Review of: Betterment
Reviewed by: Larry Ludwig
Last modified: April 18, 2018
Betterment is a good starting point for beginner investors. The robo advisor has no minimum deposit and costs 0.25% annually. If you need the assistance, it recently added human advisors, who can assist with your retirement account. Unfortunately, its asset allocation excludes REITs or commodities.
In today’s low interest rate environment, most investors know that parking their money in a bank CD is a nearly surefire way to lose against inflation. But at the same time, to the average individual, investing in the stock market can seem overly complicated. So what’s the smart money to do?
Traditionally, investing and asset allocation have required basic finance skills — which many individuals lack. Likewise, the steep fees of professional advisors have put off everyday investors. As a result, advisors are usually available only to high-net-worth individuals.
Enter the robo advisors. These services use computer algorithms to generate personalized advice and manage your investing portfolio. So they offer a solution that takes some of the stress, frustration and high fees out of investing.
Betterment has risen to the forefront as one of the biggest robo investing platforms in the industry. But is it the best?
How Does Betterment Work?
When saving, we don’t care about investment theory; we care about the result. We are investing for a purpose, whether it’s retirement, college, a home down payment or a vacation to Hawaii.
This robo advisor is all about the endgame, walking you backward through 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.
There’s no researching which investments you need to purchase or what percentage for each. The service does this for you automatically. So Betterment makes investing easy for beginners.
The company’s goal is to maximize your return while at the same time minimizing your risk. Although this sounds like an impossible task, in reality, it’s not. So how the heck do they do this? The service uses Modern Portfolio Theory, or MPT for short. By investing in a diverse pool of assets, it should collectively lower your risk yet stabilize your returns over the long term.
How’s Betterment Different?
Traditionally, this level of service was available only with a full-service financial advisor. So this makes Betterment somewhat unique since it’s all done via automated methods.
Betterment was created to make investing as easy as opening a bank account. But let me be clear: Although the service is an SEC-registered broker-dealer and a member of FINRA/SIPC it is not FDIC insured. Therefore, your returns are not guaranteed and are subject to market risk. It’s possible your investment could lose principal. But if you take a look at other investment options that don’t have principal risk, you’ll see that they still do have other types of risk.
With the service, you don’t own individual stocks or bonds; instead, investments are held in the form of exchange-traded funds (ETFs). The ETFs own a portion of the equities market via indexing. As a plus, the asset allocation among these various ETFs then ensures your account is not weighted too heavily in one particular area, company, country or sector. While this doesn’t lead to outrageous returns, it prevents you from putting all of your eggs in one basket.
Betterment Fees & Features
|Fees||Digital – 0.25%/year; Premium – 0.40%/year|
|Tax Loss Harvesting||— All Taxable Accounts|
|Automatic Deposits||— Weekly, Biweekly and Monthly|
|Socially Responsible Investing|
|Access||Website, iOS App, Android App|
|Customer Service||Phone: M-Th 9A-8P, F 9A-6P ET; Live Chat: M-Th 9A-8P, F 9A-6P, Sat-Sun 11A-6P ET; Email|
|Promotions||Up To 1 Year Free|
- Custom Asset Allocation — Based upon your risk profile and account type (taxable vs. tax deferred), the asset allocation is customized.
- SmartDeposit — You can automatically make deposits if your bank balance goes over a specified amount.
- RetireGuide Calculator — The service helps you plan for retirement by linking your existing external accounts.
- Tax-Coordinated Portfolio — Asset-allocate your investments to maximize the tax efficiency between your tax-deferred and taxable accounts held at Betterment.
- Two-Factor Authentication — Secure your account via SMS text or an authenticator app on your smartphone.
- App Passwords — This allows personal finance services such as Mint, Personal Capital or TurboTax to a read-only view of your financial information without giving away your master password.
- Socially Responsible Investing Portfolio — Investing can only help you make money, but can also make a difference. Betterment offers Social Responsible Investing (SRI) ETFs to be achieve your goals to make the world a better place.
- BlackRock Target Income Portfolio (New) — This portfolio is designed for those in retirement or investors wanting a low-risk portfolio. The portfolio is 100% composed of bonds to give investors income with low risk.
- Goldman Sachs Smart Beta Portfolio (New) — Competing with Schwab, Betterment now also implements Smart Beta with this portfolio in the hopes of improving returns over using traditional indexing.
- Talk to Financial Expert via Betterment’s App (New) — Got a financial question? Just like texting your friend, you can send a message to a financial expert within the Betterment app. This feature is available to all Betterment customers.
- Charitable Giving (New) — Betterment allows customers to donate shares directly from their accounts to charities. This can save investors at tax time because they will avoid capital gains taxes on donated shares.
- Flexible Portfolios (New) — Available for investors with $100,000 or more in investible assets at Betterment, these portfolios allow you to customize your portfolio by adjusting your individual asset class weights. You’ll receive feedback from the Portfolio Analysis tool on your selections.
