In this Betterment review, we’re going to show you the details of how Betterment works, what services it offers for investors, and whether investing with Betterment is the best choice for you.
Once upon a time, having your investments managed by a professional was reserved for the rich. Hiring a portfolio manager was expensive and often required a minimum net worth that no one but the 1% could afford.
Betterment, and companies like it, aim to change that.
By using sophisticated technology, robo advisors can make high quality investing available to everyone. Even if you are new to investing and only have a small amount of money to start with, robo advisors make it possible to easily get started.
Betterment gives you an individualized, professional portfolio. All you have to do is tell them a bit about yourself, then fund your account.
We’ve researched all there is to know about this company and spill it all right here in our complete Betterment review.
Betterment Review At-a-Glance
Account Minimum $100k minimum for Betterment Premium
Annual Fee 0.40% for balances of $100k or more
Betterment is one of the most popular robo advisors and investment apps in the industry. The sign-up process is very easy, they offer tax-loss harvesting, simple asset management, good retirement calculators, low management fees, and the option to speak with a human advisor.
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- No account minimum
- Low, fixed management fees
- No transaction fees
- Access to Certified Financial Planners™
- Quality, hands-off investing
- Not designed for DIY stock traders
- Tax-loss harvesting isn’t as robust as some competitors
- Can’t balance asset allocation with external accounts
What is Betterment?
Betterment is an online service that will invest your money for you, and keeps it invested in a way that is aligned with your goals using tested algorithms. Companies like Betterment are commonly referred to as robo advisors, and they provide automated, algorithm-driven investing services.
Founded in 2008, Betterment is the largest robo advisor on the market with $13.5 billion in assets under management. In 2017, it became the first online financial advisor to exceed $10 billion in assets.
For a low management fee of 0.25% and a $0 minimum investment, you can open traditional investment accounts, retirement accounts, or trusts with Betterment to help you save for a variety of goals.
Besides its standard portfolio, Betterment offers three portfolio options from which to choose. Then Betterment will manage your assets based on your goals, risk tolerance, and personal financial situation.
While you won’t have access to a certified financial advisor in-person or on the phone, you can ask questions at any time in Betterment’s app. All inquiries will be answered by a Certified Financial Planner (CFP). The Betterment app is certainly handy to have on your smartphone for this reason alone.
If you want a little more hand-holding, you can get unlimited phone access to CFPs for personalized advice. This service has a higher management fee of 0.40% and a minimum investment size of $100,000.
Betterment Facts & Figures
|Assets Under Management (March 2018)||$13.5 billion|
|Account Minimum||$0 for Betterment Digital
$100,000 for Betterment Premium
|Account Management Fee||0.25% for Betterment Digital
0.40% for Betterment Premium
|Investment Expense Ratios||ETF expense ratios average 0.13% for Betterment portfolios. Slightly higher for Socially Responsible, Blackrock Income and Goldman Sachs Smart Beta options|
|Other Account Fees||None|
|Account Types Offered||Individual and joint taxable accounts
Roth, Traditional, SEP and Rollover IRAs
|Professional Support||All customers can reach Certified Financial Planners (CFPs) via in-app messaging. Premium customers get unlimited access to advisors via phone.|
How Does Betterment Work?
Like most robo advisors, Betterment uses modern portfolio theory to determine asset allocation, attempting to maximize your return regardless of your level of risk. It then invests across 12 asset classes in its standard portfolio. This portfolio automatically rebalances to keep your risk profile in-line with your goals and personal financial situation.
By using ETFs, Betterment keeps underlying investment costs low, which keeps costs from eating away at your wealth over time. The company’s platform also lets you track different financial goals, and lets you know if you’re on track each time you log in.
How much does it cost to invest with Betterment?
Betterment charges a flat management fee of 0.25%. This means a $10,000 account will pay $25 a year in management fees.
There are no trading fees, sales fees, or other fees when you invest with Betterment. However, the underlying ETFs that Betterment buys do have internal costs paid to the ETF provider, not Betterment. These fees average 0.13%.
Is there a way to lower fees?
Betterment’s promotion to lower fees for new clients isn’t much help for smaller investors. Deposits of $15,000 to $99,999 get one month free; $100,000 to $249,000 get six months free; and a deposit of over $250,000 gets one year free.
Betterment offers a referral program. For each friend you refer to Betterment, you get 30 days of free management, and they get three months free. To qualify, your friend needs to open and fund a new account. But refer three friends, and you get an extra free year.
