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In-Depth Betterment Review 2018

Investing is hard.

Where should I put my investments? What funds should I buy? Am I diversified? Am I too diversified?

If you want professional help, it'll cost you. Is hiring an adviser worth it? Should it be fee only or a percentage of assets?

With so many questions, it's easy to see how it paralyzes so many Americans.

What if I said there is a professional investment management service that will answer many of those questions? And they charge a fraction of a traditional human investment manager?

They're known as a robo-advisor. And Betterment was one of the first in the industry.

In short, Betterment will build a portfolio based on your goals and risk tolerance. They'll stay on top of it, rebalance as necessary, and your only responsibility is to save. Betterment handles the rest.

Learn More about Betterment

Who is Betterment?

Betterment is an online, automated investment platform, a.k.a. a robo-advisor.

With $13.5+ billion in assets under management, Betterment is largest independent robo-advisor. Betterment was the first independent online financial advisor to reach $10 billion AUM in July of 2017.

With Betterment, your entire investment experience takes place online. An algorithm calculates your portfolio based on your preferences and goals. That algorithm uses Modern Portfolio Theory (MPT), created by Harry Markowitz during the 1950s, and supported by 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 through ETFs. They use ETFs because they are low-cost and tax efficient.

Since everything runs through computers, they can offer investment management at very low cost. This makes it cost effective for any investor, regardless of investment size. Most human financial advisors won't even talk to you if you have less than half a million in assets. You can invest using Betterment with just $1.

If you’re new to investing, or you don’t have much money, Betterment may be the best solution to your investment needs. If you are a larger or more experienced investor, Betterment may be a good platform to have 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 a few minutes and the entire process happens online. The questionnaire asks a series of risk tolerance and investment goal related questions. Your answers will determine your portfolio allocation – conservative, aggressive or somewhere between.

You can open any one of the following types of accounts with Betterment:

Betterment for Business

To open an account, you must be a U.S. citizen. They will also want to know your permanent U.S. address, Social Security number, and link a checking account with a U.S. bank.

You don't need to transfer money to open up an account. Betterment doesn’t have a minimum initial deposit requirement. You can set up the account today but fund it later, such as by automatic deposits from your paycheck.

Betterment will build a portfolio that consists of a mix of 13 ETF’s. They choose from are six stock ETF’s and seven bond ETF’s. Each portfolio will have at least some of the 13 ETFs but the specific percentages vary based on your profile.

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.

From here, all that's left is funding. That's on you. Betterment handles the 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.

If your accounts outside of Betterment are heavily weighted in one sector, you can use this to reduce your allocation inside Betterment to balance it out.

A peek at how Flexible Portfolios work!

Betterment Features and Benefits

Betterment has a large number of features and benefits, but here are some of the most important ones:

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:

Stock Funds

I love seeing low cost Vanguard funds on their list.

Bond Funds

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

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 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.

Betterment Plus

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

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.

Betterment Pricing & Fees

In late 2017, Betterment updated their pricing from a three tier pricing model:

Betterment Pricing, early 2017

To only two:

Only two tiers in 2018 – Digital and Premium.

Betterment works on a flat fee based on the size of your portfolio. There are no other 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. You can have up to $100,000 account managed with Betterment for $250 per year. Even at the lowest service tier, you get all the benefits of a Betterment – rebalancing, tax harvesting, diversification, etc.

For a Betterment Premium account, which requires a $100,000 minimum account balance, the annual fee is 0.40%. $100,000 funded account managed by Betterment for a mere $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.

The typical human investment advisor would charge 1.00% to 1.50%. If they're managing $100,000, you'd be paying $1,000-1,500 per year. (and that's probably not enough to get them out of bed in the morning!)

Most recently (Fall 2018), Betterment adjusted their fee structure. This is the fee on balances over $2 million:

Previously, they did not charge a fee on balances over $2 million. They will continue to honor that pricing for existing customers, even if their balance is less than $2 million, but new customers after September 18th, 2018 will pay the new pricing.

Should You Invest With Betterment?

Betterment is an affordable roboadvisor and a good choice for new investors. If you're new, have little in assets, or prefer a professional help but don't want to pay through the nose, Betterment is a good solution.

It provides professional-level investment management at low cost and it does so for investors in all asset 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.

Learn More about Betterment

Betterment

0.25%-0.50%
8.5

Overall

8.5/10

Strengths

  • Low fees
  • Tax loss harvesting
  • Low minimum ($0)
  • Low cost plus/premium product

Weaknesses

  • High net worth individuals can do this themselves in Vanguard
  • No other asset types (REITs, etc.)