Imagine that there’s a professional investment management service that will manage a very small portfolio, and do so at a fraction of what it will cost to hire a traditional human investment manager?
What you've described is known as a robo-advisor and Betterment was one of the first in the industry.
The platform will create an individual portfolio, based on your own goals and risk tolerance, and then manage and rebalance it going forward. Your only responsibility in the engagement is to fund your account – Betterment handles all of the investment details for you.
Who is Betterment?
Betterment is an online, automated investment platform, commonly referred to as a robo-advisor. In fact, with more than 270,000 investors and over $10 billion in assets under management (AUM), Betterment is largest independent robo-advisor. Betterment was the first independent online financial advisor to reach $10 billion AUM when it breached that level in July of 2017.
Betterment is known as a robo-advisor in part because your entire investment experience takes place online, but also because your portfolio is created by an algorithm. That algorithm is based on Modern Portfolio Theory (MPT), an investment theory that was created by Harry Markowitz during the 1950s, and is supported by nearly 70 years of investment research. MPT focuses on investing in major market sectors, rather than in individual securities.
Betterment constructs portfolios by investing in broad market sectors. They use index-based exchange traded funds (ETFs) because they are low-cost and tax efficient.
Betterment has democratized the investment world by offering this investment management at very low cost. But it is also available to investors of all sizes since you can open up an account with Betterment with virtually no money at all.
If you’re new to investing, or you don’t have much money, Betterment can be the perfect solution to your investment needs. If you are a larger or more experienced investor, Betterment may be the perfect platform to have at least some of your portfolio professionally managed.
Here's a CNBC Mad Money segment from 2014 where Jim Cramer talks to founder and CEO Jon Stein:
And a more recent interview in Fall of 2017 at Finovate, a financial technology conference in New York City:
How Betterment Works
You can sign up for Betterment in just a few minutes and the entire process is handled online. You start out by answering a series of questions, that are designed to determine your risk tolerance and your investment goals. Your answers to those questions will determine your portfolio allocation, whether conservative, aggressive or somewhere in between.
You can open any one of the following types of accounts with Betterment:
- Individual or Joint taxable investment accounts
- Traditional IRA
- Roth IRA
- Trust account
- SEP IRA (single participant only)
- Betterment for Business (this is Betterment’s 401(k) for small employers)
In order to open an account, you must be a U.S. citizen. You will also be required to have a permanent U.S. address, a valid Social Security number, and a checking account with a U.S. bank.
You don’t even need to have any money to open up your account because Betterment doesn’t have a minimum initial deposit requirement. You can set up the account and fund it later, such as by automatic deposits from your paycheck.
Once your investment portfolio has been determined it will be constructed of a mix of 13 ETF’s. Betterment builds your portfolio from six different stock ETF’s and seven different bond ETF’s. Each portfolio will have at least some of the 13 ETFs but the actual percentage will be determined by your portfolio allocation.
For example, if your risk tolerance is more aggressive, you will have more in stock funds. If it’s more conservative, you’ll have more in bond funds.
Those 13 ETF’s provide exposure to nearly the entire investment universe. That includes both foreign and domestic equities, and foreign and domestic bonds. There also different sectors represented by those funds. For example, your portfolio will include a mix of large-cap, mid-cap, and small-cap stocks. On the bond side, you will have exposure to short-term and long-term securities, as well as corporate and government bonds.
Once your account has been opened, and your portfolio determined, your only responsibility will be to fund your account. Betterment handles all of the mechanical details of managing your portfolio for you but you still need to put the money in. 🙂
What if I want to adjust them manually? In late-March 2018, Betterment announced a new feature for accounts with $100,000 or more – Flexible Portfolios. Flexible Portfolios lets you adjust the Betterment portfolio manually for a variety of reasons. Perhaps your accounts outside of Betterment are heavily weighted in one area so you want your Betterment portfolio to be reduced in that area.
Betterment Features and Benefits
Betterment has a large number of features and benefits, but here are some of the most important ones:
- Account protection. Your account is covered under the Securities Investors Protection Corporation (SIPC), for up to $500,000 in cash and securities, including up to $250,000 in cash. This protects you from broker failure but not losses due to market fluctuations.
