Traditionally, selecting the right investments and determining the appropriate asset allocation has required a certain level of expertise or assistance from a professional advisor. As a result, investing has long been considered something for the wealthy who could afford personalized advice – certainly too risky and costly for amateurs.
With the arrival of robo-advisors, everything has changed. Investing is now accessible to anyone with an Internet connection and a desire to build for their financial future.
At the forefront of this change is Betterment. One of the more popular robo-advisors, Betterment’s technology takes complex investing strategies and makes them available to the masses. Like other automated investing services, Betterment relies on computer algorithms to generate personalized investment advice and to manage your portfolio. There’s no longer any need to research which stocks and bonds to purchase. Betterment does it all for you. And with a 0.25% annual fee, Betterment comes close to completely erasing investing fees along with the stress and frustration that many new investors experience.
Betterment bills itself as the “simplest, smartest way to invest.” But is Betterment really your best robo-advisor option?
How Much Does Betterment Cost?
Betterment has two investing plans tiers with distinct fee schedules:
Betterment’s core product offering is called Digital. There’s an annual fee of 0.25% and no minimum account balance requirement for Digital. The 0.25% management fee is comparable to the fees charged by other robo-advisors such as Wealthfront and Wealthsimple. Betterment does its best to separate itself from the robo-advisor pack by offering additional features such as in-app message with financial advisors, Tax-Loss Harvesting (TLH+), and automatic rebalancing to help users get the most bang for their buck.
The Premium plan carries a flat annual fee of 0.40% and requires a minimum account balance of at least $100,000.
Betterment Premium builds upon the Digital product by giving users all the benefits of the Digital plan, plus a few extra perks. Both plans give users the ability to pose financial questions to Betterment’s financial experts via in-app messaging. The Premium plan takes that access one step further by granting users access to advisors for assistance with investments outside of Betterment. Premium users also get unlimited phone access to a network of licensed Certified Financial Planner (CFP) professionals. According to Betterment, these advisors “are vetted to ensure they have the experience and knowledge to help you maximize your money.”
Both price plans waive account management fees on the portion of your account balance that exceeds $2 million. In other words, your maximum annual fee will come out to $5,000 for the Digital plan.
There aren’t any fees for trades, transfers, or portfolio rebalancing with either the Digital or Premium plan. Plus, you can cancel your Betterment account at any time without paying any additional account closure fees.
Investment Account Types
Betterment supports the following types of accounts:
- Roth IRA
- Traditional IRA
- Individual taxable accounts
- Joint taxable accounts with rights of survivorship
- SEP IRA (single participant only)
- Trust accounts
Investment Portfolio Options
Betterment’s primary goal is to maximize your investment returns while simultaneously limiting your risk exposure. To help users accomplish that goal, Betterment has curated four different investment portfolios.
1. The Betterment Portfolio
Betterment’s core portfolio strategy is based on two key elements: asset allocation and fund selection. Betterment’s portfolio consists of expertly selected EFTs that allow users to invest in thousands of publicly traded companies at once. Betterment uses ETFs rather than mutual funds because ETFs typically have lower expense ratios and receive preferential tax treatment. The primary funds currently represented in Betterment’s portfolio are shown in the chart below.
It’s also worth mentioning that Betterment has also selected secondary ETFs which also have low expense ratios and are highly correlated with the primary ETF which allows Betterment to maximize TLH benefits.
2. Socially Responsible Portfolio
Betterment also offers an optional Socially Responsible Investment (SRI) Portfolio. This portfolio employs the same investing concepts and strategies as the Betterment Portfolio Strategy described above, except that it allows users to align their investments with the values and social ideals that shape their world view.
To do so, Betterment tilts the balance of stocks toward companies that meet certain social, governance, and environmental criteria. Consequently, the portfolio also reduces exposure to companies that are deemed to have a negative social impact (e.g., profiting from poor labor standards, harmful environmental practices, etc.).
3. Goldman Sachs Smart Beta Portfolio
In September 2017, Betterment introduced it Smart Beta Portfolio Strategy by Goldman Sachs. This portfolio strategy is based on four primary factors that drive performance and risk: good value, high quality, low volatility and strong momentum.
This type of strategy is ideal if you’re goal is to outperform a conventional indexing strategy. Keep in mind, that given the risks of such a strategy, you’d better be ready for potential periods of under-performance. It is also worth noting, the underlying ETF expenses for this portfolio are considerably higher than the standard Betterment Portfolio option.
