TL;DR: Betterment is one of the best robo-advisors in the market today and offers a lot of financial features and low account fees. It is geared towards beginner investors but even those with some experience can find something to like.
One of the things that keeps many people away from investing is the traditionally high monetary bar to entry. Back in the day, stock trading had to be done at physical exchanges and only those who already had a lot of money could participate in any really meaningful way.
Thanks to the internet and advances in technology, now the average person can get in on investing. Betterment is a robo-advisory service that aims to make investing more accessible to beginners. Betterment is one of the most popular robo-advisors out there and has a large library of educational materials for beginner investors.
But how good is Betterment really? Does Betterment deliver comparable returns to traditional brokerages? We will answer all those questions and more in our Betterment review.
Betterment is a robo-advisory service that aims to bring basic stock investing knowledge to beginner investors. Robo-advisors utilize advanced algorithms to automatically allocate your funds, keeping in line with your predetermined investment preferences. The focus on automated investing reduces the knowledge barrier one needs to have a well-diversified portfolio.
Betterment offers a wide range of investment accounts, including traditional taxable brokerage accounts and tax-advantaged retirement accounts. Betterment also recently added checking account options to their offerings in a bid to provide more traditional banking products.
Betterment was founded in 2010 by current CEO Jon Stein in the wake of the 2008-2009 financial crisis. The goal was to create a service that could help more people responsibly invest their money and protect their assets.
How Does Betterment Work?
Like most robo-advisory service, Betterment is designed with automation options in mind. Betterment’s algorithms allow you to smartly invest your money with little to no personal involvement.
Betterment’s robo-advisor uses algorithms based on Nobel Laureate Harry Markowitz’s Modern Portfolio Theory (MPT). The basis of MPT is to find the optimal balance of assets to maximize returns and minimize risk. When you create an account, you will answer a short questionnaire about your investment goals, time horizon, and risk tolerance. Depending on how you answer, Betterment will generate a custom portfolio that ranges from conservative (mostly bonds) to aggressive (mostly stocks).
Betterment trades in ETFs. Their ETFs span 14 different asset classes; specifically 5 stock funds and 8 bond funds. Betterments robo-advisor focus allows it to keep investment expenses to a minimum which explains their very affordable fee structure.
If at any point your investments fall out of their predetermined allocations, the algorithms will automatically buy and sell assets to return to the right investment spread. Betterment takes care of this automatically so you don’t have to spend time managing your assets.
One shortcoming with Betterment is that you cannot pick and choose individual investments for your portfolio. You are basically locked into the different prebuilt portfolios. However, Betterment’s ETF spread covers nearly 5,000 top globally traded companies so you get broad coverage of investments.
Betterment offers a wide range of account types and is continually adding more to their repertoire. Currently, they offer:
- Individual taxable accounts
- Joint taxable accounts
- Retirement accounts (Traditional and Roth IRAs)
- Target Income profiles
- Charitable giving accounts
- Business accounts
Core portfolios for Betterment account users have a good mixture of asset classes. The current breakdown of asset classes for Betterment is
- US Sector
- Large Cap Sector
- Mid Cap Sector
- Small Cap Sector
- Foreign Sector
- Emerging Market Sector
- US High-Quality Bonds
- Muni Sector
- US Inflation-Protected sector
- International Development Market Sector
- Corporate Sector
- US Short-Term Treasury Sector
Betterment used to have fixed allocations for each of these categories but no longer. The algorithm will adjust the allocations of specific ETFs to math the most efficient investment strategy.
Socially Responsible Portfolio
In recent years, many investors have become aware of the impact that their investments can have on the world stage. That is why Betterment has introduced socially responsible investing (SRI) profiles.
Betterment keeps two goals in mind when designing their SRI portfolios.
- Reducing exposure to companies involved in environmentally, socially, or governmentally irresponsible companies.
- Increase exposure to companies that utilize responsible practices such as green technologies and sustainable supply chains.
Betterment allows users to set investment goals when they sign up for an account. Betterment has investment goals for retirement savings. Retirement income, safety nets, major purchase, and general investing. Betterment offers investment tips and strategies depending on which plan you choose. You can also change these goals at any time.
Betterment recently started offering cash management accounts as part of their checking accounts. These checking accounts have no annual fees and currently pay a 0.40% APY on deposited funds for cash reserves. Betterment also offers joint checking accounts and does not charge ATM fees. All checking accounts are FDIC-insured for up to $250,000 in cash value.
Keep in mind that you cannot make withdrawals directly from your Cash Reserve accounts. You must first transfer the funds to your checking account then you can use your Betterment Visa debit card to spend. One great feature of Betterment Checking accounts is that there is no limit on the number and size of transfers you can make.
