When it comes to investing, one of the most important factors is cost. That’s why it is important to invest in low-cost mutual funds and ETFs, and to use a low-cost broker if you buy individuals stocks and bonds. And that brings me to this review of Betterment, an online tool that makes investing in stocks and bonds simple and easy.
Initially, I was going to title this review “Are you Better Without Betterment?“ because of the fees Betterment initially charged. Having signed up for Betterment, however, I’ve come to a slightly different view. In addition, Betterment has significantly lowered the fees it once charged.
So, let’s get to it.
What is Betterment?
Betterment is a website that enables investors to invest in stock and bond exchange traded funds (ETFs). But rather than picking the individual ETFs, Betterment picks them for you based on an asset allocation you select. As an investor, all you have to do is decide how much of your investment you want in stocks and how much in bonds. And if you need some help with that decision, Betterment has several tools that can offer you some guidance.
Betterment is a registered investment advisor, and securities in customer accounts are protected up to $500,000 by the SIPC.
How Betterment Works
After you sign up, you will link your checking account to Betterment. Doing so enables you to make online contributions and withdrawals from your Betterment account. You can then either make individual contributions whenever you’d like or set up a recurring contribution. This makes monthly investments and dollar-cost averaging very easy.
As you can see from the above image, setting up a one-time or recurring transfer takes just a few clicks of the mouse.
Once you’ve funded your account, the next and final step is to select your asset allocation. Here, Betterment offers what it calls the RetireGuide. This guide walks you through a series of questions, such as marital status, pre-tax income, and the age at which you want to retire.
One feature of the RetireGuide is that you can link external accounts. Many people have multiple retirement savings avenues, and they may not all be with Betterment. By linking your outside 401k, IRA, and other retirement accounts, Betterment’s RetireGuide can offer a more complete assessment of retirement readiness. The result is an analysis of whether you are on track to retire, and how much more — if any — you should be saving.
You can then change your allocation anytime you want (limited to one change per day). Using your age and income range, you can compare your asset allocation to others similarly situated. Betterment also shows you the potential upside and downside of your allocation over one and ten years. And it offers a handy sliding scale to show you the likely outcomes of different allocation decisions (see image below):
Betterment invests your funds in 8 different ETFs. Six of the ETFs invest in stocks, and two invest in bonds. Here are the eight ETFs, along with the percentage of your money invested in each:
The portion of your total investment allocated to stocks is invested in the following six ETFs:
- 20% VTI: Vanguard Total Stock Market
- 20% IVE: iShares S&P 500 Value Index
- 20% IWD: iShares S&P 1000 Value Index
- 15% IWN: iShares Russell 2000 Value Index
- 15% IWS: iShares Russell Midcap Value Index
- 10% DIA: DIAMONDS Trust Series 1
The portion of your total investment allocated to bonds is invested in the following two ETFs:
(Note that the specific ETFs Betterment uses do change from time to time, so be sure to confirm directly with Betterment what investments it currently uses.)
When Betterment first launched, the big negative was its fees. I even spoke with Betterment’s CEO about the fees at a conference we both attended. Since then, Betterment has lowered its fees significantly. Its current fee structure no longer depends on how much you have invested, but if you do have at least $250,000 invested, you have up to three options.
- Betterment Digital: Access to our award-winning technology, with tax-efficient algorithms and digital advice — now at a flat 0.25%. For the Digital Plan, Betterment’s fees are only charged on the first $2 million of your balance. Betterment will waive its management fee on any assets over $2 million.
- Betterment Plus: Our digital product with an annual planning call from a team of CFP® professionals and licensed financial experts who monitor accounts throughout the year. The plan is a flat 0.40% ($100,000 minimum balance required).
- Betterment Premium: Our digital product with unlimited access to a team of CFP® professionals and licensed financial experts who monitor accounts and give advice and financial planning throughout the year. The plan is a flat 0.50% ($250,000 minimum balance required).
Investing costs may not seem like a big deal at first. The problem is that over a lifetime of investing, these fees make a huge dent in your retirement savings. If you’d like to learn more, Ron Lieber of the NY times published a must-read article on why 401(k) plans should offer index funds. The article included the following chart depicting the effect fees can have on a retirement nest egg:
Even still, fee-based advisors can be the best choice for some. With Betterment’s current fee structure, for example, it’s an ideal option for those who don’t want to actively manage their investments. Because Betterment automatically reinvests dividends and rebalances the portfolio, there’s really little for you to do. Some like it that way, and if you don’t have the time (or knowledge) for managing the portfolio, automating this process can mean more growth in the long run.
Learn More About Rebalancing Your Portfolio
If you’d like to check out Betterment, they are currently offering a bonus worth one month of investing w/o fees ($10,000 minimum deposit).
- You can check out the deal and get more information from the Betterment website.