Betterment is designed so that you have access to a lot of automated options. And because the process is streamlined, it requires little day-to-day involvement. Compared to traditional investing options, it’s “set it and forget it.”
|Fees||Digital – 0.25%/year; Premium – 0.40%/year||First $10k managed free; 0.25%/year for $10k+||Under $5k – FREE; $5k-$100k – 0.50%/year; $100k+ – 0.40%/year|
|Promotions||Up To 1 Year Free||$5k Managed for Free||Up to $100 Bonus|
|Review||—||Read the Review||Read the Review|
Easy Signup Process
The signup process is easy and takes approximately five minutes. First of all, 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 — e.g., 60% stocks with 40% bonds. Once you’ve made your choices, you must then link your personal checking account. You can either transfer money into your Betterment account whenever you desire or set up an automated deposit.
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% will be rebalanced automatically.
Back when I first reviewed Betterment, the service’s stock asset allocation was slightly different than what is available today. Originally, it did not include international equities and offered only TIPS for bond portfolios. But the service has since fixed this with a new model portfolio, which was a much-needed improvement.
|US||Vanguard U.S. Total Stock Market||VTI|
|Large Cap||Vanguard U.S. Large-Cap Value||VTV|
|Mid Cap||Vanguard U.S. Mid-Cap Value||VOE|
|Small Cap||Vanguard U.S. Small-Cap Value||VBR|
|Foreign||Vanguard FTSE Developed Markets||VEA|
|Emerging Market||Vanguard FTSE Emerging Markets||VWO|
|Socially Responsible||iShares MSCI KLD 400 Social||DSI|
|Socially Responsible||iShares MSCI KLD 400 Social||KLD|
|US TIPS||Vanguard Short-Term Inflation-Protected Treasuries||VTIP|
|Muni||iShares National AMT-Free Muni Bond||MUB|
|Corporate||iShares Corporate Bond||LQD|
|Emerging Market||iShares Emerging Markets Bond||EMB|
|Foreign||Vanguard Total International Bond||BNDX|
|US Short-Term||iShares Short-Term Treasury Bond||SHV|
|US Total||Vanguard U.S. Total Bond Market||BND|
The percentages of the ETF allocation are 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: Betterment has optimized the portfolio to give you the best performance possible.
All of the ETFs the service has selected are great picks. They all follow their respective indexes very closely and are very liquid (which lowers the bid/ask spread), tax efficient and low in annual fees.
However, even with these recent changes in allocation, I would still like to see some additional asset classes, such as commodities and REITs.
For experienced investors who want more control over their portfolios, Betterment now offers Flexible Portfolios. These portfolios allow users to adjust the individual asset class weights. You’ll still receive feedback from the Portfolio Analysis tool as to the risks of your selections, but the choice will ultimately be up to you. This feature is available for accounts with $100,000 or more and is not valid for Betterment’s Socially Responsible Investing, BlackRock or Goldman Sachs portfolios.
Socially Responsible Investing Portfolio
In recent years, many investors have become keenly aware of the impact their dollars can have on the world. Whether for humanitarian or environmental reasons, socially responsible investing (SRI) has become a hot topic.
Betterment is one of the robo advisors at the forefront of this trend, with its charitable giving options and now with a portfolio designed with a slant toward SRI. In designing its SRI portfolio, Betterment took two goals into account:
- Reducing exposure to companies involved in activities deemed irresponsible on either an environmental, social or governmental level; and
- Increasing exposure to companies that are striving to solve environmental and social challenges.
With this in mind, here’s the current makeup (March 2018) of Betterment’s SRI portfolio:
|Vanguard FSE Emerging Markets ETF||VWO|
|Vanguard FTSE Developed Markets ETF||VEA|
|Vanguard Small Cap Growth Index Fund||VBK|
|Vanguard Small Cap Value Index Fund||VBR|
|Vanguard Mid Cap Growth Index Fund||VOT|
|Vanguard Mid Cap Value Index Fund||VOE|
|iShares MSCI KLD 400 Social ETF||DSI|
|iShares JP Morgan USD Emerging Markets Bond ETF||EMB|
|Vanguard Total International Bond Index Fund||BNDX|
|iShares iBoxx Investment Grade Corporate Bond ETF||LQD|
|Vanguard Short Term Inflation Protected Securities ETF||VTIP|
|iShares Short Treasury Bond ETF||SHV|
In addition, IRA portfolios will contain the Vanguard Total Bond Market Index Fund (BND), and taxable accounts will contain the iShares National Muni Bond ETF (MUB).
BlackRock Target Income Portfolio (New)
Betterment has joined forces with asset management corporation BlackRock to create a special portfolio designed to produce income with low risk.
The portfolio strategy is a diversified 100% bond basket. Investors can choose from four risk levels, each with its own targeted level of income yield. The higher the potential income, the greater the risk.
This portfolio could be a solid choice for retirees looking for stable, dependable income as well as a way to preserve their nest eggs. It’s also a solution for investors who would like a lower-risk investment than stocks.
Goldman Sachs Smart Beta Portfolio (New)
For those investors who are not allergic to risk, there’s also the new Goldman Sachs Smart Beta Portfolio. This portfolio seeks to outperform a conventional investing strategy using smart beta. It intends to give investors higher returns by eschewing market capitalization weightings in and across equity asset classes.