Ultra-high net worth investor
Investors with over $2 million invested will Betterment won’t be charged fees over that amount. You’ve got that hidden in the couch cushions, right?
Betterment investment options
The vast majority of Betterment’s assets are invested with its proprietary Betterment Portfolio. But the company recently added a few new options. All four investment strategies provided by Betterment rebalance as needed.
The Betterment Portfolio
This portfolio is built with up to 12 asset classes, depending on your goals and risk tolerance. It includes domestic and international stocks and government bonds and U.S. corporate bonds.
No REITS or commodities
One knock on Betterment by professionals is that its portfolio does not include Real Estate Investment Trusts (REITs) or commodities. Betterment states that, based on testing, these securities can add cost but don’t benefit returns. However, both of these asset classes can provide more stability to a portfolio than one just made up of stocks and bonds.
Betterment has 3 additional portfolio strategies:
Socially Responsible Portfolio
Socially responsible investing (SRI) involves investing more dollars in companies whose business practices benefit different social causes. It is a rapidly growing area in the investment world. For heart-focused investors, Betterment offers such a fund.
Betterment’s Socially Responsible Portfolio substitutes three ETFs in the standard portfolio with three SRI ETFs. These ETFs exclude companies with poor records on specific issues, while allocating more to companies with excellent records.
However, the majority of the ETFs in this portfolio are the same as the standard portfolio. Betterment is working on adding more SRI ETFs but is balancing social benefit with cost. This is a new investment arena, so options are still coming on the market. As low-cost alternatives become available, Betterment plans to switch more of the standard ETFs to SRIs.
BlackRock Target Income Portfolio
Built by BlackRock, this is a 100% bond portfolio focused on generating income from interest payments. For investors living off their assets, this can insulate you from some of the ups and downs of the stock market.
Keep in mind; the BlackRock Target Income Portfolio is only meant to be a piece of your investment strategy. Having no stock exposure limits your returns over time, which can increase the probability of running out of money in a long retirement.
Goldman Sachs Smart Beta Portfolio
Designed by Goldman Sachs Asset Management, the Smart Beta Portfolio seeks higher returns by taking on somewhat higher risks. While this strategy still sticks to Betterment’s principles of diversification and tax optimization, it is also a little less passive.
This portfolio will select for areas of the market where greater returns are expected over time, using a distinct algorithm. It looks for areas of the market with good value, high-quality, robust momentum, and low volatility.
If you’re risk-averse, this strategy isn’t for you. There will be times when this portfolio will underperform the standard Betterment Portfolio, in pursuit of higher long-term returns.
Individualized asset allocation
Introduced in May 2018, Betterment took a small step away from formula-based robo-advising.
In the past, investors could select their balance of stocks and bonds. But they couldn’t control how much of each of the underlying ETFs in the Betterment Portfolio they owned. That was determined by the algorithm.
The problem with this was high-net-worth investors who had significant investments outside of Betterment. Betterment’s platform (and all robo advisors at the time of this writing) can’t balance asset allocations over funds they don’t manage. If an investor already owned a significant amount of international stocks in another portfolio, she might not want to own any in her Betterment portfolio.
So, Betterment handed over control to clients with more than $100,000 in assets invested at the company. The standard formula will still manage portfolio composition for most investors. But if you choose, you can alter how much your portfolio owns of the 12 different underlying asset classes.
This is for more advanced investors who want to set the rules for how their money is invested.
Note: If you only have tax-advantaged accounts (IRAs, 401(k)s, etc.) you can scroll on by. Capital gains taxes only occur in standard, taxable accounts.
No one wants to send more money to Uncle Sam than they have to. Robo advisors like Betterment use strategies to reduce your tax burden from investment gains.
How do they do it?
Well, when you sell an asset that has increased in value you have a taxable realized gain. But when you sell an investment at a loss, that loss offsets any potential gains. So, robo advisors like Betterment balance selling investments with losses and assets with realized gains to reduce taxable amounts.
This means that when you go to withdraw money or rebalance, Betterment is always taking tax implications into account automatically.
Betterment vs. Wealthfront
Unfortunately, Betterment’s tax handling is one area where it falls short of its main competitor – Wealthfront. Wealthfront uses what is called “direct indexing” for portfolios with over $100,000 in investments. This means instead of buying an ETF; it buys all the tiny pieces that make up the ETF directly. Why? Well, it gives them far more options when looking for small offsetting losses than Betterment’s 12 ETFs. Which makes its tax-loss harvesting strategy more effective.
