With the low interest environment we are currently in I think it is important that we all look at options that can help us get a better rate on our savings. I put together this Betterment review because it truly is a great option for anyone looking to improve their interest rates, even if you are not an investing expert.
Most people think you need an investment expert or become an expert themselves to really maximize their portfolio. The problem is that advisors are expensive and most people don’t have the time or desire to really gain the knowledge necessary to do this investing themselves. This is where a robo-advisor like Betterment comes in.
Betterment is sitting on the forefront of the robo-advisor platform with clients numbering more than 150,000, who have invested over $4 billion dollars with the broker.
How Does Betterment Work?
Betterment takes a unique approach in that they really focus on your end goal. Instead of taking you through steps that talk about which investment and what percentage you want to place in each of these investments they start with the end and help you work your way forward.
You never have to choose an asset allocation because the software does all of that for you. This gives beginners a big hand up because they get to focus on what they know; where they want to be in the future.
Similar levels of service used to only be available to high money investors through a full service advisor. This makes Betterment and other robo-advisors a really high value for investors who could not afford this type of advice.
As far as the types of investments, Betterment invests your money in ETFs (exchange traded funds). The best way to think of these investment vehicles is like a mutual of index fund that you can buy into like purchasing an individual stock. This means that instead of having to save up enough money to get into one of these funds (usually at least $3,000), they purchase fraction pieces of these fund through ETFs.
This type of investing allows Betterment to immediately diversify your portfolio and make sure that you are getting the best return for the least amount of risk.
You should know that these accounts are not FDIC insured. These are full out investment accounts. Returns are subject to risk and are not guaranteed. Betterment is a broker-dealer that is a member of FINRA/SIPC and SEC registered.
Betterment Signup Process
Honestly singing up with Betterment is one of the easiest signup process I have come across. It takes about five minutes and they take you through a set of questions that cover what you are trying to accomplish with your investments. You even have the option to set the allocation of asset using a cool slider bar (stocks vs bonds).
You roll through all these choices, link a checking account, and boom you are ready to roll. Putting money into the account works just like moving money from one bank account to another.
Investment Choices and Model Portfolio
Now that we have money in our account it will be automatically invested into ETFs. Betterment has chosen ETFs for its investments instead of mutual funds because they have preferential tax treatment and lower expense ratios. Basically the ETF route saves us money over mutual funds.
Your allocations for each of these will depend on how you answered the questions in sign up. So, while the percentages will change, the actual investments will be part of two groups of assets.
Stock Martket ETFs
With the stock ETFs the investment committee at Betterment has chosen, we get access to index funds that are some of the broadest for U.S. and International markets. This means that our stock investments are spread out over thousands of companies all at one time.
They chose the below ETFs for several reasons. The U.S. exposure has a slight emphasis on small-cap and value stocks. This is based on the Farma-French three-factor model. A little researcher that nabbed both economists the Nobel Laureate in Economics. Basically these two types of stocks outperform the entire stock market.
For international stocks Betterment takes advantage of the stability of developed markets in Europe, the U.K. and Japan. They also take advantage of some of the emerging markets with the most stable governments. This would include India, China, Brazil and a few others. This gives us a greatly diversified portfolio and lowers the risk factors of any one of these funds. The current stock ETFs used by Betterment are (stock symbol followed by name):
- VBR – Vanguard US Small-Cap Value Index
- VEA – Vanguard FTSE Developed Markets Index
- VOE – Vanguard US Mid-Cap Value Index
- VTI – Vanguard US Total Stock Market Index
- VTV – Vanguard US Large Cap Value Index
- VWO – Vanguard FTSE Emerging Index
The Bond ETFs chosen by Betterment’s investment committee balance out the risk in four different areas: interest rate and company credit risks for U.S. bonds and interest rate and company credit risks for international bonds.
To limit the amount of exposure to taxes on taxable investment accounts, tax-exempt municipal bonds are used. Since there is no tax threat on retirement accounts they have a mix of investment grade bonds from the U.S. In both instances this is done to maximize after tax returns.
- BNDX – Vanguard Total International Index
- LQD – iShares Corporate Bond Index
- SHV – iShares Short Term Treasury Bond Index
- VTIP – Vanguard Short Term Inflation-Protected Treasury Bond Index
- VWOB – Vanguard Emerging Markets Government Bond Index
- BND – Vanguard US Total Bond Market Index (Only used with tax privileged accounts)
- MUB – iShares National AMT Free Muni Bond Index (Only used with Taxable accounts)
Since each portfolio is going to be customized by the individual and how they answer the enrollment questions, it is hard to give you a single model portfolio.
For someone who is young you are probably going to see in the range of 90% of your portfolio be in stock ETFs and the other 10% in bond ETFs. This will change as we age and need our investments to be less at risk. As we enter retirement you will see these numbers flip and the majority of investment be in Bonds.
Types of Accounts
There are several different types of investment accounts available through the Betterment platform. They include:
- Standard taxable investment account (individual and joint)
- Roth IRA
- Traditional IRA
- SEP IRA
Basically, no matter what angle you want to take with your investments, Bettermnet has you covered.
Other Features of Betterment
In this review of Betterment you should have a pretty good idea of how your money is going to be invested. This is the basis for my recommendation on the brokerage, but there are a few really cool features that have been added to the platform.
