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.
Table of Contents
Who is Betterment?
Betterment is an online, automated investment platform, a.k.a. a robo-advisor.
With $16.4+ billion in assets under management as of April 2019, Betterment is one of the largest independent roboadvisors. 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 a 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 at 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 portfolios professionally managed.
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:
- 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)
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 ETFs and seven bond ETFs. 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.
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 sub-accounts that Betterment calls goals. These can include retirement, a “Safety Net” (emergency savings), or another intermediate goal, such as saving for college education or a house.
You can set a portfolio allocation, time horizon, and schedule deposits and withdrawals for each goal. You can add new goals by clicking the “Add Account” button. You can 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 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. You can determine how much money you’re likely to spend in retirement plus how much you’ll need to save to support that spending.
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 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 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 roboadvisor 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 October 28th, 2019: (I list primary ETF only, they also have a secondary ETF when tax-loss harvesting)
- U.S. Total Stock Market – Vanguard U.S. Total Stock Market Index ETF (VTI)
- U.S. Large-Cap Value Stocks – Vanguard US Large-Cap Value Index ETF (VTV)
- U.S. Mid-Cap Value Stocks – Vanguard US Mid-Cap Value Index ETF (VOE)
- U.S. Small-Cap Value Stocks – Vanguard US Small-Cap Value Index ETF (VBR)
- International Developed Stocks – Vanguard FTSE Developed Market Index ETF (VEA)
- International Emerging Market Stocks – Vanguard FTSE Emerging Index ETF (VWO)
I love seeing low cost Vanguard funds on their list.
- U.S. Short-Term Treasury Bonds – iShares Short-Term Treasury Bond Index ETF (SHV)
- U.S. High-Yield Corporate Bonds – Xtrackers USD High Yield Corporate Bond ETF (HYLB)
- U.S. Inflation-Protected Bonds – Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- U.S. High Quality Bonds (IRA and 401(k) accounts) – iShares Barclays Aggregate Bond Fund (AGG)
- U.S. Municipal Bonds (Taxable accounts) – iShares National AMT-Free Muni Bond Index ETF (MUB)
- U.S. Short-Term Investment-Grade Bonds – iShares Short Maturity Bond ETF (NEAR)
- International Developed Bonds – Vanguard Total International Bond Index ETF (BNDX)
- International Emerging Market Bonds – iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
(see a lot of Vanguard in that list right? See how Vanguard compares to Betterment)
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 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 Cash Reserve
Betterment has a savings vehicle named Betterment Cash Reserve – their foray into the banking world. Betterment Cash Reserve is a cash management account that is FDIC insured up to $1,000,000 and pays a high-interest rate (4.50% APY). Your funds are put with their four partner banks, which is why you get 4x the FDIC coverage, but managed all through their app.
(Annual percentage yield (variable) is as of 4/21/2023. Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.)
Previously, they offered a savings-like rate of return by putting your funds into two ETFs – 80% U.S. Short-Term Treasury Bonds (iShares Barclays Short Treasury Bond Fund, SHV) and 20% U.S. Short-Term Investment-Grade Bonds (iShares Short Maturity Bond ETF, NEAR). It was a clever idea but it was still an investment, so not FDIC insured. Smart Saver will be going away and replace with Cash Reserve.
Here are more details on Betterment Cash Reserve.
Betterment offers just one premium investment plans for larger investors.
Betterment Premium requires a minimum account balance of $100,000. But it enables you to have unlimited consultations with their CFP professionals. They’ll monitor your account, as well as be available any time you have a financial question.
They can help navigate major financial decisions such as (from their site):
- Getting married? Make sure your goals are aligned, decide how to combine your money, set financial boundaries, and decide how to allocate your money across your retirement plans.
- Having a child? Save for college, prioritize family goals, select life insurance, and discuss your estate plan.
- Managing equity-based compensation? Understand your plan, walk through possible tax implications, and manage the potential risks.
- Retiring? Plan for your transition from saving to spending, and create a tax-smart withdrawal strategy.
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 to only two:
The list a “no fee” version on the pricing page but it’s not for the robo-advisor, it’s for their cash management account. It includes their tools (financial goal-setting and advice tools, retirement planning tools, and feedback on accounts you hold at other institutions) but not actual management.
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!)
There is a discount of 0.10% on the portion of your balance above $2 million:
- Digital fee: 0.15% on balances over $2 million
- Premium fee: 0.30% on balances over $2 million
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. Wealthfront is similar if you want to see Betterment vs. Wealthfront, and I don’t think you’re making a bad choice of one over the other.
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.
Cash Reserve is provided by Betterment LLC, which is not a bank, and cash transfers to program banks are facilitated by Betterment Securities. Click for details.
About the comments on this site:
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I invested with them early in the year, watching the stock market approach record highs this summer. So you think my Betterment account would be doing as well. Nope, YTD they have LOST 6% of my money. Pathetic…
I have had my Betterment account for the better part of 4 years. Today, with yet another stock market decline, I have learned this one very important fact: Betterment is not a Robo Advisor as we’d like to think.
Here’s what the actually do: They invest your money in a few ETFs, collect the dividends, and then sit on their hands and ride the waves of the stock market. They do absolutely nothing to protect what gains you may have earned. That is not a robo advisor. That’s just a basic hedge fund. You and I can both do that… but without the fees. They’re trash and a complete scam. In 4 years, I am in the negative earnings category thanks to them doing nothing. That means all dividends earned are gone. And… I’ve lost money to their fees. Again… A COMPLETE SCAM!
