Betterment has become one of the foremost robo-advisors since opening for business in 2008. While Betterment is not a true discount brokerage, the price points (fees and commissions) at Betterment make them worthy of consideration by investors looking for a new investment broker. If you’re interested in a new online broker or need help managing your investment needs, this Betterment review should help you determine if they’re the best brokerage for you.
As was addressed in the Motif Investing review, there are many discount brokerages to choose from. Each one has its own way of doing things that differentiates them from their competition. Betterment is at the forefront of a growing trend in the brokerage space towards the robo-advisor model.
Betterment History and Background
Betterment is a robo-advisor that automates and simplifies investing for the masses. Since opening in 2008, Betterment has begun to change the way investing is done by offering virtual financial advising access to non-mass affluent investors, who previously would not have had access to such services. They have seen success with their approach, now managing over $1 billion in investor assets.
Betterment is not a traditional online broker, rather they are a robo-advisor; you do not trade individual stocks, mutual funds, etc. with them. Rather, you invest in a bucket of Exchange Traded Funds (ETFs) that are formulated around things like your risk tolerance, age, goals, timeline and so forth.
This is all geared with the goal of maximizing your return through managed risk. The team making the investment decisions at Betterment is comprised of CFA charterholders, CFPs and numerous other PhDs in Finance. You can take advantage of all this through the standard brokerage accounts, IRAs, and Trusts Betterment offers.
How Does Betterment Work?
As with most other robo-advisors, the process at Betterment is relatively simple. The platform walks you through a battery of 10-12 questions that can be completed in less than ten minutes. The purpose of this is to gauge your appetite for risk, timeline and goals.
Once you’ve completed the questionnaire, the Betterment site returns a suggested portfolio of ETFs they recommend for you. The beauty of this approach is that the team at Betterment takes in mind the importance and need to have a properly allocated portfolio that is geared towards simplifying investing to allow you to reach your goal while following a Modern Portfolio Theory approach.
With that in mind, following are the ETFs currently used by Betterment:
- VTI – Vanguard U.S. Total Stock Market Index ETF
- VTV – Vanguard U.S. Large-Cap Value Index ETF
- VOE – Vanguard U.S. Mid-Cap Value Index ETF
- VBR – Vanguard U.S. Small-Cap Value Index ETF
- VEA – Vanguard FTSE Developed Market Index ETF
- VWO – Vanguard FTSE Emerging Index ETF
- SHV – iShares Short-Term Treasury Index ETF
- VTIP – Vanguard Short-Term Inflation-Protected Treasury Bond Index ETF
- BND – Vanguard U.S. Total Bond Market Index ETF
- MUB – iShares National AMT-Free Muni Bond Index ETF
- LQD – iShares Corporate Bond Index ETF
- BNDX – Vanguard Total International Bond Index ETF
- VWOB – Vanguard Emerging Markets Government Bond Index ETF
This may seem like a small grouping of ETFs to choose from, but the right mix of funds will provide all the diversification you’ll need. It is important to point out with regards to Betterment vs. Wealthfront (their main competitor) that the only difference between the two in terms of fund selections is Wealthfront offers access to a real estate and natural resources ETFs. Outside of that, the selections are exactly the same.
It is also important to point out that Betterment does not require a minimum balance to open an account whereas Wealthfront requires a minimum opening balance of $500.
Fees are really what sets discount brokerages apart from others and that’s the case when it comes to Betterment. Robo-advisors, in general, because of their structure are going to be relatively low-cost. You do not trade stocks with Betterment, so there are no trading fees; you are only charged quarterly fees based on the amount you have invested.
Quarterly fees might sound bad, but they’re actually quite reasonable in price especially when you compare them against pricing at other discount brokerages. This is especially the case when you consider that you’re receiving access to a virtual financial advisor.
Betterment has three fee plans – ‘Builder’, ‘Better’, and ‘Best.’ If you’re unable to open an account with at least $10,000 or can’t invest $100 per month then you will pay $3 per month instead.
The other thing to consider when it comes to fees at Betterment is that the ETFs they’ve selected are incredibly low-cost in nature. In all likelihood, the bucket suggested for most will have average total fees of .10 percent and if you are in the higher fee tier you’ll be paying .35 percent. A total of .45 percent is an incredible value for professional investment advice and ongoing management.
If you are investing $100,000 per year with Betterment you’ll only be paying $150 per year in management fees – that’s incredibly hard to beat. When looking at Wealthfront vs. Betterment, you would be paying $212.50 per year at Wealthfront.
It is also important to point out that Betterment does not charge any hidden or maintenance fees.
