Most people think you need an investment expert or to become an expert themselves to maximize their portfolio.
The problem is that advisors are expensive, and most people don’t have the time or desire to gain the knowledge necessary to do the investing themselves. Betterment is a robo-advisor that fills this need while keeping costs low.
Betterment is at the forefront of the robo-advisor platform with clients numbering more than 380,000, who have invested over $15 billion with the broker.
How Does Betterment Work?
Betterment takes a unique approach in that they 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. Beginners get 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. Betterment and other robo-advisors present a 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 or index fund that you can buy into, like purchasing an individual stock.
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 funds 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
Singing up with Betterment is an easy process. 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 assets using a cool slider bar (stocks vs. bonds).
You roll through all these choices, link a checking account, and boom you are ready to go. 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 in ETFs. Betterment has chosen ETFs for its investments instead of mutual funds because they have preferential tax treatment and lower expense ratios. 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 Market 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. As a result, our stock investments are spread out over thousands of companies all at one time.
U.S. exposure has a slight emphasis on small-cap and value stocks. The strategy is based on the Farma-French three-factor model.
A little research that nabbed both economists involved the Nobel Laureate in Economics. The study shows that 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.
India, China, and Brazil are just a few of the main countries. Giving us a diversified portfolio and lowering the risk factors of any one of these funds. The current stock ETFs used by Betterment are (stock symbol followed by name):
- VBR – Vanguard U.S. Small-Cap Value Index
- VEA – Vanguard FTSE Developed Markets Index
- VOE – Vanguard US Mid-Cap Value Index
- VTI – Vanguard U.S. Total Stock Market Index
- VTV – Vanguard U.S. Large-Cap Value Index
- VWO – Vanguard FTSE Emerging Index
The Bond ETFs were chosen by Betterment’s investment committee to 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, 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, the goal is 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 U.S. 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.
If you are 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. The portfolio weights 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
No matter what angle you want to take with your investments, Betterment 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. There are a few cool features that have been added to the platform that we need to explore.
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 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 an additional $1,000 of ETF shares in the 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. What that means is that none of your money sits on the sideline while you wait for it to accumulate enough to purchase another share.
This frequently happens with people who invest automatically in mutual funds or a 401k. The fractional share purchases make sure your money is 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 micro-savings 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 an investment account.
Betterment becomes a wiser option than Acorns or Digit because you are probably not going to build up enough over time to 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 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 connect to more than 13,000 different services
What is nice is that it helps you break down your retirement spending based on your current balances as well as how much you need to be saving to reach your spending and retirement goals. The three cool features that stick out to me are:
- Daily advice that refreshes automatically based off all the synced accounts
- Excellent organization of all your accounts in one place
- Accounting for Social Security benefits with the ability to upload files from SSA.gov
Automated Tax Loss Harvesting
Automated tax-loss harvesting is integrated into Betterment investment strategies. It is used in all taxable accounts on Betterment and allows you to offset any capital gains against any capital losses.
Tax-loss harvesting is beneficial to larger accounts where the back and forth of your investments can 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 two tiers of fees based on 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:
- $0-$99,999 – 0.25% fee based on the account balance
- $100,000+ – 0.40% fee based on the account balance and includes advice on accounts outside of Betterment and CFP access.
There is one interesting 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 charged when you purchase them.
They are much lower than any expenses you incur with a mutual fund, but 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. You will get the same protection 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).
I would still avoid accessing my Betterment account from a public network. If you must access your account at an unsecured location, I would recommend having an encrypted password manager and use a VPN service. These steps will keep you safe from hackers.
Betterment Review Final Thoughts
Betterment has 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 most significant 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 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.
- No Minimum Deposit – You can start by investing $100 or even $10
For investors under $100,000, there is no access to a financial planner or adviser.
To call this the biggest of any Betterment complaints is pretty small. Most brokerage accounts offer much more guidance for those who have larger investment balances.
While it would be helpful for all brokerages to invest time into smaller investors, that isn’t a practical business model and completely understandable for Betterment to set that benchmark.
Betterment Review Bottom Line
Betterment continues to improve its service and make investing easier for more and more people.
Whether you are making an investment of $100,00 or just starting out, Betterment can provide a great way for you to invest without having to manage your account fully.