- Review: Betterment
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Betterment is a good starting point for beginner investors. The robo-advisor has no minimum deposit and costs 0.25% annually. If you have the need, they recently added human advisors as an option. Unfortunately, with the change in fees, Betterment is more costly for accounts over $100,000.
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 — which many individuals lack. If you were to use an investment advisor, their fees are quite cost prohibitive. Which is why advisors are usually available only 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 endgame. When saving, we don’t care about investment theory; we care about the result. We are investing for some purpose, whether saving for retirement, college, a home down payment or for a vacation 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.
There’s no researching which investments you need to purchase or at what percentage for each. Betterment does this 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 while minimizing 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 available only to a full-service financial adviser. 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: 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 that don’t have principal risk, they do have other types of risk. Betterment is an SEC-registered broker-dealer and member of FINRA/SIPC.
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. The asset allocation between these various ETFs then ensures your account is not weighted too heavily into one particular area, company, country or sector. While this doesn’t lead to outrageous returns, it prevents putting all your eggs in one basket.
|Account Fees||Digital – 0.25%/yr, Plus – 0.40%/yr, Premium – 0.50%/yr (Updated Pricing)|
|Accounts Available||Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts, Non-Profit, Individual, and Joint|
|Tax-Loss Harvesting||Yes — All Taxable Accounts and Linked Spouse Accounts|
|Automatic Deposits||Yes — Weekly, Every Other Week, Monthly, and Twice a Month|
|Advice||Automated with Human Advice for additional fee|
|Mobile App||Yes — Apple iOS and Google Android|
|Customer Service||Phone and Live Chat — M-F 9A-8P ET, Email — 24/7|
|Promotions||Get One Month Free w/$10k Deposit|
- Custom Asset Allocation — Based upon your risk profile and account type (taxable vs. tax deferred), the asset allocation is customized.
- SmartDeposit — Automatically make deposits if your bank balance goes over a specified amount.
- RetireGuide Calculator — Help plan for retirement by linking your existing external accounts.
- Tax-Coordinated Portfolio — Asset allocate your investments to maximize tax efficiency between your tax deferred and taxable accounts held at Betterment.
- Two-Factor Authentication (New) — Secure your account via SMS text or an authenticator app on your smartphone.
- App Passwords (New) — Allow personal finance services, such as Mint, Personal Capital or TurboTax, to a read-only view your financial information without giving your master password.
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 “set it and forget it,” compared to traditional investing options.
|Read the Review||Read the Review||Read the Review|
|Fees||0.25%/yr||First $10k Free; 0.25%/yr||Under $5k – Free; $5k-$100k – 0.50%/yr; $100k+ – 0.40%/yr|
|Promotion||One Month Free w/$10k+ Deposit||First $15k Managed for Free||$50 Bonus; Addl. $50 for Wealthsimple Black|
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Easy Signup Process
The signup 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 — e.g., 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 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% is rebalanced automatically.
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 included only TIPS for the bond portfolio. They have since fixed this with the new model portfolio, which was a much-needed improvement.
|US||Vanguard US Total Stock Market||VTI|
|Large Cap||Vanguard US Large-Cap Value||VTV|
|Mid Cap||Vanguard US Mid-Cap Value||VOE|
|Small Cap||Vanguard US Small-Cap Value||VBR|
|Foreign||Vanguard FTSE Developed Market||VEA|
|Emerging Market||Vanguard FTSE Emerging Markets||VWO|
|US TIPS||Vanguard Shrt-Trm Inflation Protected||VTIP|
|Muni||iShares National AMT-Free Muni Bond||MUB|
|Corporate||iShares Corporate Bond||LQD|
|Emerging Market||Vanguard Emerging Markets Govt. Bond||VWOB|
|Foreign||Vanguard Total International Bond||BNDX|
|US Short-Term||iShares Short-Term Treasury Bond||SHV|
|US Total||Vanguard US Total Bond Market||BND|
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: 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 and are very liquid (which lowers the bid/ask spread), tax efficient and low in 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.
Tax Loss Harvesting+ (Updated)
Betterment has tax loss harvesting (TLH) that 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 this service. However, now all taxable accounts have access to this feature. No minimum deposit is required. But in reality, only larger accounts really see the benefits of TLH.
Betterment also just announced Tax Loss Harvesting+ across multiple accounts for spouses. If used effectively doubles the size of your tax efficient space. Plus it sets up Betterment to incentivize you to have all your accounts with Betterment.
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. 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.
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.
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. While moving bond ETFs which are tax inefficient into say an IRA account you have with them. 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 Betterment 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.
SEP IRA Support
Betterment recently announced the option to invest your SEP (Simplified Employee Pension) IRA with them and get up to 12 months completely free. This offer is available for new and existing Betterment customers.
Betterment’s SEP IRA process is quick and easy to set up, with minimal paperwork, and offers a high contribution limit of up to $53,000 for 2016 and 2017. In addition, your earnings grow tax free 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.
How Much Does It Cost to Use Betterment? (Updated Pricing)
|Digital||$0||0.25%||Rebalancing, TLH+ and RetireGuide|
|Plus||$100,000||0.40%||Digital + Yearly call with financial experts, more monitoring|
|Premium||$250,000||0.50%||Digital + Unlimited calls with financial experts, more monitoring|
Betterment updated their pricing on January 31, 2017. Their annual fees for the basic service (what they are calling Betterment Digital) is one flat rate no matter how much you invest. Betterment Plus and Betterment Premium are optional services. The old pricing for Digital deposits from $100,000 and higher was 0.15% annually. This change for existing customers will go into effect June 1, 2017.
Also gone is the $100 monthly deposit required to stay with the lower fee when you had under $10,000 invested.
This new pricing structure is overall a better deal for individuals who have less than $100,000 to invest. It’s not so much of deal for investors with more than that when compared to their previous fee structure. Though when compared to a traditional investor advisor, their service is still quite cheap.
For individuals who want more handholding from Betterment, they now offer two additional pricing tiers: Plus and Premium. Both services are in addition to the Digital services and aren’t mandatory. The add-on service is meant to help Betterment clients who want more financial advice with their life goals. The Plus plan gets you an annual call by their team of CFP® professionals and licensed financial experts. The Premium plan gives you unlimited access to their team of professionals. Both offer additional monitoring, but at the time of writing, it’s not clear what exactly that includes. Either of these advisor plans, 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 their 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.
- Simple Asset Allocation — Betterment teaches the ropes to investing and, more importantly, proper asset allocation.
- Low Management Fees — Flat rate 0.25% annual fee
- 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 a 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.
- 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 tax advice in which Betterment cannot offer.
- $100k+ is Now More Costly — With their new flat rate pricing $100k or more investors will pay more to use Betterment.
- 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.
With Betterment’s fee increase that matches Wealthfront’s and Wealthfront adding their new Path functionality, we no longer rate Betterment as the best robo-advisor. Betterment is still a solid choice, but Wealthfront has a slight edge. If you wanting more information, check out our comparison of the two robo-advisors.
Without question, the fees are much lower with Betterment than if you were to hire a traditional financial advisor. If anything, with a professional money manager you would get similar or lower returns but pay much more in management fees.
With Betterment’s introduction of human advisors, it makes them a formable competitor to Vanguard’s Personal Advisor Services. Though 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.