when they access their Betterment accounts. The second arm, Betterment Securities, is a FINRA member broker-dealer, which executes trades on customers’ behalf and is the custodian of customers’ assets.

      Betterment is subject to the same set of strict capital requirements and regulatory oversight as Fidelity, Charles Schwab, and other qualified custodians. These requirements ensure customers’ safety and make us unique among other online investment managers, many of whom are introducing firms. Introducing firms have minimal capital requirements and in practice, pass customers’ fund through to another firm that custodies them. With Betterment, the only company customers ever deal with is Betterment.

      In the event of a worst-case scenario such as company insolvency, assets with Betterment Securities are protected by SIPC up to $500,000 per account. And to be sure, it’s extremely rare that a firm cannot return customers’ assets in a crisis, or that customers must rely on SIPC. Over SIPC’s 42-year history, less than 1% of broker-dealers have been subject to SIPC proceedings.

      Customers are always able to check investments and holdings at all times. Our investment platform has verification built in at every step—customers’ transaction amounts are reconciled with cash transfers and ACH transaction amounts, which are then reconciled with trade amounts, which are then reconciled with positions, and then with fills. We also undergo regular, rigorous examination independently both by the SEC and by FINRA to ensure that we properly maintain our customer records and satisfy our capital requirements. Finally, the way we handle our operations capital is yet another way we ensure the safety of customers’ investments. It’s a core part of our integrity as a company. Our operational funds are always 100% segregated from any kind of customer investment activity, always in different accounts. As Betterment Securities is the custodian of your assets, we also maintain substantially higher levels of net capital than an introducing firm—another way we have a higher level of security than many other online investment managers.

      Let me know in the comments if you have other questions about security with Betterment. Our customers’ trust is incredibly important to us, and we work hard to maintain it every day.

      Katherine

  4. Barrett says

    Larry,

    Outstanding review. I’m looking to invest more than $100k. I read your mention of Personal Capital…they’ve targeted me through my Mint account and I’m considering them Could you expound upon why you think Personal Capital might serve my needs better than Betterment?

    Also, do you know of a blog review or site review of the differences or advantages between Betterment, Personal Capital, and Wealthfront? ALL 3 are on my radar.

    THANK YOU!

    • says

      Hi Barrett,

      I can’t speak for you personally, but can tell you the difference. Betterment is a completely automated (without human) asset allocation system. Personal Capital is a tech assisted financial advisor. Wealthfront is similar to Betterment with some slight differences. Wealthfront has improved in the past year, but still prefer Betterment over Wealthfront.

  5. Chinmay says

    Hi Larry,

    I am starting to invest with Betterment, though I had this question – I was looking into having a 60% stock – 40% bonds mix, and I have already reached my IRA limits this year, so would have to go for a taxable account with Betterment. My initial capital to start with Betterment this year would be < 5000. With this in mind, is it wise to have such amount of bonds with Betterment, as they would generate more capital gains OR should I wait till next year when I can start investing in IRA again and have an IRA account with Betterment?

    Thanks for providing such an in depth review of betterment. It made me go overboard to actually start investing with them!

    Best Regards,
    Chinmay

    • says

      Hi Chinmay,

      I cannot give you individual advice since I’m not a registered broker. What I can say is it depends upon what you are going to use this saved money for. It sounds like you’ve filled up your tax deferred space and going to use this for retirement savings as well. One option is you can mix your asset allocation between both accounts since both are for the same time frame and effectively one large account in two different types of accounts.

      In taxable accounts it is usually better to place tax efficient investments like stock indexes than bonds. Then place into your tax deferred accounts investments that are tax inefficient (ie bonds, REITS, etc.) So individually they may seem lopsided when together they are not and get your desired asset allocation strategy. Hope this helps.

    • ThatGuy says

      For anyone curious about this…
      I have a 60/40 stocks/bonds bucket and 24% of it is allocated to municipal bonds since you do not have to pay tax on them. In the tax advantaged accounts, they replace these with higher yield bonds that would normally be taxable.

  6. Chinmay says

    Hi Larry,

    Thanks for the response and the advice. Though, the question indeed was meant for Goal based savings – like for home purchase, marriage, and the sort. The time frame is around 5 years at least for the home. I just want to put my money (except emergency fund) into something which is more useful than an online savings account.

    The problem I have is that I don’t understand all the different types of bonds completely yet (currently reading some stuff on it) and so the decision to go with Betterment for the time being. As the current investment is going to be in a taxable account for now – Is it advisable to keep some portion of it as bonds (and incur the penalty of taxes) ? As I had mentioned before, the investment is going to be <$5K. Also I do not know how much penalty I will incur with such an amount for 30-40% in bonds. Another strategy can be to max out in betterment for stocks and purchase the bonds in IRA next year, but its still 5 months away and I don't really like the risk for 100% stock. May be there is some middle ground here, but I have not yet stumbled upon it.

    I understand that you are not a broker, but what I am really looking for is a nudge in the right direction, so that I can make proper decision with this investment!

