Now with lower fees, foreign investments, and Roth and Traditional IRA accounts, Betterment is a serious consideration for any investor. In this review, we’ll look at all of the pros and cons of the original robo-advisor–Betterment.
In this article
When it comes to investing, one of the most critical factors is cost. That’s why it is essential to invest in low-cost mutual funds and ETFs and to use a cheap 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.
In this article, I’ll review the original robo-advisor, Betterment, and it’s key features. I’ll also cover how it works and its pros and cons. From there, you can make an educated decision on whether Betterment is a fit for your financial life or not.
Founded by Jon Stein in 2008 as the first widely-available robo-advisor, Betterment is a website that enables investors to invest in stock and bond exchange-traded funds (ETFs). Stein’s goal was to develop an investment platform that had the customer as its top priority and focus.
Rather than picking the individual ETFs, though, Betterment picks them for you based on an asset allocation you select. In fact, there are no options to build a portfolio yourself unless you have $100,000 or more in your account–otherwise, you can only select from pre-built, professionally assembled portfolios. As an investor, all you have to do is decide how much of your investment you want in stocks and how much in bonds. One of the intriguing things about Betterment is that you’ll have a completely unique portfolio from everyone else–no two investment portfolios are precisely alike. And if you need some help with deciding how to allocate your investments, Betterment has several tools that can offer you some guidance.
The old way
With traditional investing and stock-picking, you have a couple of options. You can either buy pre-diversified securities (such as ETFs or mutual funds) or individual stocks (or a mix of them). With either strategy, though, you’ll end up needing to do a lot of research. You’ll also need to know when to buy and when to sell each security for not only the most significant gains but also the most significant tax benefit. Finally, you’ll need to continually keep tabs on your portfolio to ensure it’s balanced and allocated the way you want.
Betterment wants to help you solve these problems and make your life easier (remember when I said their goal was to be customer-focused?).
How Betterment works
First, you only need a few moments to sign up online. Betterment will ask you things like your age, income, and projected years until retirement. Then they’ll ask you about your goals. For example, do you want to save for retirement, college, or emergency savings? From there, they’ll use an algorithm to help determine what level of aggressiveness you should have in your portfolio.
This brief questionnaire helps them determine the big picture of your finances. By looking at your overall financial goals, level of risk tolerance, and external accounts, Betterment can get a full financial picture of you and develop a portfolio that makes sense.
The answers to these questions will ultimately define how your portfolio is developed and how aggressive (or conservative) the investments in it look.
Once you finalize your risk tolerance (by choosing the percentage you want in stocks), a portfolio will be built for you. Here’s an example of what mine looks like right now with 90% in stocks:
As you can see, they’ve developed a portfolio that has 10 different securities in it.
What Betterment will then do is keep this portfolio balanced for me and automatically invest new deposits where needed to maintain that balance. They decide when to buy and sell shares and which holdings to keep in the portfolio. It’s all done for me.
Funding your account
After you sign up, you will link your checking account to Betterment. Doing this enables you to make online contributions and withdrawals from your 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. One thing to note is that you don’t need to immediately deposit money to open an account, as Betterment doesn’t have a minimum requirement.
Projecting your future with RetireGuide
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 connecting 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.
The cool thing about RetireGuide is that it’s always up to date. It continuously stays synced with your Betterment and non-Betterment accounts and uses over 20 pieces of information to create and maintain a retirement plan for you.
What makes this different, too, is that Betterment considers taxes. According to Betterment, a key differentiator “is that we account for taxes—based on the accounts you invest in—by adjusting the expected returns while saving and the withdrawals while in retirement.”
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 distribution over one and ten years.
Betterment is a robo-advisor, which means they use their own proprietary algorithm to determine risk levels and investments that should be a part of that corresponding portfolio. It also means your portfolio will stay optimized to the best possible asset allocation for your goals and risk tolerance. Betterment uses global investments, so you’ll be diversified across all types of asset classes, big and small, across the world.
I love this feature. One of my biggest gripes, as I mentioned above, with traditional investing is that you have to monitor your portfolio continually and rebalance it to maintain a consistent asset allocation. You do this by buying and selling investments to keep a particular percentage of each asset class. As you can imagine, this can get tiresome. Betterment handles this all for you. All you do is establish a goal and your risk tolerance, and they do the rest. In fact, I frequently get emails from them telling me they’ve either rebalanced my portfolio or reinvested my dividends and rebalanced my portfolio. What a time-saver.
Tax loss harvesting
Rob just did an excellent podcast on tax loss harvesting to explain the more in-depth details, but in short, tax loss harvesting is when you sell investments at a loss, strategically, to offset the taxes you’ll pay on the gains you make from selling shares that have increased in value. Tax loss harvesting is very tricky, and if done incorrectly can result in tax penalties. Betterment does this automatically for you, though. They’ll buy and sell assets at the best times, so you are reducing your tax impact as much as possible.
