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Betterment Review – Is This Robo-Advisor Worth Using?

By Dave

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Betterment Review

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Betterment Review

  • Commissions and Fees
  • Ease of Use
  • Investment Options
  • Performance
  • Support
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Summary

Betterment is one of the leading robo-advisor services for people who want to simplify their approach to investing. Is this service worth using? How does it compare to other robo-advisors? Read our in-depth review to find out if Betterment is the right investment service for you.

About Betterment

Betterment.com is an automated investment management application, also known as a robo-advisor. It performs many of the functions of a financial advisor, including portfolio construction and management, at a fraction of the cost.

Betterment is credited with spawning the robo-advisor brokerage industry by replacing human advisors with sophisticated machine learning algorithms that seamlessly automate managed-portfolio services. The platform uses exchange-traded-funds (ETFs) as the building blocks for its wealth management strategies, which helps provide diversification and liquidity while keeping costs low.

In our Betterment review, we’ll cover everything you need to know to decide if this robo-advisor is right for you.

Betterment History

Betterment was launched in 2008 by Jon Stein with the goal of providing access to professional wealth management services to a broader consumer demographic that otherwise wouldn’t qualify for or be able to afford a financial advisor. Professional financial advisors often require a minimum of $100,000 or more in capital to invest and they command expensive management fees around 2% of assets in addition to transaction costs. Since 2008, Betterment has grown assets to $29 billion under management and has diversified services to offer access to human advisors.

Betterment Platform

How Betterment Works

Betterment seamlessly walks users through the process of defining your Betterment investor profile, identifying your goals, scheduling funding, and creating and managing your optimized investment portfolio. Automated tax-harvesting, portfolio rebalancing, funding and dividend reinvestment are embedded into the platform, enabling users to set it and forget. For investors who want to take a more hands-on approach, Betterment gives you the ability to track your portfolio performance or manually adjust your portfolio allocations. It’s similar to services like Wealthsimple and M1 Finance.

Betterment takes a goals-oriented approach (i.e. Retirement, Build Wealth, Safety Net) that enables users to prioritize near-term and long-term financial goals. These goals guide the platform in designing and executing a transparent investment plan that is geared towards meeting your investing objectives. Betterment has teamed up with BlackRock and Goldman Sachs to expand its strategic portfolio offerings.

Account Requirements

There is no minimum balance required to open an account at Betterment. Users must be 18 years or older.

Betterment Pricing and Fees

Betterment offers three pricing plans, which give you access to either purely automated robo-advisor services or a combination of human advisors and automated management.

Betterment Pricing

The No Fee plan doesn’t require an account minimum and doesn’t come with any fees. It includes a fee-free Betterment checking account, a Betterment cash reserve account with variable interest up to 0.10% (which is essentially a savings account), and access to Betterment’s retirement and financial planning tools. You cannot invest with this plan.

The 0.25% Annual Fee plan provides access to the core robo-advisory services that will construct and manage your investment portfolios according to your investment profile. You can open a traditional investment account, an IRA, and/or a trust account. You get access to socially responsible investing options, portfolio rebalancing, and automated tax-harvesting (matching capital gains with capital losses). The plan comes with a 0.25% annual management fee based on the total balance in your investment account.

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The 0.40% Annual Fee plan requires a minimum balance of $100,000. In additional to all services in the 0.25% fee plan, this premium plan provides unlimited access to a human advisor who can provide advice on managing retirement plans, real estate and individual stocks. Betterment’s Certified Financial Planners (CFPs) are also at the ready to provide personalized guidance for life events including estate planning, insurance planning, college planning, tax implications and retirement planning.

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Indirect Fees

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, these fund fees can still erode portfolio performance in the long-run. Like most robo-advisors, Betterment specifically targets ETFs with low expense ratios.

Betterment Portfolio Expense Ratio

Betterment Platform

Betterment can be accessed online and through a mobile app for 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 over what’s included in the Betterment core portfolio. For many, leaving things to the professionals is a good thing. 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 feature helps users budget savings and expenses.

Account types

Betterment offers standard taxable accounts, traditional and Roth IRAs, joint accounts, and trusts for investing. You can also open a checking account or savings account with Betterment.

Portfolios

Betterment offers flexible portfolios that enable you to slightly change the asset allocation in the Betterment core portfolio. You can’t invest in individual stocks or choose your own funds, but you can add more of one ETF in the portfolio at the expense of another.

In addition to the core computer-generated portfolios that Betterment offers, the platform also provides theme-based portfolios. These include Socially Responsible Investing (SRI) portfolios that eliminate companies with a large negative climate impact (e.g. oil companies) and weights towards companies with a positive social impact (e.g. women-led companies). There’s also the Goldman Sachs Smart Beta portfolio for investors with higher risk tolerance and the BlackRock Target Income portfolio for bond investing.

Betterment Portfolio

Performance

Individual portfolio performance depends on many factors both controlled and uncontrolled. Controlled factors include when you get started, the timing and amount of your deposits, and your portfolio allocation. Uncontrollable factors include geopolitical events and global and financial market volatility. Regardless of these events, Betterment purports that its tax-loss harvesting strategy can yield performance gains up to 2.66% during periods of high volatility.

Betterment Historical Performance

Rebalancing

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 Flexible Portfolio

Tax-loss Harvesting

While tax loss harvesting (TLH) is a function of many popular robo-advisors, 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, Betterment is able to swap out one losing position to apply the losses, while repurchasing the same index through a different ETF to benefit from gains in the market. As an example of how this works, Betterment might swap 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.

Comparisons

Betterment is the original robo-advisor that launched a whole new segment of robo-advisors within the fintech industry. Many competitors have entered the field through the years with their own little niches (for example, 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 who want to be involved with those markets.

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Key Differentiators

There are several things that set Betterment apart from other robo advisors. First, it’s tax loss harvesting is much more effective. By swapping out equivalent index ETFs, Betterment is able to avoid the wash sale rule and claims to add up to 2.66% to your portfolio performance.

Betterment’s partnerships with major investment banks also helps this robo advisor stand out. The Goldman Sachs Smart Beta portfolio and BlackRock Target Income portfolio are unique investment options for high risk and income investors that you won’t find at other robo-advisors. The climate impact and social impact portfolio options are also relatively unique to Betterment.

While our Betterment review focused on its investing options, Betterment checking and savings accounts are also a differentiator. Thanks to these accounts, Betterment is something of a financial super-app. You can take care of cash management and investing all from a single account.

You can also see how Betterment compares to similar services in the guides below:

Trustworthiness

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 Betterment account and investments are SIPC insured up to $500,000.

Betterment currently has over $29 billion under management, making them one of the most trusted robo-advisors. Betterment also offers customer service by phone 5 days a week.

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 human 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 market have low barriers to entry with Betterment. However, they beginners may be better off starting 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.

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Pros

  • 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

Cons

  • No commodities or real estate vehicles for investment
  • Untested (like all robo-advisories) in a bear market
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Dave

Dave has been a part-time day trader and swing trader since 2011 when he first became obsessed with the markets. He focuses primarily on technical setups and will hold positions anywhere from a few minutes to a few days. Over his trading career, Dave has tried numerous day trading products, brokers, services, and courses. He continues to test and review new day trading services to this day.

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