    Thanks once again!

    Best Regards,
    Chinmay

  7. Ralph Stevens says

    Has anybody done any research on the relative performance of Betterment and vs their competitors (after fees)? I’m curious if they outperform brick and mortar active managers as well as other online services.

  8. Chris Gagner says

    Betterment has a very easy to use platform, but as a more advanced investor, I would still like to be able to pick my own stocks. Which online broker do you think has the easiest to use platform for long-term buy & hold investors who will need to periodically rebalance?

  9. dodong says

    So the dividends only get reinvested and not the money earned through market changes? How can we take advantage of compounding interest?

    • says

      If I understand your question correctly, they do automatically re-invest dividends. When you say money earned the shares are already owned so therefore they are unrealized gains. If the ETFs go up in value, the shares you own will go up in value. The gains only become realized when you sell them. Which then becomes a taxable event.

      • dodong says

        you got it right. i see. can you suggest what / where investment institution can i park my money that’s better than betterment?

          • dodong says

            would you recommend to withdraw the earnings (money earned through market change) and reinvest it again to betterment? what would be the disadvantages of this idea?

          • dodong says

            would you recommend to withdraw the earnings (money earned through market change) and reinvest it again to betterment?

          • dodong says

            would you recommend to withdraw the earnings and reinvest it again to betterment? what would be the disadvantages of this idea?

  10. RB says

    I had requested a demo via their website 3 days ago and never got a response. I called to follow up and the excuse was that they have been overwhelmed with requests and cannot keep up. I can’t imagine what customer support would be like once I pay for the product. Typical growth company; too much marketing but not enough infrastructure to handle the workload. I suggest that anyone condsidering this company hold off until the dust settles.

  11. LM says

    I would contend that a more advanced investor can take further advantage of Betterment through the use of “bucket accounts.” For my mother, I created a 1 year, 3 year, 5 year and 10 year horizon portfolios within Betterment. Money that she might need in the next the next 12 months were placed in a “safety net” and then with each longer time horizon, an increasing use of stocks was employed.

    While I could put together a collection of ETFs and mutual funds, the ease of setting up specific time horizon portfolios and let them be managed automatically is a useful way of creating a blended investment portfolio.

  12. Nick K says

    I’m young, a student, and just starting out with investing. I also don’t make much at my current job. For me, Betterment really has been amazing. Many of my peers have no interest in investing, preferring to live (only) for today. The fact that I only need to send Betterment $100 a month to maintain the low fee makes them ideal. Think about it. To manage 5K in assets, they want less than what most brokers would charge for 3 trades. How do you build a diverse portfolio with 3 trades in a year? Think about all the time that the cash I’d like to invest would sit idle in a savings account! I’m paid weekly. Sending Betterment $25 a week automatically, and having it invested across different ETFs as soon as they receive the money, really is great for me. I can also invest additional money, as I try to, even if it’s only $10, without paying commission. Just their management fee.

    Also, since this article has been updated, Betterment now includes tax free bonds in investment accounts, and even better stock funds.

  13. Bill says

    Thanks for the helpful review.

    I am looking for a vehicle to invest 5K and then $1K per month. Looking for growth and income over 20+ years – 10% annualized would be really great target.

    Still weighing pro’s and con’s of betterment, fortune advisor and jemstep.

    Why not just choose a vanguard 2060 (vttsx) or lifestrategy (vagsx) – other than personal preference and keeping fee’s low – it appears many of these would return similar returns – although all very cool. Has anyone compared a few of these side by side.

    Love this website – all guidance appreciated.

    Thanks.

  14. Dick B says

    I plan to retire in 4 months and looking for assistance with asset allocation and portfolio monitoring. I read Betterment does offer Retirement services. Have they or another service(s) been reviewed with the Retiree in mind? Any suggestions would be appreciated.

  15. Peter says

    Hi Larry,

    I am 25 with about 17k in Vanguard target retirement / health mutual fund. I have been happy with Vanguard but then again I’ve only been investing since I graudated in 2012 so I have only experienced the economy post-recession. Do you think making the switch to Betterment would be a good option for me? Also do you recommend switching to Personal Capital once I hit 100k?

    Love the blog!

  16. says

    im 28 years old and i have been investing in betterment for the last year and a half i started with a minimum wage job 7.25 an hour then moved to 9 dollars an hour for 5 months i managed to save and invest 8k into betterment when i was earning 10 an hour i must say i truly apreciate and im very happy with betterment not just because of the dividents and gains but the opportunity to start investing and learning how to save little by little step by step at a minimum wage it gave me perspective , hope and a mission to find financial independence, today i have close to 25k and plan on reaching 45k on it and then expand to lending club and amazon afiliate sales, my little goal is to reach 100k before turning 30 today i earn 16 dollars an hour and save an average of 2.6k a month i work 14 hours a day 6 days a week and i live a simple live drive a simple and old car but i have learned the old ways of dicipline and saving and that is something that will always be grateful to betterment.