I love investing. The simpler it is, the better. This is why I’ve always been a fan of automating my investments. In the past, I opened up a mutual fund and had them take money out of my checking account each month. They invested the money for me. I did nothing else but sit back and watch my investment grow over time.
As great as this was, it wasn’t perfect. I still had to do my homework. What funds would I invest in to create a diversified portfolio? How long was it going to take to set up automatic transfers for each investment? While automatic investing was easy, it could be better.
Thanks to technology, investing today is even easier. This is because you can do the same thing I did in the past, but have a diversified portfolio right from the start and have only one transfer. This is all thanks to Betterment.
Who wants to spend their weekends analyzing stocks, trying to find the next home run when you could be playing with your kids or enjoying your favorite hobby? The sad thing is, many investors make investing harder for themselves and they never reap the rewards of that hard work. What if I told you that you could reap the rewards without putting in the hard work? You’d probably wonder what I was smoking!
Well, I’m not smoking anything. With Betterment, you can invest your money in the stock market without putting in all of the time researching investments. Remember, when it comes to investing, risk and reward are related. Time spent researching investments and returns are not.
With Betterment, you set your goal and let them do all the work while you enjoy your free time. Let’s learn more about what makes Betterment so great.
My Betterment Review
What Is Betterment?
Betterment is the most trusted online investment manager and has been around since 2010. They are an SEC-registered investment advisor and their broker-dealer is a member of SIPC and FINRA. Their investment approach is simple: they manage your investments so you don’t have to. And they mean it. They manage everything for you. I’ll talk more about this later.
They do this so that you reach your goals by focusing on the long-term which is what successful investors do. And ignoring the short-term volatility which is what most investors focus on. With Betterment, you are always diversified, balancing risk and reward. And investors are starting to realize this. In 2013 Betterment tripled its assets under management (AUM) and in 2016 they have surpassed $6 billion AUM.
Here is a really cool inside look at Betterment from Bloomberg:
- Betterment and Fidelity joined forces to connect registered investment advisors (RIAs) with the services Betterment provides.
- Betterment is partnering with Vanguard and Goldman Sachs to diversify their offerings to users
- Uber has partnered with Betterment to offer retirement planning services for their drivers.
- Sophia Bera, a CFP and founder of Gen Y Planning, uses Betterment to help her with re-balancing and tax loss harvesting for her clients.
How Betterment Works
To start investing with Betterment, you simply choose your investing goal, risk tolerance and timeline. Betterment makes all of this easy. You can choose pre-selected goals like saving for a house, college, or retirement, or you can just invest without picking a specific goal.
Based on what you select, Betterment offers you a pre-selected asset allocation. This saves you time because most investors have no idea what their asset allocation should be. By having the experts at Betterment pick your asset allocation, you can sleep at night knowing your money is being put to work based on your goals.
From there, you set up an automatic transfer from your bank account to Betterment and Betterment will invest your money and periodically rebalance your portfolio for you.
Betterment invests your money in one of their index portfolios consisting of ETF’s (see below). Depending on your risk tolerance and your goals, your portfolio will be created with a mix of the stock basket and the bond basket.
- Vanguard U.S. Total Stock Market Index ETF (VTI)
- Vanguard US Large-Cap Value Index ETF (VTV)
- Vanguard US Mid-Cap Value Index ETF (VOE)
- Vanguard US Small-Cap Value Index ETF (VBR)
- Vanguard FTSE Developed Market Index ETF (VEA)
- Vanguard FTSE Emerging Index ETF (VWO)
- Shares Short-Term Treasury Bond Index ETF (SHV)
- Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- Vanguard US Total Bond Market Index ETF (BND) (IRA accounts)
- iShares National AMT-Free Muni Bond Index ETF (MUB) (Taxable accounts)
- iShares Corporate Bond Index ETF (LQD)
- Vanguard Total International Bond Index ETF (BNDX)
- Vanguard Emerging Markets Government Bond Index ETF (VWOB)
These investments are the same investments that anyone could pick from, regardless if they invest with Betterment or not. Betterment does not make money by putting your money into these investments.
Costs and Fees
The fees that Betterment charges are based on what level of service you are looking for:
- Betterment Digital: the classic version of Betterment where you let automation work 100% for you. The fee is 0.25% on balances up to $2 million. Balances above $2 million are not charged a fee.
- Betterment Plus: this version of service is the automated offering but also includes an annual planning call with a Certified Financial Planner. In order to use this service, you need a minimum of $100,000. The fee for this level of service is 0.40%
- Betterment Premium: this is a step up from the Plus version. Not only is it the automated investing service but you get a dedicated Certified Financial Planner who you can talk with throughout the year. You do need a minimum of $250,000 to use this service and the fee is 0.50%
Betterment takes a fee to manage your money and this fee decreases as your account size increases.
For example, on an account balance of $5,000 and using the digital plan, Betterment’s fee comes to $12.50 a year. There are no other fees that they charge.
Understand that you still pay the management fees of the underlying ETF’s that you invest in. This holds true if you invest in ETFs with any broker. In other words, the ETF fee is one you cannot avoid no matter who you choose to invest with.