With a smart beta approach, overall market performance is considered only one of many factors that can affect investment returns. By addressing other factors, this strategy means more risk but also the potential for greater returns.
Betterment’s new portfolio strategy was developed by the smart beta experts at Goldman Sachs Asset Management.
Tax Loss Harvesting+ (Updated)
The service offers tax loss harvesting (TLH), which 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 to offer no additional risk or cost. See the graph below:
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. If your capital losses exceed your capital gains, you can still claim the excess loss up to $3,000, or up to $1,500 if you are married filing separately, provided you have other income of at least the amount you’re claiming as a loss. If you’re in a high tax bracket and start using tax loss harvesting now, this service will become more beneficial over time.
Previously you needed more than $50,000 to gain access to tax loss harvesting. However, all taxable accounts now have access to this feature. No minimum deposit is required. But in reality, only larger accounts really see the benefits of TLH.
The company also just announced Tax Loss Harvesting+ across multiple accounts for spouses. If used effectively, it can double the size of your tax-efficient space. Plus, it sets Betterment up to incentivize you to have all your accounts with the service.
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. 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 per year.
The RetireGuide tool is a game-changer since 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.
RetireGuide syncs with more than 13,000 external accounts to:
- Provide daily, automatically refreshed advice based on synced account balances.
- Help you stay organized with a display of all of your retirement accounts in one place.
You can also now update the age at which you expect to receive Social Security benefits and even upload a Social Security statement file from SSA.gov for even more precise advice.
This new feature helps investors who have taxable and tax-deferred accounts with Betterment. It places investments like stocks ETFs, which are tax efficient, in your taxable account. At the same time, it moves bond ETFs, which are tax inefficient, into, say, an IRA account you have. Betterment still keeps the overall recommended asset allocation in mind for the set goal you’ve defined.
This service assumes you have multiple accounts with Betterment. Currently, Betterment cannot take an external 401(k) plan (though it does offer 401(k) plans for businesses who are interested) and perform this feature with a taxable account you have them.
Betterment makes the claim this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years.
How Much Does It Cost to Use Betterment?
|Digital||$0||0.25%||Messaging via App with financial experts, Rebalancing, TLH+ and RetireGuide|
|Premium||$100,000||0.40%||Messaging via App + Unlimited calls with CFPs; Assistance with external investments|
Included in both plans is the ability to message a financial question to Betterment’s financial experts. No different than sending a text message to your friend, you can ask a financial question within Betterment’s app. Betterment will respond back within their business hours.
For individuals who want more hand-holding from a human life form than just digital zeros and ones, Betterment now offers the Premium tier. This service is optional once you reach the $100,000 investment threshold.
The primary advantage of the Premium plan is assistance with investments outside of Betterment – retirement accounts, stocks, or other life events. The other benefit is unlimited access to Betterment’s CFP professionals.
With the Premium plan, you’ll be happy to know Betterment can assist with your 401(k) plan and give advice on asset allocation.
Lastly, once you reach $2 million in investments your fees are capped with any of the service’s pricing. So make any investment past $2 million and you will effectively get the Betterment service for free or a maximum annual payout of $5,000 for the Digital only service.
Pros and Cons
- Simple Asset Allocation — Betterment teaches the ropes to invest and, more importantly, proper asset allocation.
- Low Management Fees — A flat rate 0.25% annual fee for Betterment's automated service. 0.40%/year for their advisor service.
- Perfect for Young Investors — Betterment makes investing accessible for young investors by automating the investing process.
- Tax-Coordinated Portfolio — With tax and tax-deferred accounts at Betterment, it's possible to minimize taxes you pay while investing.
- RetireGuide Calculator — An easy-to-use retirement planner tool, though not as comprehensive as Personal Capital's Retirement Planner.
- Flexible Portfolios — If you have $100,000 or more to invest, you can use Betterment's Flexible Portfolios to customize your asset allocation.
- Not the Best for Higher-Net-Worth Individuals — For advanced investors or higher net worth individuals, 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. In addition, you may need tax advice in which Betterment cannot offer.
- Cannot Asset-Allocate With External Accounts — The biggest limitation of Betterment (and most other robo advisors) is they can only manage accounts at Betterment. While Betterment can display your 401(k) plan, it cannot create an overall asset allocation plan with your 401(k) plan in mind.
- No REITs or Commodities — Betterment does state these asset classes don't increase returns, but from some research do decrease volatility.
Because Betterment increased its annual fee and Wealthfront added new functionality, we no longer rate Betterment as the best robo advisor. While Betterment is still a solid choice and recommended by us, Wealthfront has a slight edge. If you want more information as to how these two competitors stack up, check out our comparison.
Without question, Betterment’s fees are much lower than you’d find if you were to hire a traditional financial advisor. If anything, with a professional money manager you would get similar or weaker returns but pay much more in management fees.
With the introduction of human advisors, Betterment has become a formable competitor to Vanguard’s Personal Advisor Services. Still, the more advanced investor might do better doing it themselves with a more diverse asset allocation selection and save money in annual fees in the process.