As I mentioned above, Betterment features a robust retirement planning section where you can add as much information as you want (the more, the better). This allows the algorithm to help you decide how aggressive you need to be with your investing, how often and how much you need to deposit, and what your future financial outlook will be in retirement, based on those factors. It’s a great way to “see into the future” a bit. For me, I love knowing how much I need to deposit now to hit my retirement goals that are 30+ years away. Again, this is all based on algorithms and educated guesses, but it gives you the best possible chance to hit your retirement goals.
New portfolio options
Betterment historically has only had one choice for your portfolio–and it was based solely on your risk tolerance. They now offer a variety of options for investing, based on your preferences. Some of the current options are:
- Socially Responsible Investing Portfolio – this portfolio invests in socially responsible companies exclusively, so if you want to put your money into companies that focus on environmental impacts and making the world better, this might be for you.
- Goldman Sachs Smart Beta Portfolio – this portfolio uses smart beta (a hybrid between value investing and market hypothesis) to choose investments in hopes of getting you a more significant return while minimizing risk.
- BlackRock Target Income Portfolio – if you want low risk, this is for you. It invests solely in bond funds, so the risk is small, but the expected return will be as well. This is an excellent option for those close to retirement.
Financial advice packages
In addition to robo-advising, Betterment now offers the ability to connect with a certified financial planner to get advice on significant life events, including changing jobs, having a baby, buying a home, or planning for retirement. Those who want to talk to a real person and get practical advice will appreciate this as a supplement to everything else Betterment offers. There is a cost to these packages, however:
- Getting Started – $149
- Financial Checkup – $199
- College Planning – $199
- Marriage Planning – $299
- Retirement Planning – $399
Smart Saver is a new feature within Betterment that effectively serves as a savings account. The Smart Saver account is invested entirely in bonds and will take available cash that would otherwise be “sitting there” and invests it into a bond portfolio. Betterment claims this portfolio can earn you up to 20 times more than a traditional cash savings account while saving on taxes. According to Senior Quantitative Researcher Adam Grealish, “since the underlying funds are mostly U.S. government bonds, they are not subject to state taxes, which means you can take home more of the yield you earn, compared to a bank account offering a comparable interest rate.”
If you want to donate shares to charity directly from your account, you can. Not only is this a great thing to do to help organizations in need of financial support, but it also eliminates any capital gains taxes you’d pay on donated shares (check with a tax advisor before making a move like this, however).
As I mentioned above, if you have at least $100,000 in your accounts with Betterment, you’re eligible to comprise your own flexible portfolio. This means you can choose individual asset classes and the percentages of each, instead of having a pre-defined portfolio from Betterment. This is a nice feature, but to me, it sort of takes away some of the appeals of a robo-advisor. While Betterment will give you feedback, you still have the final say. For some this is great, for others, it just increases decision fatigue.
There are two plans with Betterment, each with different account minimums and pricing structures:
- Account minimum: $0
- Annual fee: 0.25% on balances up to $2 million (drops to 0.15% once you hit $2 million)
- Account minimum: $100,000
- Annual fee: 0.40% on balances up to $2 million (drops to 0.30% once you hit $2 million)
The main difference between the two packages is the amount of attention you’ll get. With Premium, you’ll get unlimited access to Betterment’s Certified Financial Planners who can give you advice on your portfolios, both inside and outside of Betterment. This means assistance with things like your 401(k), which is awesome. You can also talk with them about advice on life events and other financial planning situations.
LIMITED TIME PROMO
For a limited time, Betterment is offering up to one year of their services for free. Depending on how much you deposit, you’ll earn free months.
- $15,000 – $99,999 – 1 free month
- $100,000 – $249,999 – 6 free months
- $250,000+ – 12 free months
Read More: Betterment Promotions
- Easy to use: Very easy to get started with investing
- Unique features: Multiple goal options and corresponding asset allocations
- RetireGuide: Long-term retirement planning and advice
- Great portfolio options: Optimized portfolios with simple asset allocation
- Reasonably priced: Inexpensive for what you get
- Access to Certified Financial Planners: With the Premium package, Certified Financial Planners can also analyze accounts outside of Betterment
- Tax loss harvesting: Automated to reduce your tax impact
- Restrictive: Investors who want complete control may not appreciate the automated features
- Unable to manage external accounts: Can view other external accounts, but you can’t align your investment strategy easily since they’re managed elsewhere
- Certain ETFs only: You can’t invest in individual stocks, REITs, or commodities
- Can be pricey: Guided advice is expensive
The short answer is yes. There is no cost or account minimum for signing up for a Betterment account, and if you’ve never tried a robo-advisor, this is the one to try. Betterment was the original robo-advisor and, in my opinion, offers the best service and the best features. It finds the right balance between giving you control and making decisions for you. The point of a robo-advisor is to reduce decision fatigue and make your life easier while building a portfolio that grows. If you want to pick individual stocks and manage every little piece of your portfolio, Betterment is not for you. But if you’re a new investor or just someone who wants their money to be managed for them, I strongly encourage you to give Betterment a shot.
If you’d like to check out Betterment, they are currently offering a bonus worth up to one year of investing w/o fees.