4. BlackRock Income Portfolio
This is an all-bond portfolio designed by BlackRock to offer investors an opportunity to generate regular cash income. Since this strategy replaces stock ETFs with bond funds, users will see far less growth potential while being in a better position to preserve capital. Additionally, the bond interest is usually taxed as ordinary income which makes this portfolio less tax-efficient if it’s held in a taxable investment account.
Certified Financial Planners and Personalized Advice
Not only does Betterment create and manage your investment portfolio, but the platform also gives users access to financial advisors. With unlimited messaging through the Betterment mobile app, users can transmit financial questions securely and receive answers from a licensed professional. By upgrading to the Premium plan, you’ll receive unlimited calls with Betterment’s CFP® so you can get in-depth advice over the phone
Betterment Tax Efficient Strategies
Like any other investor, your ultimate goal is undoubtedly to make and keep as much money as possible. Paying close attention to the tax implications of your investments is a key part of that mission. That’s why Betterment has developed two primary methods to optimize your investments for tax efficiency: Tax-Coordinated Portfolios and Tax-Loss Harvesting.
Betterment’s research shows that their Tax-Coordinated Portfolio strategy can boost after-tax returns by an average of 0.48% each year. That means, that after 30 years investors will have an 15% in their portfolio thanks to Betterment’s advanced tax strategies. With returns like that, you can easily justify paying for Betterment’s 0.25% annual fee. (The Tax-Coordinated Portfolio service is available to all Betterment customers at no extra cost.)
Of course, this assumes that you have multiple accounts with Betterment – at least two of the following:
- Taxable account
- Tax-deferred account
- Tax-exempt account
If you’re only in the market an IRA, then you wouldn’t benefit from Betterment’s Tax-Coordinated Portfolio.
Simply put, Betterment’s Tax-Coordinated Portfolio automates a strategy known as “asset location.” This strategy manages multiple accounts as a single portfolio, placing assets that taxed more into more tax-advantaged accounts (e.g., IRAs) and your lower-taxed assets in your taxable account.
Tax-loss harvesting allows investors to potentially save lots of money each year by strategically selling a financial asset that has experienced a loss and then replacing the asset with a correlated asset in order to achieve similar returns while maintaining an optimal asset allocation. Simple right?
The truth is, implementing a tax-loss harvesting strategy can get kind of complicated since it requires investors to monitor the markets and execute trades at the right time to avoid wash sales that negate tax savings. Wouldn’t it be wonderful if there was an investing platform that could do all that for you automatically?
Well, that’s exactly what Betterment’s Tax-Loss Harvesting+ (TLH+) does.
Betterment automatically reviews your investments on a daily basis in search of opportunities to realize, or “harvest” losses, that you can use to offset taxes on gains and income. And it offers this service at no additional cost!
According to Betterment’s research, this service would have increased Betterment returns by approximately 0.77% per year over the last decade.
Betterment also announced recently that it’s offering TLH+ for spouses as well. If your spouse uses Betterment, this service will help optimize investments across all accounts and help prevent wash sales.
No Direct Indexing
Unlike Wealthfront, Betterment doesn’t have a stock-level tax-loss harvesting tool (also known as direct indexing). This strategy involves directly owning the stocks that comprise an index so that investors can harvest losses at the individual stock level, rather than through buying an ETF tracking a specific index. This type of strategy can help single out tax-loss harvesting opportunities which can help investors generate significant tax savings.
Betterment Tools and Features
Betterment provides a variety of valuable tools and features to help you to make the most of your money. Here are the details:
All Betterment clients have access to a comprehensive retirement planning tool called RetireGuide. Betterment’s RetireGuide tool reviews all of your financial accounts (even accounts held outside of Betterment) and uses your retirement goals to provide users with a better idea of what their retirement might look like some day. More specifically, RetireGuide takes into account all sources of income, your savings rate, where you live, and what your estimated expenses during retirement to formulate a comprehensive, personalized plan for retirement. Taking it one step further, RetireGuide automatically updates along with any changes to your accounts. Using that information, RetireGuide will help you monitor your progress and stay on track to reach your retirement goals.