- Customer Service. You can contact Betterment by Phone or by Live Chat, Monday through Friday, 9:00 am to 8:00 pm Eastern Time (ET), and Saturday and Sunday, from 11:00 am to 6:00 pm ET. You can also contact them by email at any time.
- Betterment Mobile App. Betterment offers mobile apps for both iOS and Android. You can download them at the App Store and Google Play.
- Creating Investment Goals. You can create customizable subaccounts that Betterment refers to as goals. These can include retirement, a “Safety Net” (emergency savings), or some sort of intermediate goal, such as saving for college education or for the down payment on a house.
Each goal can be established with its own portfolio allocation, as well as an individual time horizon and a schedule of deposits and withdrawals. You can add new goals just by clicking the “Add Account” button. This allows you to create individual portfolios for very specific investment needs.
- Flexible Portfolios. After you've established your portfolio, those with $100,000+ in assets will be able to manually adjust the allocations of your portfolio to better suit your needs. You get your own allocation but all the automation and tax benefits of Betterment's management.
- RetireGuide. Betterment offers this as a retirement planning tool. It provides you with advice to enable you to achieve your retirement goals. With it, you can determine how much money you’re likely to spend in retirement (your after-tax income from all sources), as well as how much you’ll need to save to support that spending level.
It will also show you which accounts to save in, and that includes your employer retirement plan, as well as traditional and Roth IRAs, or taxable investment accounts. This will enable you to securely sync all of your investment and retirement accounts, and not just those that you have with Betterment.
You can even change the assumptions within RetireGuide to account for different outcomes. For example, you can adjust the expected level of Social Security income or an employer pension plan. This will give you the ability to tweak your retirement expectations as you move closer to your retirement date.
- SmartDeposit. This is Betterment's automated cash investment tool. It is designed to put more of your money to work by investing your excess cash. It works by moving excess cash from your bank account into your Betterment account, based on parameters that you set. For example, you establish the maximum amount of money that you want to have in your bank account, and then Betterment automatically moves the excess balance into your investment account.
- Betterment Advisor Network. Recognizing that some people may prefer contact with a human investment advisor to go along with their robo-advisor portfolio, Betterment created this network. They can match you with one of the vetted independent Certified Financial Planners in the network, who will get to know you personally. They can then develop a customized, comprehensive financial plan, and help you with more advanced and complex financial issues.
Betterment Investment Portfolio
Betterment portfolios are constructed from six stock ETF’s and seven bond ETF’s.
Here are the ETF’s currently being used by Betterment, as of January 20th, 2018:
- US Total Stock Market – Vanguard U.S. Total Stock Market Index ETF (VTI)
- US Large-Cap Value Stocks – Vanguard US Large-Cap Value Index ETF (VTV)
- US Mid-Cap Value Stocks – Vanguard US Mid-Cap Value Index ETF (VOE)
- US Small-Cap Value Stocks – Vanguard US Small-Cap Value Index ETF (VBR)
- International Developed Stocks – Vanguard FTSE Developed Market Index ETF (VEA)
- Emerging Market Stocks – Vanguard FTSE Emerging Index ETF (VWO)
I love seeing low cost Vanguard funds on their list.
- Short-Term Treasuries – iShares Short-Term Treasury Bond Index ETF (SHV)
- Inflation Protected Bonds – Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- US High Quality Bonds (IRA and 401(k) accounts) – Vanguard US Total Bond Market Index ETF (BND)
- National Municipal Bonds (Taxable accounts) – iShares National AMT-Free Muni Bond Index ETF (MUB)
- US Corporate Bonds – iShares Corporate Bond Index ETF (LQD)
- International Developed Bonds – Vanguard Total International Bond Index ETF (BNDX)
- Emerging Market Bonds – iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Note that the National Municipal Bond ETF applies only to taxable investment accounts. Since retirement accounts are already tax-deferred, there is no need to include municipal bonds in those accounts.