Intelligent Dividend Reinvestment
Dividends are profits paid out to bond or stock owners. Most places will take your dividends and immediately reinvest them into the stock or bond index fund from which they came.
Where Betterment takes this a step farther is that they actually distribute all dividends into your investment account, instead of immediately reinvesting them into the contributing index fund. The software then looks at your entire portfolio and reinvests the dividends where they are most needed to keep your model portfolio balanced.
To give you a good example, say one of your bond funds distributed a dividend of $1,000. In many traditional accounts you would automatically purchase and additional $1,000 of ETF shares in the exact same bond fund. Betterment takes that $1,000 and finds the best place for it to maximize your long term gain.
Fractional Share Purchases
Betterment can purchase 1/1,000,000 of a share from the various ETFs that are invested in through their platform. This means that none of your money sits on the sideline while you wait for it to accumulate enough to purchase another share. This happens frequently with people who invest automatically in mutual funds or in a 401k. The fractional share purchases make sure your money is actually working all the time not just when it builds enough to get in the game.
If you have always had problems forcing yourself to put money into your investment accounts, then you are going to love the Smart Deposit feature of Betterment.
Services that are pushing microsavings have become a big winner in today’s busy world. I have personally tried Digit.co and came away very impressed with their algorithm. Betterment takes this same idea and dumps that money into a powerful investment account.
This is much wiser option that Acorns or Digit because you are probably not going to build up enough over time to really have an impact on your savings.
RetireGuide is planning advice that takes int account all of your accounts not just what is invested with Betterment. It really reminds me of PersonalCapital because it gives you a full view of all your investments and all your assets instead of just what is invested with a single entity. You can actually connect to more than 13,000 different services
What is really nice is that it helps you break down your retirement spending based off of your current balances as well as how much you need to be saving to reach your spending and retirement goals. The three really cool features that stick out to me are:
- Daily advice that refreshes automatically based off all the synced accounts
- Great organization of all your accounts in one place
- Accounting for Social Security benefits with ability to upload files from SSA.gov
Automated Tax Loss Harvesting
This service is completely integrated into the Betterment investment strategies. This is used in all taxable accounts on Betterment and allows you to offset any capital gains against any capital losses. This is really a benefit to larger accounts where the back and forth of your investments can really hurt you in taxes.
By adding this feature to all taxable accounts, Betterment is setting a pretty high bar for others to keep up.
When you compare the fees of a managed portfolio Betterment is much better. There are three tiers of fees based off of the balance in your portfolio. The good news is that all three are less than the 1.5% in fees a mainstream broker would charge. The fee structure includes:
- $3 per month for accounts less than $10,000 and without a $100 automatic monthly deposit
- 35% for accounts under $10,000 with a monthy $100 automatic deposit
- 25% for accounts over $10,000
- 15% for accounts over $100,000
There is one interested caveat to these rules. They will let you take out multiple accounts and add them together. So if you have a 401K from an old employer as well as a taxable investment account, you could move both over to Betterment and take advantage of lower management fees.
Now the above are just the management fees. ETFs have expense fees that are charges when you purchase them. They are much lower than any expenses you incur with a mutual fund, but in order to get a real picture of the fees you are paying they must be added in. In digging through the Betterment support, I found that the ETFs have expenses ranging from 0.09%-0.17%. If we go with a high average of 0.15% then our total fees range from 0.5% to 0.3%, depending on the balance of your account.
Account Security at Betterment
Betterment is required to have strict digital security in line with all other banks and brokerage services. This means you will get the same security as you will with Bank of America or Charles Schwab accounts.
As we should expect with any site that handles personal information, Betterment uses 256 bit SSL encryption (your browser shows that little closed lock and the url starts with https).
That being said, I would still avoid accessing my Betterment account from a public network. If must access your account at an unsecure location, I would recommend having an encrypted password manager and use a VPN service. This will keep you safe from hackers.
Betterment Review Summary
Betterment has really put out a great product and it makes sense why they are putting other robo-advisors on their heels. Here are the biggest pros and cons of the service.
The biggest advantages when reviewing Betterment are:
- Low Fees – for what equates to a full service advisor their fees are one third that of an in person option
- Great Tools – The extra tools for savings and retirement planning are really top notch
- Easy to Use – With their simple signup process and automated investing you are getting great techniques on investing while not having to be an investment guru.
The biggest complaint I have for Betterment is that if you are just getting started they require you to have a minimum of $100 invested each month to get the lower fees. This is not a huge hurdle for most people, but it would be nice if they put some sort of exception for people who are lower income or very young.
Think how awesome it would be is a 16 year old who got their first summer job could start investing through the Bettement service. They have at least 50 years of investing ahead of them and working with a robo-advisor could be a huge benefit to their retirement savings.
That being said to call this the biggest of any Betterment complaints is pretty small. The company makes its money off of fees to large investors. So not pulling in a ton of small investors who are in their investing infancy is not the biggest knock I can make on a brokerage.
Betterment is particularly attractive for anyone who has investments of $100,000 or more. However, if you are looking for a hands off method of investing, while getting great service and constant rebalancing of your portfolio, then Betterment is a great option for your needs.