I love making things automatic. Whether is is bill-paying, direct deposit, prescription renewals, or investing, making things automatic makes life easier and that is where our Betterment investing review comes in.
When it comes to retirement planning, an overwhelming number of online tools and websites promise to help you create a dynamic and profitable portfolio while minimizing fees.
This growing list of services includes robo-advisors, a class of financial websites that offer to manage your portfolio with minimal in-person interaction and a heavy reliance on the latest investing tools and software.
One of the most popular robo-advisors by far is Betterment. Conceptualized by its founders in 2010, Betterment has since grown to help its customers invest billions of dollars of their hard-earned dollars.
It hasn’t been easy. With other competitors like Wealthfront and Personal Capital always a few steps behind them, Betterment has struggled to find a way to stand out. Even with the competition, Betterment has emerged as one of the top online brokerage accounts and continues to grow its market share.
What is Betterment?
Let’s first start off with, what exactly Betterment is – along with what you can actually expect from the service.
Betterment is an online financial advisor that uses advanced algorithms and software to find the perfect investment strategy for your portfolio and individual needs. The main difference between investing your money with a traditional financial advisor and Betterment is that there is minimal human interaction. Unless you email or call in, your communication with an individual advisor will be very minimal.
But, there is some good news to counteract the lack of individual service. Because of lower operating costs, Betterment is able to charge lower fees than traditional financial advisors. This can be huge for individuals who want to take a hands-off approach to their retirement accounts, yet don’t want to pay top dollar for access to a top tier financial advisor in their area.
Using complex tax software, Betterment allocates your investment portfolio based on your individual circumstances, investment timeline, and thirst for risk. In the meantime, they keep fees at a minimum by using ETFs (exchanged-traded funds) that let you diversify like mutual funds, but are tradeable much like stocks. Since ETFs come with very low expense ratios, Betterment is able to pass those savings along to the consumer.
Although the program already manages over $3 billion dollars for their clients, they are still growing at a rapid pace. Because the service is able and willing to deal with investors at all stages of wealth accumulation, it has become a go-to for both experienced and novice investors with various investing goals.
Further, Betterment’s portfolio strategy isn’t geared just for retirement savings; the service can also improve your returns on dollars you invest for short-term and medium-term goals like saving for college, taking an annual vacation, or building up a cash reserve.
Features
When you invest with Betterment, you’re hiring a robo-advisor who will balance your portfolio, help you invest in a smart and efficient way, and maximize your returns for minimal cost. This kind of scenario is perfect for investors who want to maximize their earnings, yet don’t want to deal with the day-to-day hassle of managing their own accounts.
With that in mind, here are some of the basic features that Betterment currently offers:
- Automated portfolio rebalancing – Automatically rebalances your portfolio for you based on your specifications.
- Fractional share investing – Fractional share investing ensures that every penny you have invested is working for you.
- Goal setting – With a handy online interface to figure out what you need to meet your goals – or create new ones.
- Portfolio customization – Advanced software will create a portfolio that has been customized just for you.
- Tax loss harvesting – Automatic tax loss harvesting will help reduce your tax burden and improve your returns over time.
- Tools and calculators – The online tools can help you learn advanced investing strategies and truly understand how your money is being invested and why.
- RetireGuide – Input your financial information into Betterment’s RetireGuide to get a glimpse at what you need you achieve your retirement goals, and potential investment strategies that could get you there.
Signing Up with Betterment
Going through the Betterment sign up process is one of the most user friendly I have seen for any brokerage. If you can type at any sort of reasonable rate, the whole process should take about five minutes. The questionnaire helps them determine your risk preference and the overall goals you are trying to reach with your investing.
Once you get through the questions, you link your bank account and you are in business. Moving money into your Betterment account works just like any other bank transfer between accounts. So if you are used to moving money electronically from checking to your savings account, then you are going to have no problems with the interface.
A Model Portfolio
With most brokerage accounts you could put together a simple model portfolio to give people an example of what to expect. The problem in trying to do this with Betterment is that how each person answers the questions is going to change how the portfolio will be structured.
What we do know is that to avoid fees and lower costs to you, Betterment uses a mix of Bond and Stock ETFs. If you are young, looking to retire 40 years from now, and have a high tolerance for risk, you are probably looking at a mix of 90% stock ETFs and 10% bond ETFs. Someone who is getting closer to retirement and needs to protect their nest egg will see a much higher mix of bonds in their Betterment portfolio.
No matter how the mix comes out, you know that the algorithm is going to focus your investing based off of the choices you made in the questionnaire. You can always go back and make adjustments to your answers and risk tolerance as your circumstances change.
