As you probably know, I’m a fan of robo advisors. The idea of automating your investments in a low-cost, sophisticated manner just makes sense. Especially when you figure that many 20 or 30-somethings don’t have enough money to turn the head of a traditional financial advisor.
That being said, not all robo advisors are created equally. Just because an investment service touts an algorithm that automates your investments doesn’t necessarily mean they’re the company you want to put your money with. But in the case of Betterment, you have a proven robo advisor with over
$3 billion under management. And as you’ll see in my Betterment review, the service offers countless benefits for the average investor looking for a long-term, low-cost solution to investing.
Let’s take a closer look at the service in my Betterment review below.
What is Betterment?
Betterment is a software-based financial advisor (also frequently referred to as an automated investment service or a robo advisor) that makes diversified portfolios of low cost stock and bond ETFs available to all investors — there is no minimum investment and no hidden fees.
As they put it on their website, “We help people better manage and grow their wealth through smarter technology for a fraction of the cost of traditional financial services.” That “smarter technology” automatically rebalances your portfolio when necessary, harvests losses for greater tax efficiency, and reinvests dividends for you.
It’s like having a financial advisor inside your computer or smartphone. A financial advisor that works for you 24 hours a day, 7 days a week.
6 Key Benefits and Features of Betterment
#1 Low fee
While big name investment companies charge fees of 1% or more, Betterment offers fees as low as .15% (depending on account size). This can result in a difference of tens or even hundreds of thousands of dollars over the lifetime of a retirement account.
#2 No minimums
One of the issues with big name investment advisors are the high minimums that the average newbie investor can’t meet. Many advisors simply can’t afford the “little guys” trying to get their feet wet in the investing world. But as Betterment says, “Everyone deserves sophisticated investment advice.” And they put their money where their mouths are, because they have no account minimums. This means you could get started with say, $10 you have left over in your bank account this month.
#3 Diversified portfolio
The old adage, “Don’t put all your eggs in one basket,” rings especially true when it comes to investing. A diversified portfolio is essential for long-term gains and stability. When you invest with Betterment, you can receive a portfolio invested “in over 100 countries and in more than 5,000 publicly traded companies across the world” in up to 12 different classes of assets.
#4 Automated investing
The beauty of having an advanced algorithm run your investments is that the entire thing is on autopilot. Once you set your risk tolerance and automatic deposit schedule, Betterment can automatically do all of the following:
- Withdraw your set contribution from your bank account each pay period
- Rebalance your portfolio when needed
- Harvest tax losses to lower your tax liability
- Reinvest dividends
- Invest extra money in your checking account with SmartDeposit
#5 Goal setting
Betterment isn’t just for retirement planning. At any time, you can login and set a new savings goal for whatever you need: safety net fund, saving for a home, car, whatever. One of the benefits of investing in ETFs is their liquidity, so pulling your money out is a fairly painless process. Just remember, you’ll have to pay taxes on any gains.
#6 Easy-to-use app
While I never advocate being a helicopter investor (hovering over your portfolio and fretting over the short-term ups and downs), it is nice to be able to check in on things from time to time. And you never know when you’ll want to up your contributions, create a new savings goal, etc. I’d argue that Betterment has the best app on the market. The interface is elegant yet simple to use.
How Does Betterment Compare to Other Popular Automated Investment Services?
As technology improves and people become more disenfranchised with the idea of traditional financial advisors, more and more software-based investment services are taking center stage. Betterment and Wealthfront are probably the two most popular pure robo advisors, both with over $2 billion under management. Then you have some of the more popular hybrid services like Personal Capital and FutureAdvisor that offer free financial software-based tools, as well as premium advisory services.
With so many seemingly legitimate options out there, let’s see how Betterment matches up to the rest.
What Are the Different Account Types Supported by Betterment?
At the time this Betterment review is being written, the robo advisor currently supports the following types of accounts:
- Individual accounts–Open an individual account and begin setting goals for wealth building.
- Joint accounts–To open a joint account, both participants must first have a Betterment individual account. Once the joint account is setup, both participants have full access to all aspects of the joint account.
- Trust accounts–Betterment supports both revocable and irrevocable trusts, assuming they’re U.S. domestics trusts that are previously established and authorized to invest in stocks and bonds. Betterment can’t create trusts.
- Traditional IRAs–Receive a tax deduction when you contribute now and pay taxes on withdrawals later.
- Roth IRAs–Contribute after-tax dollars, and your money grows tax-free. No taxes due on withdrawals. Contribution and income limits apply.
- Sep IRAs–For self-employed individuals, Betterment supports these IRAs only for one plan participant at this time.
- IRA, 401(k) and 403(b) Rollovers–Simply click the rollover button at the top of your account summary page, and Betterment will walk you through a direct transfer of your retirement account.
Betterment also recently announced they’d be offering 401(k) plans in the near future.
Can You Explain How Betterment Invests Your Money?
When you invest with Betterment, your money goes into a globally diversified portfolio of stock and bond exchange-traded funds (ETFs) in up to 12 asset classes. Your asset allocation will depend upon the risk tolerance you’ve set for your portfolio. The lower the risk of your portfolio, the more government-backed bonds and fewer volatile stocks included. Should your asset allocation call for higher risk, more volatile stocks and bonds comprise your portfolio in order to increase the potential for higher returns.
Each security Betterment uses in your portfolio was hand picked based on:
- expense ratio
- assets under management
- capital gains implications
- and other factors
In general, you will notice the majority of ETFs in your portfolio are Vanguard ETFs. What’s so good about Vanguard ETFs? Lower expense ratios, commission-free trades, and top fund managers. Simply put, Vanguard is an inexpensive, proven, no BS investment management company. Just to give you an idea of how well-respected Vanguard is, in 2014, 67 Vanguard ETFs made Forbes’ list of “Best ETFs.”
Here are the current stock and bond ETFs Betterment is using:
Does Betterment Distinguish between Taxable and Non-taxable Accounts in Asset Allocation?
Yes. Retirement accounts (non-taxable IRAs, Roth IRAs, etc.) use investment-grade U.S. bonds, since IRAs can handle bonds with higher tax burdens. Whereas taxable accounts take into account tax burden of the ETFs, and will have municipal bonds that are federally tax-exempt. Betterment also uses tax loss harvesting for taxable accounts.
What Fees Does Betterment Charge?
While some services like Wealthfront have flat fees, Betterment operates on a tiered system. Let’s take a look:
Keep in mind that if you deposit less than $100 per month, you’ll be charged a fee of $3 per month.
Betterment Review: My Top Pick for Automated Investment Services
Whether you’re just starting out investing and you’re looking for a service with a low minimum, or you have $100,000 or more and you’re looking for an automated, low-fee investment alternative, Betterment is worth looking into. In fact, it’s my top choice for robo advisors. But you don’t have to take my word for it. You’ve read the Betterment review, now take the service for a test drive with a one month, no-fee trial. It only takes a few minutes to get your account up and running!
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