Betterment and Your Taxes
Taxes might seem like an odd thing to consider when it comes to choosing an online broker, but it can be incredibly important. Betterment is on top of its game when it comes to taxes thanks to their introduction of Tax Loss Harvesting (TLH) in 2014.
In simplistic terms, TLH allows you to offset gains you’ve realized to help lower any potential tax hit. This is done through selling a position that has incurred a loss and replacing it a similar holding. By going through this process you not only get the ability to lower your overall tax bill but you also get to improve gains. While it is possible to manually do TLH in your own portfolio, it can be incredibly tedious.
As you can see in the graph below, you can experience as much as a two percent return through TLH with Betterment. That seems like little to concern yourself with, but over time, can add up to a significant amount.
Betterment offers TLH for free in non-taxable accounts, with no minimum account balance requirement. Comparing Betterment vs. Wealthfront, Wealthfront offers a similar TLH service, though you must have at least $100,000 to take advantage.
However, Wealthfront does offer a more advanced version for accounts of at least $500,000 where you receive a tax-optimized US Index Portfolio TLH that can improve gains even more. Thus, both have strong points to consider. Lastly, Betterment offers tax efficient ETFs (those that don’t have a lot of turnover) so that only enhances the tax benefits of investing with Betterment.
Advantages of Betterment
As has been pointed out, Betterment has grown in popularity since their launch in 2008. Following are some of the pros to consider when looking at opening a Betterment account:
- No minimum balance. This is an often overlooked, but key feature to consider. Betterment lowers the barrier to entry so anyone can open an account with them. This is a huge win for those wanting access to professional guidance but don’t have the requisite funds to get it.
- Wise rebalancing. You never know how a portfolio will react to the stock market and thus you need to rebalance it to bring it back in line with the allocation that’s right for your needs. Betterment keeps this in mind by not triggering a short-term gain. As they actively reinvest dividends this decreases the need to rebalance constantly.
- Price. Looking at the fees graph above, it’s easy to see that Betterment is relatively cheap based off the value you receive. That is not terribly common in the discount brokerage space.
- Tax Loss Harvesting. This was covered above, but the TLH offered by Betterment helps maximize returns and lower taxable responsibility.
- Retirement income. If you’re approaching or in retirement then you know the need to decumulate during that time. Betterment offers a retirement income feature that allows you to create a system of sustainable cash flow to help you wade through retirement wisely.
- Personalized service. This is the real beauty of Betterment, or most robo-advisors for that matter. Betterment is set up to help you reach your goals. Your emotions are removed and they do the heavy lifting of investing for you. This is great for beginners and seasoned investors who just don’t have time to manage their portfolios.
Drawbacks To Betterment
Nothing in life is perfect, so that’s obviously the case with Betterment. Here are some of the drawbacks to Betterment:
- No customization. Yes, your portfolio is customized based off your given situation, however you only can work with the selected ETFs they offer. This will be the case at any robo-advisor and is not unique to Betterment.
- Not for the DIY investor. If you like to mange your own portfolio then a robo-advisor like Betterment is not for you. This isn’t necessarily a bad thing, but important to know.
- No pure cash option. Just as with other robo-advisors, there is no pure cash option with Betterment. They keep enough funds in your account to fund your quarterly fees but little beyond that. This is to ensure you’re fully invested, though can pose a problem if you have a short-term need for funds.
- They only know what you have with them. Again, as with other robo-advisors, Betterment does not act with knowledge of what you have invested with other brokers. As such, you will need to keep that in mind with your other investments. The easy work around to this is to sign up for a free Personal Capital account so you can watch all of your investments in one place.
Betterment Review – Final Analysis
There are many things to consider when choosing an online broker to manage your investment needs. This is made more difficult when the number of options is taken into consideration. Betterment has done a great job to differentiate themselves and is one of the forerunners in the robo-advisor space.
What helps set Betterment apart is they have lowered the barrier of entry for those wanting and needing access to professional investment advice but, until now, didn’t have the necessary funds to be able to secure it. Beyond that, Betterment is a great option to consider for those who are new to investing and those who simply lack the time to manage their investments but want to avail themselves of the tools Betterment offers.
If you are a DIY investor, or someone who wants to control what they’re investing then you may want to consider other discount brokerage options as there are many other good options to choose from. However, if you’re looking for someone to do the heavy lifting of investing for you in order to reach your goals then the simple, low-cost and straightforward approach provided by Betterment is worthy of consideration.
As with many other brokerages, Betterment offers a promotion for those who open a new account. Based on the amount you fund your account with, you can receive up to six months of free of commissions. This can be a great way to try Betterment out without spending anything to determine if you like them or not.
Betterment is one of the top robo-advisors in the industry, and a great option for new and seasoned investors alike.