Betterment Details

Betterment logo

Betterment is a financial advisor that uses software to automate value-added tasks that most brokers charge big fees to do. Betterment is just like many of the biggest banks that pedal long-term wealth management and retirement solutions, except that Betterment does this with drastically lower costs and better execution.

What Is Betterment?

Betterment is an online brokerage just like many others, but it takes the view that fees eat into long-term investing account returns. So Betterment lowers fees by using ETFs (exchange-traded funds) that diversify like mutual funds, but are tradable like stocks. ETFs carry very low expense ratios. Betterment also uses software to create a low-cost, diversified plan for you, and then constantly manages your account through:

  • Portfolio rebalancing
  • Tax loss harvesting
  • Goal setting
  • Automated deposits

Betterment allocates your investment portfolio based on your needs, goals, and market conditions.

Types of Accounts Supported

  • IRAs
  • Roth IRAs
  • Trusts
  • Taxable

Features

  • Automated portfolio rebalancing
  • Tax loss harvesting
  • Goal setting
  • Choose your risk level
  • Customized portfolio
  • Fractional share investing
  • Automated deposits

Fee Tiers

  • Digital: 0.25% of average balance, with no minimum
  • Premium: 0.40% of average balance, $100,000 minimum

Registration/Regulation

Betterment is an SEC-registered investment advisor. It’s broker-dealer is a member of SIPC and FINRA.

Security

Betterment uses banking industry standards for security, including 256-bit SSL encryption of data.

Betterment’s Main Features

Optimized, Globally Diversified Portfolio

Your money is placed in an optimized, diversified portfolio that utilizes very low-cost, liquid ETFs. This portfolio approach balances risk and reward. The initial allocation is based on your age and retirement timeline, but you are in complete control of your portfolio. So, you are free to manually adjust it based on your individual risk preference.

Automated Portfolio Rebalancing

Over time, the ETFs inside your portfolio will grow and shrink. However, the risk management side of portfolio theory is handled by allocating a set amount to each sector and maintaining that balance. When these allocations get out of whack, your returns can drift away from your goals.

For example, let’s say you want 10% of your portfolio in technology. After a big run in the Nasdaq, you might find that tech stocks now comprise 15% or more of your portfolio. Selling some of the shares that have risen to get your allocations back in balance ensures you’re buying high and buying lower, to keep your risk profile steady.

Betterment uses smart algorithms to automatically buy, sell, and reinvest cash flows to keep your allocations in balance.

I like this feature. Its a HUGE time saver, and in my opinion much better than rebalancing once a year with your broker.

Betterment Goals

You can divide your funds into multiple investment goals, each with its own allocation. Let’s say you want to set aside money for a home down payment, retirement, and a new car. You can split your contributions among those three goals, and set a different risk level for each.

This isn’t really a feature I will use in my retirement account, but it is attractive for many people who want to save for a variety of purposes.

Betterment RetireGuide

As of late 2015, Betterment updated its RetireGuide to include new features that help individuals and families reach their retirement goals. Betterment’s RetireGuide uses information you provide and the balances from your Betterment accounts, as well as assets outside of Betterment, to help you determine how much you need to save for retirement as well as your “investment timeline.” With this feature, you can even digitally sync your non-Betterment retirement accounts for advice that is inclusive of your entire investment portfolio.

If you want a financial advisor that will create a personalized plan based on your account balances, appetite for risk, and goals, Betterment’s RetireGuide might be exactly what you need.

Automated Tax Loss Harvesting

If you’re looking at tax-advantaged accounts like IRAs, then this feature doesn’t really apply, because your account is already tax-advantaged. So when I roll over my 401(k), I won’t use this feature.

However, if you have diligently maxed out your tax-advantaged accounts and have extra investable assets to put into a normal investing account, Betterment’s software makes sure you capitalize on any losses that you can use to offset your taxable income. This is done on a regular basis, as opposed to once a year as your human financial advisor might do.

Smart Dividend Reinvestment and Fractional Shares

When you receive dividends, those proceeds are first distributed to make sure your portfolio allocation is in line. So if you receive a dividend from a bond fund, instead of adding it to that bond fund, the software looks for an area where you might be low, say a stock fund, and automatically invests the money there.

This happens with every penny you own, since Betterment has the ability to invest in 1/1,000,000th of a share! You never have money sitting on the sidelines. This has been a real issue for me in my current 401k account. I constantly see cash in my account that I would otherwise like to have invested. I don’t have the time to constantly monitor this, so smart reinvestment is a great feature.

Additional Features

  • Five-minute account setup
  • No minimums for withdrawals or deposits
  • No account minimum
  • Automatic deposits

Who Is Betterment Good For?

Betterment is a great option for two segments of investors, in my opinion. I tend to fall into the first category.

  1. Long-term passive investors with some financial knowledge. I call this group the “Planners and Forgetters.” These types of investors understand how to be patient with their money. They understand the concepts behind portfolio diversification and how fees impact long-term returns.
  2. Financial novices looking for an easy investing approach, the best bang for their buck, and time savings. This group may be intimidated by starting an investment program, and may not want to invest all their time to figure it out. This group may be young millennials skeptical of high-priced financial advice, or busy older professionals who need to get started on their retirement savings.

Who Is Betterment Not Good For?

If you want/need a lot of handholding, you may want to go with a human financial advisor, and pay a bit more. People who fall into this category may have limited knowledge of financial markets and want to learn about the process in more depth. Of course, not all financial advisors like handholding their clients!

Another group that might not like Betterment are people who think they can beat the market, or want to trade individual stocks. I do some short-term trading myself through a designated trading account at another online broker, but this is mostly event-driven and for fun. In my experience, it is hugely disadvantageous to “trade” your long-term retirement funds.

Betterment Fees

Betterment fees are low overall compared to traditional managed portfolios. As I outlined, a typical managed portfolio at a mainstream broker can run you 1.5% per year!

Betterment offers two different pricing plans depending on your needs. Digital plan costs 0.25% with no minimum balance requirement, and the Premium plan costs 0.40% with a $100,000 minimum.

Remember that the Betterment fees stated above are only for their management services. I believe the services they offer are well worth the price, especially compared to regular investment advisors. However, the true cost of this service must include the expense fees for the ETFs themselves. This issue is not unique to Betterment. Any ETF you buy through any broker charges a fee. The fees are drastically lower than those for mutual funds.