Jim Wang says
I can see why you’re upset but no advisor, robo or otherwise, can protect your gains. They simply cannot predict the future and buy and hold is a strategy that has worked since the beginning of time, it simply relies on you having a long enough time horizon. Even if you were in a relatively aggressive 100% S&P500 index, which started at 2058 points in 2015 and will start at ~2485 in 2019 (4 years), you should still be up even after factoring the fees.
It’s a robo advisor and it is NOT a hedge fund, which would be more active in trading to try to lock in positive gains because their fee structure incentivizes them to do so.
Interesting comments especially because after reading several reviews on Betterment I began searching for “Performance” and have had a difficult time finding how they’ve actually performed with your $$. It all sounds great in the detailed descriptions but where’ s the performance data? After reading the comments here I have some cold feet.
Jim Wang says
Hi Paulette, the reason we don’t have any performance data is that it’s all based on the mix of investments they put you in. I don’t have an account with them so my review is a look at the service itself, without looking at performance. The Performance will also be relative to how the market performs and so it’d be hard to give that type of information.
I’ve held a minor portion of my investments in Betterment since 2015 and Betterment has returned a subpar ~6% since they use a heavy concentration of international funds (45%) which underperformed the U.S. market. Betterment’s high international exposure should better emphasized by those who review it.
I personally would not have such a heavy exposure to global market as I’m with Warren Buffet and John Bogle on U.S. markets and is the main reason I’ve stopped adding to Betterment.
I’m about to close my account. I had Betterment since 2012. Their exposure to the international funds is what holds my investment down. They should let investors have a say how much of their investments are exposed to the international market like we have a choice of how much of our money is invested in stocks v bonds. My FKTFX account which grows 4% the most yearly has a better return than VWO or VEA or probably even combined. I don’t recommend FKTFX either. I kept it because my mom opened it when I was a minor and kept it in her memory. I also have index funds from another company. If anyone wants to compare how funds compare just check out the funds comparison from John Hancock investment management. I use it to compare if certain funds are worth my time.
The real nightmare of Betterment is trying to leave. I was unhappy with the lack of transparency (can’t tell what the heck my unrealized gains are!) and lack of control (can’t time a backdoor Roth because they don’t let you keep it in cash), so I set out to move back to Vanguard, thinking it would be simple. Not at all! They don’t do electronic outbound transfers at all, and they’re asking for a Medallion Signature Guarantee, which requires you to go into a physical bank with which you have a long-standing relationship and meet with a manager to have them sign off that it’s really you. Normal companies require this only if you’re transferring to a different name or something else suspicious, but Betterment has decided to use it to hold customers hostage. They have refused to provide an alternative that avoids unnecessary exposure during COVID. I cannot caution you enough to stay away from this company.
Jim C says
I have some cash sitting in my HSA account. To get better return, I transferred the fund to Betterment investment account. I select it because it is the only choice that HSA administrator specifies.
I regret of my decision, and now I stuck in the hand of a swindler. Today is first day that my fund has been transferred into my Betterment account. Although the market is up big today, NASDAQ is up 3.69% and S&P 500 Index is up 1.42%. However, my account value is down on its first day with Betterment. Upon further scrutiny, I found that Betterment bought 10 EFT funds on my behalf. However, each and every EFT they purchased are at the high end of the daily price range. Amazed at the Betterment’s “BUY HIGH” skill, I immediately have the doubt that those transactions might be manipulated. The EFTs might be purchased at lower prices but book to my account at higher price, to profit from the difference.
In order to determine whether the HIGH prices were due to the bad timing and luck, or they are the result of Betterment’s manipulation, I made phone call to Betterment customer service asking for the transaction detail on the trade of these ETF funds. I specifically asked for the timestamps of when the trades were executed (so I can verify with the market data to confirm whether they are legitimate price, albeit they are high and look suspicious).
After waiting in the music for about an hour, I finally connected to a specialist. However rather than provide the information I was asking, the specialist kept beating around the bush. She referred me to the activity section but there was no information there. Then she educated me that they could not provide me the information because they are not day-trading firm. Then they could not provide me the information because they focus on the long term, blah, blah….
At the end, I told her that it is federal law and sec rules that Betterment as agent to execute the orders for me, has obligation to be transparent and to disclose the transaction details to me. If she does not have the access to the information, I urged her to open a case for the back office to look into the matter and get back me at later time. But she simply hung up the phone on me.
Based on the above interaction, it seems Betterment has hided something about the transactions that leads me to believe that I have been duped by Betterment and the transactions in my account have been manipulated illegally by the greedy Betterment.
I’ve about had it. Betterment seems good, and in fact several of my friends in professional finance like them, but the truth is, in four and a half years, my returns with annualized returns have been 0.1% – yes, you read that right, one-tenth of one percent. That’s with a portfolio that is always between 70%-80% stocks vs bonds.
Part of it was my mistake. In March 2020 I panicked and put my money in their safe ~3% APY portfolio. I didn’t move it back until Feb 2021. So I catch about a 10% loss and miss out on a lot of gain. But, still, that’s only 11 months out of over four and a half years. It sure feels like even with that one big mistake, I should have done better than 0.1% annualized during almost 5 years of the biggest bill market in history.