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? And the reason was the fees that Betterment charges. Having signed up for Betterment, however, I’ve come to a slightly different view. The fees are still an issue (as I’ll get to in a minute), but this new investing option is definitely right for many investors.
So let’s get to the review.
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 that 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 signup (which is free and takes about 5 minutes), you link your checking account to Betterment. Linking your checking account 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 transfer or a 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 you are deciding between how much to invest in stocks and how much to invest in bonds. “>Betterment helps you select your allocation is several ways. First, when you sign up you provide your current age and the date you plan to retire. Based on this information, Betterment sets your initial allocation for you. In my case, it was set at 67% stocks and 33% bonds.
You can then change your allocation (limit one change per day) anytime you want. 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 you money 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:
So how do these investment stack up? Well, the chosen ETFs are all good choices in my opinion. But there is one gaping hole–no international exposure. All of the ETFs invest in U.S. stocks and bonds. A well diversified portfolio absolutely must invest in foreign stocks and bonds. So if you decide to use Betterment, you’ll want to consider getting international stock and bond exposure through other mutual funds or ETFs.
Since writing this review, Betterment has significantly lowered its fees. You can read about the reduced fees and an IRA option here.
If there is any negative to Betterment, it comes in the form of fees. There are no fees to open an account, and there are no minimum balance requirements. Instead, much like a mutual fund, the fees come in the form of a percentage of the money you invest with Betterment. For accounts up to $25,000, the fee is 0.9% annually. As your account balance increases, the fees you pay go down:
These fees may not seem like a lot at first glance. For example, if you invested $10,000, your annual cost would be $90 ($10,000 x .009). The problem is that over a lifetime of investing, these fees make a huge dent in your retirement savings. Ron Lieber of the NY times recently 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:
In the past Betterment has lowered its fees, and I’m hoping they lower them again. But for now, the question is whether the fees are worth paying? In the past I would have flatly said no. It’s too easy to pick a well-diversified mutual fund or ETF and pay about 0.10% in fees rather than the 0.90% Betterment charges. And if I were helping out a friend or family member, that’s exactly what I would advise. Vanguard’s Total World Stock Index ETF (ticker: VT) is a great way to get instant diversification (including international exposure) in a single fund.
Having talked to a lot of folks about investing, however, I know that some are just not comfortable opening a brokerage account and buying an ETF. For those folks, using Betterment is far better than not investing at all. Still, I hope to see Betterment’s fees come down significantly in the future. If you’d like to checkout Betterment, they are offering a $25 bonus if you open an account with at least $250. You can check out the $25 deal and get more information from the Betterment website.