Types of Accounts Betterment Supports
- IRAs
- Roth IRAs – We have a posts to help you learn more about Roth IRA contribution limits for your reference
- Taxable Investment Accounts
- Trusts
When you invest with Betterment, your individual portfolio will be individualized for your needs. When you open an account, the service asks you a series of questions to determine your investment timeline, your appetite for risk, and what you hope to achieve throughout the process.
The information they collect during this interview helps them create a perfect blend of ETFs that can help you reach your goals. If you’re fairly young, that will likely mean your portfolio will hold a stronger allocation of stocks than bonds. As you age, however, your portfolio will automatically rebalance to reflect your changing needs and desired level of risk.
The main benefit that Betterment offers is that they take care of all of these details for you. Once you set your account up and enter all of the information they ask for, Betterment will take it from there.
What is the Cost?
Because Betterment leverages the use of technology instead of relying heavily in individual financial advisors, it is able to cut down on the costs associated with managing these accounts. However, there is a tiered approach to pricing. Simply put, the more money you have to invest, the less you’ll pay each year.
If you have less than $10,000 to invest, Betterment charges 0.35% annually. However, that percentage drops steadily from there. Having between $10,000 and $100,000 to invest, for example, results in an annual fee of 0.25%, whereas investing more than $100,000 allows you to pay just 0.15%.
Betterment Fees:
- $0 – $10,000: 0.35%
- $10,000 – $100,000: 0.25%
- $100,000+: 0.15%
While Betterment’s investment services are far from free, they are extremely affordable when you compare what it would cost to hire a top tier personal financial advisor. Further, the fact that they have no trade fees, no transaction fees, and no rebalancing fees lets you rest assured that you won’t be gouged by “extras” while your money is stashed away in your account.
You will, however, have to pay fees associated with the ETFs your portfolio picks up. This is an unfortunate fact, but the truth is, these fees are charged on all ETFs and Betterment does not receive a percentage. Generally speaking, the fees you’ll pay for the ETFs in your portfolio will cost around 0.10%.
But remember, these fees are in addition to the underlying percentage you’re paying Betterment to manage your portfolio. That doesn’t change the value of this service, and it certainly doesn’t cut down on the affordability factor, but I wanted to mention that for full disclosure.
It’s also important to note that, for accounts that hold less than $10,000, you’ll need to set up a monthly deposit of at least $100 to avoid paying a $3/month account fee.
Who Should Use Betterment?
While nearly anyone who invests could benefit from the online portfolio management and advising, this service is definitely geared to certain types of investors. In most cases, Betterment will work best for:
- Hands-off investors who have some investing knowledge – Since it takes care of the heavy lifting for you, it works best for investors who want to take a hands-off approach to their investment portfolio. Passive investors can let Betterment handle the logistics while using online account management to keep a close eye on their accounts.
- Investors with more than $100,000 in their portfolio – Betterment charges some of the lowest fees in the business to investors with more than $100,000 in their accounts. Because of this, high net worth investors should seriously consider investing to take advantage of this fee structure.
- Novice investors who need help – Beginning investors who are just learning the ropes can turn to Betterment for online portfolio management with low fees. The many online tools and user-friendly interface make it easy to beginners to get a grasp on basic financial concepts and investing strategies.
Who Shouldn’t Use?
While Betterment is perfect for certain types of investors, robo-advisors in general may turn out to be a raw deal for other types. In most cases, it will not work well for:
- Investors who want to speak to a financial advisor regularly – Since all business is conducted online, you won’t have continuous access to a financial advisor. If you want to speak with someone frequently, you might be better off paying more for a top financial advisor in your area.
- Investors who cannot afford $100 per month – The only real downside that I see when doing my Betterment review is that if you don’t have a lump sum of $10,000 or $100 a month to invest you get hit with the high fees. This isn’t a big obstacle for most, but it would be nice to have some exceptions.
- Investors who love to trade stocks frequently – If you’re not a buy-and-hold investor, Betterment will be more of a drag than a benefit. The company’s focus on ETFs hamper the process of individual trading. If short-term stock trades are your game, you’ll be much better off with a service like Scottrade.
If you determine that you would be better served by a more hands on approach check out the other top brokerage account options before you make your final investing decision. Being a certified financial planner I have had a great chance to work with several of these platforms and have done the following reviews:
I want everyone to feel comfortable with any investment before they dive in, whether it be a short term investment or long term.
Final Thoughts
While robo-advisors are much more popular than they were just a few years ago, they could easily replace in-person advisors in the near future. With lower fees and advanced software that can maximize results, online investing certainly is gaining an edge.
Whether Betterment is right for you depends on your individual needs and investing goals. If you’re a hands-off investor who wants to grow your retirement funds without paying a lot of fees, then Betterment might be ideal. Conversely, beginning investors can benefit handsomely from the online tools and investing education offered through the Betterment website.
If you think Betterment investing might be exactly that your portfolio needs, sign up for a new account today.
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