Betterment was at the forefront of the move toward automated investing. This brokerage’s innovation in the “robo-advising” niche has given it an “early-mover” advantage in the fintech (financial tech) space.
We are going to review Betterment closely to see if it’s the right robo-advisor for your needs. In general, it’s a particularly great service if you are new to investing and have limited funds to invest.
What Is Betterment?
Betterment was developed with one primary goal in mind—to democratize investing. They do this by making it as simple to start investing as it is to open a regular bank account.
Betterment’s strategy, based on “Modern Portfolio Theory,” involves exclusively investing in ETFs or exchange-traded funds. If you’re unfamiliar, an ETF involves a basket of individual stocks or bonds. This provides immediate diversification, as each ETF necessarily includes more stocks than buying one individual stock.
The Betterment approach is:
- The company invests in a variety of ETFs so that your account is diversified in terms of company size, country, and sector. This will naturally limit your potential upside but will provide important diversification, which greatly reduces your overall risk.
- Betterment is also an independent company, which means, unlike Schwab or Fidelity, who offer robo-investing services, Betterment does not own any of the funds that it is recommending. This makes naturally for less (or even zero) conflict of interest.
- You can also have confidence in Betterment because it’s classified as a fiduciary, which, in short, means that it must legally operate in the best interest of its customers.
Here are some features and areas where Betterment thrives:
- Inexpensive management fees – A simple 0.25% fee paid annually is all it takes to use Betterment. You can choose to upgrade to a 0.40% annual fee to gain access to their service that includes more direct advising.
- Perfect for young and/or beginning investors – Betterment’s robo-advising makes investing easier than ever for the average person.
- Learn diversification – Betterment will naturally educate you as you use its service, and its focus on diversification is key for any investor to learn.
- Tax-efficient investing – You can take advantage of tax-deferred accounts, which enables you to potentially limit the taxes you pay on your investments.
- Retirement planning – They have a retirement planning calculator called RetireGuide that helps you on your path to retirement.
- Flexible portfolios – If you have more than $100,000 you can invest, Betterment offers “Flexible Portfolios,” which permit you greater customization of your asset allocation.
- Custom advice – Depending on your needs, Betterment offers specific advice packages that will help you with your investing questions, whether you’re just starting out or looking ahead to retirement.
- Meet your goals – Betterment will help you keep a laser-sharp focus on your investing goals, which is hugely important for your long-term success.
Here are some areas where Betterment could improve or why it might not be a great fit for you:
- Limited assets – Betterment doesn’t invest in REITs or commodities, even though research indicates that these assets are effective at decreasing volatility through diversification, and REITs are particularly attractive to some investors due to their higher dividend payouts.
- Doesn’t integrate with external accounts – A huge limitation of Betterment is the inability to allow your asset allocation plan to incorporate your 401(k) or other external accounts. Unfortunately, this applies to many robo-advisors.
- DIYers may want to look elsewhere – If you are comfortable with asset allocation and investing on your own, you don’t need Betterment’s services. Plus, depending on your investment strategies and net worth, you might require guidance when it comes to taxes, which Betterment doesn’t provide.
- $2 million requirement for discounted advising – Only accounts with more than $2 million are eligible for a discount (of 0.10%), meaning 0.15% and 0.30% respectively for the regular and premium plans.
Primary Features and Benefits
Let’s take a deeper look at some of Betterment’s key features and benefits.
Inexpensive management fees
Thanks to their automated approach, Betterment can offer much lower fees than you would pay for a conventional money manager. And even within the robo-investing niche, Betterment is among the best at only 0.25% for a basic account.
Should you want access to Betterment’s financial advisors by phone, you can pay the 0.4% rate.
Rebalancing made easy
It takes considerable time and energy to do regular check-ups on your portfolio to ensure that you’re staying on track. With Betterment, you’ll get automatic rebalancing whenever your portfolio no longer has an asset allocation that meets your target risk profile.
You don’t need any kind of minimum balance to get Betterment’s automated tax-efficient investing. They will automatically help you benefit from “tax-loss harvesting” by selling certain funds at a loss and reinvesting them in a related fund so that you can capitalize from the savings that accompany capital gains losses.
With Betterment, it’s easy to have all your finances in one place. They provide a high-yield account for your cash (0.40% APY), as well as a checking account with zero fees. These services help you keep your financial life simplified, which is the primary point of investing with Betterment in the first place.
Another great benefit of Betterment is the ability to purchase fractional shares of a given fund. This means that your entire deposit amount will go directly into investments, rather than having some remainder leftover in cash.
No required minimum balance
Some of Betterment’s competitors require a minimum total balance. Betterment, on the other hand, does not, which helps it easily rank among the best options for beginning investors. (There is a $10 minimum deposit to get started, but this pales in comparison to many robo advisors, some of which require at least $500.)
Slick mobile app
If you go to Google Play (Android) or the Apple App Store and search for Betterment, you’ll see that their app is immensely popular, currently sporting a rating of 4.6 and 4.8 out of 5 stars, respectively. Customers love how user-friendly and visually appealing the app is.
Betterment pricing and fees
Betterment’s service is affordable, but it’s still important to understand its pricing and fee structure. To break it down simply, if you had $10,000 in your account, their 0.25% and 0.40% basic and premium fees would amount to $25 or $40, respectively.
Also bear in mind that you’ll be on the hook for the expense ratios for each given fund that you’re invested in through Betterment. Fortunately, most of the ETFs that Betterment selects are very low cost.
Betterment customer support
With a basic Betterment account, you won’t have access to a human financial advisor. You need $100,000 in your account and a willingness to pay the higher 0.40% annual fee to get unlimited access to one of Betterment’s flesh-and-blood advisors.
Betterment isn’t for everyone, but it’s a great option for many people.
If you are new to investing and don’t know where to start, have a modest sum to invest, appreciate having cash and checking account options, and aren’t concerned about having a human advisor (or don’t mind paying a bit more for it), then Betterment should be at the top of your list of robo advisors to consider.
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