Betterment has added some features to be more competitive, but if your primary investments are in taxable accounts, you would still likely be better off with Wealthfront.
If you have both taxable and tax-advantaged accounts, you can choose to have your asset allocation balanced across all your Betterment accounts. This allows Betterment to take advantage of asset location. Placing funds that generate a high amount of taxable returns in tax-advantaged accounts. And funds that are tax-efficient in taxable accounts.
Based on research, Betterment expects Tax-Coordinated Portfolios to provide an additional annual return from tax savings of 0.10% to 0.82%, depending on assumptions.
Spousal tax-loss harvesting
If you are married and file taxes jointly, Betterment can manage taxable gains for the family. Similar to tax-coordinated portfolios, this makes it easier for Betterment to reduce the total tax burden.
Want to know whether you are on track for retirement? Link all your investment accounts to Betterment and give them some details about your goals.
Enter simple facts like your age, when you plan to retire, and how much you are currently saving a year. Then Betterment will let you know how much you need to set aside and whether you’re on track for success.
Betterment’s RetireGuide will also calculate your current asset allocation across all your portfolios, to help give you a full picture of your investments.
Other Betterment features
Beyond investing, we want to share in our Betterment reviews the other offers and many other benefits that Betterment provides to investors. Here are a few of their perks.
Personalized financial advice
Betterment’s app connects all users with Certified Financial Planners (CFPs). Get answers about your financial situation, whether or not it specifically has to do with your Betterment portfolio.
If you have complex issues or want a more personal relationship, it may make sense to upgrade to Betterment Premium or seek out a fee-based CFP. But written contact through the app can help you tackle the little things that come up.
Smart dividend reinvestment
When your portfolio earns dividends or interest, Betterment doesn’t automatically reinvest it in the ETF the payment came from. Instead, it uses the funds to buy whichever ETF best rebalances your portfolio.
This method results in less buying and selling, reducing your tax burden and managing your risk more efficiently over time.
Let’s say an ETF costs $50 a share and you’ve only got $40 to invest. Instead of buying one share while $10 sits in cash in your account, Betterment allows you to buy 1.25 shares. This way all of your money is always invested and working for you.
With investing, research shows the sooner you can get your money in the market, the better. But sometimes, you’re just sitting on too much cash.
Betterment helps you avoid sitting on the sidelines with its SmartDeposit tool. Let Betterment know how much you need in your checking account at any given time, and it will periodically scoop extra cash out of your checking account and invest it.
Don’t worry about cash moving without your knowledge. You will be notified before each transfer and can cancel it before it happens.
Betterment allows you to set up different accounts within your main Betterment account to save for multiple goals. Saving for a house requires a different investment strategy than preparing for retirement. The system understands that and will manage your risk. And let you know whether you’re on track.
My one issue with Betterment’s goal-based savings is its safety net goal. This is meant to be an emergency fund but recommends investing for this goal with 40% stocks and 60% bonds. In general, you don’t want your emergency fund to be invested at all. Investing is a long-term game. And you might need your emergency fund in the short-term. I would recommend a high-interest savings account with CIT Bank instead of Betterment for this particular goal.
Charitable giving options
Many people know that donating to charity is a tax deduction. But did you know it can save you from capital gains taxes too?
Many charitable organizations allow you to donate shares instead of cash. By gifting the shares, instead of selling it into cash first, you don’t pay capital gains tax. Plus, the full value of the shares become a tax deduction.
Betterment allows you to donate shares from taxable accounts to charities. It will even recommend the best shares to optimize your tax savings while making a positive impact.
Who Should Invest with Betterment?
If nothing else, we hope you understand from our Betterment review that this company is the largest robo advisor on the market for a reason. Its flat, low investment fee of 0.25% with no investment minimum makes it an excellent choice for most hands-off investors.
The platform is powerful and easy to use. With continual rebalancing, tax-loss harvesting, and fractional shares Betterment makes sure your investments are always working for you. All while encouraging you towards their goals with regular progress updates. Finally, by giving more flexibility to advanced investors, it creates a middle ground for those who want a say but don’t want to be completely DIY.
However, for high-net-worth investors with significant taxable investments, the tax-loss harvesting strategy at Wealthfront is more efficient for the same fees.
Betterment Review Summary
Betterment has low fees, automatic rebalancing, and high-quality investment options. This is a top choice for hands-off investors that are planning for retirement or other significant goals.
Since Betterment has no minimum investment, you can open an account with no commitment today. Take the time to test out their tools before funding your account. You can discover if you are on track for retirement and discover how Betterment can help you get there!