In recent years, Stash and Acorns have popularized the spare change investing trend that strives to stealthily accumulate wealth with trivial, inconspicuous deposits. Betterment has implemented a similar micro-investing strategy with its SmartDeposit feature.
This optional feature allows users to establish a maximum checking account balance (e.g., enough to cover a few months’ expenses) and automatically transfer excess funds from their checking account to their Betterment investment account.
Betterment starts with the end in mind. When you first sign up, Betterment will ask you what you’re saving and investing for. That’s because Better know that people are far more likely to work toward a goal that is associated with a tangible outcome, rather than some abstract dollar amount. Betterment’s goal-based wealth management system makes it far more likely you’ll save for specific goals and achieve those goals. In addition, Betterment has curated portfolios of stocks and bonds to match your time horizon to your asset allocation to ensure you take on the optimum amount of risk.
Over time, the value of the individual ETFs held in your diversified portfolio will increase and decrease and gradually move away from you target allocations. Let’s say your ideal portfolio was 80% stock and 20% bonds. Because stocks generally rise fast than bonds, there’s a strong chance that the stock portion of your portfolio will increase faster than bonds. When your assets drift from your targets it can reduce the efficiency of your portfolio and expose you to more risk than you intended. To reduce this type of drift, Betterment automatically rebalances your portfolio and does so in a way that is designed to reduce your tax liability over time.
How to Get Started with Betterment
Signing up for a Betterment account is quick and easy. It shouldn’t take more than five minutes. You’ll begin by answering a series of short questions about your investment preferences. Betterment will determine your risk tolerance and recommend an investment portfolio strategy based on your responses. Once you’ve accepted or modified those recommendations, you can link a personal checking account. You can use this account to fund your Betterment account or to set up automatic deposits.
Once you’ve funded your Betterment account, Betterment will automatically purchase funds based on your chosen asset allocations. Betterment will automatically reinvest any dividend earnings. And on a quarterly basis, Betterment will automatically rebalance any portfolio that has strayed more than 5% from target allocations.
There’s no need to research investments, execute trades, or monitor your asset allocation. Betterment has streamlined the entire process so your account will require little day-to-day involvement.
Betterment has a user-friendly interface that can be accessed via smartphone, desktop or tablet. Betterment’s streamlined design makes it easy for users to manage their investment accounts from any device.
- Low Management Fees. Betterment’s flat annual fee of 0.25% is extremely competitive, especially considering the additional features that Betterment offers at no extra charge.
- Low-Cost Funds. Betterment’s model portfolio consists of low-cost index funds (mostly from Vanguard).
- Ideal for New Investors. No minimum deposit means new investors don’t have to save up before they can open a Betterment account and start investing.
- Tax-Coordinated Portfolio. Betterment automates a strategy to optimize your investments by placing highly taxed assets in IRA and lower-taxed assets in your taxable accounts.
- RetireGuide Calculator. An easy-to-use personalized retirement planning tool to help you determine how much you should be saving and investing to reach your retirement goals.
- No Individual Securities. Betterment doesn’t allow users to select their own funds or individual stocks. Investors looking for a self-directed account will have to look to a different platform.Limited Customization. Users who want to exercise greater control over their investment portfolio can do so with the “flexible portfolios” tool, but that option is limited to users with at least $100k in their account.No REITs or Commodities. Certain asset classes such as real estate and commodities are not available through Betterment.
Is Betterment Right for You?
Without question, Betterment’s fees are among the lowest in the robo-advisor space. And with the introduction of human advisors, Betterment has made itself an even more attractive alternative to hiring a professional money manager (especially when you consider the fact that you’ll like pay far more in fees for similar returns).
Still, experienced investors might wonder if Betterment provides enough extra value to justify paying an annual instead of continuing to manage their investments themselves. That’s a fair question. Yes, Betterment has a fantastic easy-to-use design, but it’s really just a mechanism to load up on Vanguard funds. After all, investing with Betterment really means you’ll end up owning Vanguard funds – something a savvy investor can do without the aid of Betterment. However, Betterment’s real added value comes from what’s happening behind the scenes. In particular, Betterment’s Tax-Coordinated Portfolio and Tax-Loss Harvesting+ are integral tools that allow investors to earn and keep more money.
All things considered, I think Betterment provides top-of-the-line investing services that are especially helpful to new investors. If you aren’t investing yet or don’t have an IRA, Betterment should probably be one of the first robo-advisors you consider.