- Commissions and Fees
- Ease of Use
- Investment Options
A robo-advisor? An automated investment management tool? What more could you ask for! With Betterment you get all that and more, but is it worth it? Read our review to find out if Betterment is the trading tool you’ve been waiting for.
Betterment.com is an automated investment management application, robo-advisor, that performs many of the functions of a financial advisor including portfolio construction and management at a fraction of the costs. It’s credited for spawning the robo-advisor brokerage industry by replacing human advisors with sophisticated machine learning algorithms that seamlessly automate managed-portfolio services. Diversification, liquidity and low-costs are maintained by utilizing exchange-traded-funds (ETFs) as the building blocks for wealth management strategies.
Betterment was launched in 2008 by Jon Stein with the vision of providing access to professional wealth management services to a broader consumer demographic that otherwise wouldn’t qualify or be able to afford a financial advisor. Professional financial advisors often require a minimum of $100,000 or more in capital and command expensive management fees around 2% of assets in addition to transaction costs. Since then, the company has grown assets to $13.7 billion under management and has diversified services to provide human financial advisors under the premium plan.
How Betterment Works
Betterment seamlessly takes users through the process of defining your Betterment investor profile, identifying your goals, scheduling funding, creating and managing your optimized portfolio. Automated tax-harvesting, portfolio rebalancing, funding and dividend reinvestment are embedded into the algorithms, so users can set-it and forget-it, while having full access to track performance or manually adjust allocations. It’s similar to services like Wealthsimple and M1 Finance.
Betterment uses a menu-based goals-oriented approach (IE: Retirement, Build Wealth, Safety Net) that enables users to prioritize near and long-term financial goals, so the app can design and execute a transparent investment plan towards meeting the objectives. This provides a full perspective of the user’s financial picture with a transparent and systematic approach. Betterment has teamed up with BlackRock and Goldman Sachs to expand their strategic portfolio offerings.
There are no minimum investment requirements. Users must be 18-years or older.
Betterment Pricing and Fees
Betterment has two pricing plans consisting of purely automated robo-advisory and combined human and robo-advisory services.
The Digital Plan has a 0.25% annual fee based on account balance. This plan provides access to the core robo-advisory services that will construct and manage your investment portfolios according to your investment profile. This includes automated tax-harvesting (matching capital gains with capital losses) and rebalancing to maintain target allocations.
The Premium Plan has a 0.40% annual fee based on account balance with a $100,000 minimum account balance. In additional to all services in the Digital Plan, this plan also provides human financial advisors providing advice on managing retirement plans, real estate and individual stocks. Access to Betterment’s Certified Financial Planners (CFPs) are at the ready to provide personalized guidance for life events including estate planning, insurance planning, college planning, tax implications and retirement planning.
For balances over $2-million (excluding 401K balances), the Digital Plan annual fee drops to 0.15% and Premium Plan drops to 0.30%.
Since Betterment utilizes ETFs in their portfolios, users should be aware of the expense ratios for this asset class that are passed on to them. For example, the Vanguard S&P 500 ETF has an annual expense ratio of 0.04%, while relatively cheap, can still erode portfolio performance in the long-run.
Betterment can be accessed online and through mobile app on Android and iOS devices. This is not a do-it-yourself type of platform, but a structured platform that automates and manages tasks for you. In fact, users have very little control with the core plan regarding portfolio choices. For many, this is a good thing to leave things to the professionals. All investments are made with ETFs. There are no individual stocks, bonds or other financial instruments used. This keeps everything diversified and prevents the potential for blowing out the account based on a single bad earnings report or news catalyst.
Betterment Investing Tools
Portfolio analysis tools are available for users to gauge and monitor the performance of their portfolios and adjust settings. Premium users have access to Betterment financial advisors directly through the app. You can simply text for advice. The Cash Analyzer helps users budget savings and expenses while implementing the Smart Saver investment feature that is a combination of 80% short-term U.S. Treasury Bonds and 20% short-term investment-grade bonds to gain and average of 2.20% annual yield.
In addition to the computer-generated portfolios, Betterment also provides theme-based portfolios including Social Responsible Investing (SRI) as well as Goldman Sachs Smart Beta and BlackRock Target Income specialized portfolios. Customization is available for balances over $100,000 USD as users are allowed access to Flexible Portfolios function which lets you modify allocations manually.
Individual portfolio performance depends on many factors both controlled and uncontrolled. Controlled factors include when you get started, timing and amount of deposits, portfolio allocations, while uncontrollable factors include geo-political events, global and financial market volatility. However, Betterment purports additional performance gains up to 2.66% can be attained with its effective tax-loss harvesting strategy that offset capital gains with capital losses during market fluctuations.
Betterment automates portfolio rebalancing when the allocation percentages deviate past certain triggers as valuations change. For example, you may have a 65% allocation to S&P 500, but a steep drop in the underlying ETF caused the allocation percentage to fall under 60%. This would trigger automatic rebalancing by purchasing more S&P 500 ETF to bring it back to 65%.
Betterment is the original robo-advisor that launched a whole new segment of robo-advisory services within the fintech industry. Many competitors have entered the field through the years with their own little niches (IE: Acorns specializing in micro-investing and rounding-up spare change). For the most part, Betterment still maintains a leading position as it continues to strengthen alliances with full-service wealth management firms like Goldman and BlackRock to offer higher quality products. However, Betterment only invests in equities and bond ETFs, there are no commodities or real-estate asset classes. This can be a limitation for investors seeking involved with those markets.
Betterment believes in remaining 100% invested, so there are no cash allocations. While tax loss harvesting (TLH) is a function of many popular robo-advisories, Betterment gets the job done more efficiently largely in part to having secondary selection of ETFs. Offsetting capital losses with capital gains is the basic theme of TLH. However, selling a losing position requires waiting at least 30-days to avoid the wash rule. By having multiple index ETFs representing the same index enables Betterment to swap out one losing position to apply the losses, while repurchasing thought an identical version of the ETF of the same index (IE: Swapping out the Vanguard US Total Market S&P 500 ETF with the iShares S&P 500 Value ETF or the Schwab US Large Cap Value ETF) without waiting 30-days.
As the oldest robo-advisor, Betterment is one of the most trusted brands and a registered broker-dealer with FINRA. All cash deposits are FDIC insured up to $250,000 per account and investments are SIPC insured up to $500,000.
Who is Betterment Best Suited For?
Betterment is suited for a broad spectrum of investors. Experienced investors looking to have their portfolios automatically managed without paying typical industry fees for a live advisor will do well with Betterment. Investors with smaller balances that don’t meet the minimum account requirements with a full-service advisor will also benefit from cost-savings. Newbies who are completely unfamiliar with investing and looking to venture into the endeavor have low barriers to entry with Betterment. However, they may want to start with a micro-investing app like Acorns. Traders and self-directed investors that want to select stocks and manage their own portfolios are better off with an online brokerage account.
- Great for new and experienced investors looking for low-cost portfolio management services.
- Easy set-up and on-boarding.
- Premium users have access to human financial advisors through the app.
- Low-fees compared to professional human CFPs
- Diversified investments through ETFs
- Tax-Loss Harvesting (TLH) can boost performance gains up to an additional 2.66%
- Larger variety of ETFs including secondary as well as specialized theme-based portfolios
- No commodities or real estate vehicles for investment
- Untested (like all robo-advisories) in a bear market