One of Betterment’s better features is that it offers automatic tax-loss harvesting. This feature will automatically sell off losing investments to lower your overall tax burden. Many other robo-advisory services do not offer any kind of tax-assistance so it’s a feature that makes Betterment stand out compared to its competitors.
Previously, you had to have an account balance of at least $50,000 to get access to the tax-loss harvesting services. However, Betterment now offers it to everyone who has an account with no minimum deposits required.
If you have multiple joint accounts with a spouse, the Betterment will perform their new Tax-Loss Harvesting+ services. Tax-Loss Harvesting+ can essentially double the amount of your tax-efficient space.
Betterment is also unique among robo-advisors because it offers human advisory services. If you need the help of a human advisor, then Betterment offers advice for an extra advisory fee. Most advising structures are based on helping customers plan for future life events. Currently, these packages and associated fees are:
- Startup – $149
- Financial Checkup – $199
- College Planning – $199
- Marriage Planning – $299
- Retirement Planning – $399
When you buy one of these packages you get one-on-one consulting with a financial expert. This expert can give you specialized and personalized investment assistance.
IN addition to all the financial services, Betterment offers one of the best educational resources we have seen. Betterment has a huge library of articles, training resources, and blog posts on virtually every aspect of investing. The best part is you don’t even need a Betterment account to view these resources. Anyone can read them and educate themselves.
Examples of articles that are currently featured in the library include:
- How to Use Direct Deposit With Checking
- How Investor Sentiment Has Evolved During COVID-19
- Investing in Your 20s: 4 Major Financial Questions
- 7 Ways to Prepare for a New Recession
Browsing through the library shows a wide range of articles on pretty much every topic you can think of. It is one of the best features of Betterment and even if you do not have an account, we highly recommend browsing the library for some knowledge tidbits.
How Much Does Betterment Cost?
Currently, Betterment offers two major plans: the Basic and Premium services. A breakdown of the costs is below.
- Account minimum – $0
- Annual management fee – 0.25%
- Features offered: Investment accounts, retirement accounts, auto-rebalancing, tax-loss harvesting
- Minimum – $100,000
- Annual fee – 0.40%
- Features offered – unlimited messaging, unlimited CFP calls, customizable portfolio allocations
As you can see, the basic account has no minimum account balance and very low management fees. The robo-advisory setup allows them to keep management expenses very low. For comparison, Wealthfront, another popular robo-advisor service, charges a similar 0.25% management fee and offers a similar set of services.
Regardless of which plan you choose, you can always buy extra financial support from an expert. But only the Premium account offers unlimited access to Betterment’s CFP professionals and personalized investment advice.
Betterment Pros & Cons
- Investing made easy. Betterment is designed for beginner investors but anyone can benefit from it. The focus on robo-advising makes it extremely easy to create an account and start investing in a smart and responsible manner. You can start investing in just a few minutes after making an account and depositing your funds.
- Simple asset allocations. Betterment makes it easy to set your allocations. Depending on how you answer the questionnaire when making an account, you can invest in a more conservative manner with mostly bonds in your portfolio or take a stock-focused more aggressive approach.
- Low fees. Betterment offers low account fees to the tune of 0.25% AUM. that is fairly standard for robo-advisors and puts Betterment right up there with other well-known robo-advisors such as Wealthfront. There are also no account minimums so you can get started investing with as little as you want.
- Human advising services. Betterment also offers hybrid human-robo-advising services. You can pay an extra fee to converse one-on-one with a financial expert for major life decisions.
- Goal-based investing. Betterment allows you to customize your portfolio with specific investment goals, including college savings. retirement savings, and retirement income.
- Cannot customize investments. Betterment has a good spread of portfolio allocations but you cannot pick and choose individual investments for your account. If you are an experienced investor, you may feel like the options are fairly limited.
- No commodities or REITs. Betterment has a relatively diverse set of asset classes but they noticeably lack investment options for REITs or commodities. Other robo-advisory services offer these asset classes so it’s a bit strange that Betterment does not.
- No external accounts. Betterment is currently unable to work with external accounts. At the time of writing, it only works with Betterment accounts.
So, is Betterment worth it? We say absolutely, it is worth it. Betterment is one of the most well-known robo-advisory services and for good reason. They offer a streamlined investment interface and sophisticated robo-advising features that can automatically rebalance accounts. It is the perfect system for new investors to learn the ropes and has a lot of flexible account options that cover all of the bases. Betterment also has human advisory services if you need the personalized touch of a human advisor. So if you are looking for a fun and simple way to get into investing, then you can hardly find a better option than Betterment.