Once your portfolio is established, Betterment will rebalance it as needed as funds change in value. And once again, this process is automatic, based on the percentage of the divergence from the target portfolio.
Betterment Tax-Loss Harvesting
Tax-loss harvesting, or TLH, is an investment strategy in which losing investments are sold in order to generate capital losses that will reduce capital gains from winning investments. The strategy reduces the net gain in your account, and therefore it also lowers the capital gains tax that you will pay.
Betterment offers TLH on all of its taxable accounts. It is not available with retirement accounts since the investment gains in those accounts are tax-deferred anyway.
Betterment has a Tax Loss Harvesting White Paper that goes into substantial detail about this complicated topic. They maintain that you can improve the annual return on investment in your taxable accounts by an average of 0.77% per year. That can result in a substantial improvement in your investment results over the very long term.
Betterment Tax Coordinated Portfolio
This is a feature offered by Betterment that optimizes and automates an investment strategy known as asset location. That strategy involves placing investments that are likely to be highly taxed in tax-sheltered retirement accounts and then putting lower tax assets in the taxable accounts. You can take advantage of this option simply by clicking “Set Up” in the Summary tab.
An example would be placing income generating assets, such as those that pay interest and dividends, into retirement accounts. This would allow deferral of that income. Meanwhile, assets that are likely to generate long-term capital gains are placed in taxable accounts. They will be subject to, and be able to take advantage of, more favorable long-term capital gains tax rates.
Betterment maintains that you can improve your after-tax returns by an average of 0.48% per year, or an extra 15% over 30 years.
Betterment Plus and Betterment Premium
Betterment offers two premium investment plans for larger investors.
With an account balance of $100,000 or more, you can upgrade to the Betterment Plus plan. That will entitle you to an annual consultation with one of Betterment’s team of certified financial planners (CFPs). They will keep tabs on your account, and notify you throughout the year if and when a consultation is needed.
This will enable you to have a “second pair of eyes” to help you with your investment plans, and to make important financial decisions. And they will not only look at your Betterment account, but also any other accounts that you have synced with Betterment.
Betterment Premium also requires a minimum account balance of $100,000. But it enables you to have more than one consultation per year. In fact, under this plan, you will have unlimited access to one of Betterment’s team of CFPs. They’ll monitor your account, as well as be available any time you have a financial question.
This will be a particularly valuable service level for people who have more complex financial situations. That can include multiple investment accounts, a complicated tax situation, or just having someone to discuss the intricacies of your investment plan with.
In late 2017, Betterment updated their pricing. Formerly, there were three tiers:
Now, there are only two:
Betterment works on a flat fee, which is based on the size of your portfolio. Apart from that fee, there are no trading fees or commissions, no transfer fees, and no fees for rebalancing your portfolio.
The standard fee (Digital) is 0.25% of your account balance. That means that you can have up to $100,000 account professionally managed with Betterment for just $250 per year. You get all of the benefits of a Betterment account even at its lowest tier – rebalancing, tax harvesting, diversification, etc.
For a Betterment Premium account, which requires a $100,000 minimum account balance, the annual fee is 0.40%. That means that you can have a $100,000 account professionally managed by Betterment for just $400 per year. Betterment appears to have eliminated the Plus account and renamed it the Premium, lowering the Premium fee down to 0.40% from its previously 0.50% fee.
Compare these fees with the 1.00% to 1.50% annual fees charged by traditional human investment advisors. Those fees would result in the same amount of money being managed at a cost of between $1,000 and $1,500 per year.
Bonus for very large investors: Account balances over $2 million will not be charged a fee on any additional investments.
Should You Invest With Betterment?
If you’re new to investing, or you have very little money to start out with – or if you prefer to have someone else manage the investment side of your life for you, then Betterment can be the perfect solution.
It provides professional-level investment management at extremely low fees, and it does so for investors in virtually all portfolio levels. The portfolio mix enables you to achieve a much greater level of diversification than you could on your own.
Even if you’re a committed do-it-yourself investor, Betterment could be the perfect investment platform to park that portion of your portfolio that you would rather have managed by someone else.
If you fit any of those profiles, check out Betterment and see what they can do for you.