Now, we all know that I’m not a fan of fees. But in the case of Betterment, the fee isn’t an issue. Here is why. The average investor earns 2% annually on their investments. That’s it. A measly 2%.
On average, Betterment investors earn 1.25% MORE than the average investor, and this takes into account that minuscule management fee they charge you. In addition to this, when you combine the fee Betterment charges and the underlying management fee of the ETF, you are looking at a total fee of between 0.30% – 0.50% for the digital service. This is much less than what most investors pay in management fees to an investment advisor alone!
The reason why Betterment works is simple. The average, non-Betterment investor allows emotion to enter the picture and cloud their judgment. When the market rises they buy and when the market drops, they sell. This is the exact opposite of what should be done.
With Betterment, you are buying regardless if the market is up or down. When it is up, you buy fewer shares with your automatic investment. When the market drops, you buy more shares with your automatic investment. You are taking advantage of the stock market when stocks are on sale. You buy more shares at a lower cost and fewer shares at a higher cost.
But that’s not all. With Betterment, you stay invested for the long-term. Your emotions don’t sway you into doing the wrong thing. You will get an email telling you that your automatic deposit was just invested or that you earned dividends and they are being reinvested. In other words, they don’t allow for your emotions to derail your goals because they do everything for you.
Advantages And Disadvantages To Betterment
As with anything in life, there are both advantages and disadvantages to Betterment. Below are what I feel are the best and worst of Betterment.
- No Researching Investments: They have the ETFs they use for investing. All I have to do is pick a goal and set up a monthly transfer and I am done.
- Solid Principles: Betterment is built on the idea of index investing. It’s been proven time and time again that you can’t consistently beat the market. Betterment knows this and doesn’t engage in it. They also understand that fees and taxes are what really determine performance.
- Fees: They have to charge a fee for what they offer you, but that fee is more than reasonable.
- Automatic Rebalancing: Over time, depending on how the stock market performs, your asset allocation can get out of whack. Your 60% stock/40% bond portfolio can turn into a 70% stock/30% bond portfolio. This is a bad thing. If you become too heavily weighted in stocks, you will be taking on more risk than you would like and could lose a lot if the market were to drop. On the other hand, if your bond holdings become too great, you risk not earning the return you need, thus never reaching your goals. With Betterment, they will keep your portfolio allocation stay where it needs to be.
- Tax Benefits: Tied to the automatic rebalancing above, Betterment makes sure they rebalance in the most tax efficient way possible. This means come tax time, the chance of you owing a large amount of taxes is small. This is done through first selling share lots that show a loss instead of those with a gain. From there, Betterment will sell holdings with a long term gain before a short term gain, since the tax impact of long term gains is much lower. This is great because the only advisors that do this for their clients are those that deal with investors with millions of dollars. You get the same benefit while having less money!
- Tax Coordinated Portfolio: This feature allows you to use a tax efficient asset allocation across all of your portfolios, both taxable and non-taxable. By allocating your investments in this manner, you save on taxes and can boost your returns. In fact, Betterment states this strategy can boost after-tax returns by an average of 0.48% each year. When you take this out 30 years, it comes to approximately an extra 15% return. You can read more about this feature here.
- Tax Impact Preview: This feature lets you see the potential tax impact of selling shares or even changing your allocation. No more tax surprises! You’ll know before you make any trade what the tax impact will me.
- Free Advice: Betterment has a terrific blog and they offer basic investing advice to their investors free of charge.
- Fractional Investing: With many brokers, you can only invest in ETFs in whole shares. This means that if you have $100 to invest and the share price is $75, you can buy 1 share. Your remaining $25 will sit in cash, earning you virtually nothing. With Betterment, you can invest in fractional shares, meaning that all of your money is working for you, all of the time.
- Website Layout: I haven’t really talked about the website, but it is great. You know when you go to some websites and you have to look around for 5-10 minutes trying to figure out where things are or how to do things? Betterment isn’t like that at all. Its layout is clean and easy to navigate. In fact, I would argue it’s probably one of the easiest sites to navigate.
- Always Adapting: Even though Betterment doesn’t believe in active investing, they are always making enhancements and improvements to the site, service and portfolios. These enhancements result in better efficiency for Betterment and the user. It even means better portfolios too. How do I know this? I’ve updated this post at least 3 times since I originally wrote it because of the new amazing features. While I can’t say they will be offering new features this frequently going forward, I am certain that they will continue to introduce new features in the future.
- Great For Beginners: I know that for many newcomers to investing, investing can be overwhelming. With most advisors wanting nothing to do with beginners because they don’t have the assets, you are left on your own. With Betterment’s simple approach, a beginner will feel at ease from the start and that will translate into long-term investing success. In fact, many of the things I’ve just listed in this section might be too complicated for you to really grasp. That is OK. Just know that all of the features Betterment offers are of great benefit and tremendous value to you.
- Tools: The site has a lot of tools that you can play around with to help you see where you will be in the future and what you can do to help make your goal more of a reality. This includes playing with the amount you save each month, adding a one-time deposit like a tax refund, changing your time horizon or your investment allocation.
- Investment Options: There are only a few ETFs upon which your portfolio is built upon. For some, the lack of investment options is a turn-off, which is why I list it as a negative. But in reality, this is secretly an advantage of the service. See, you don’t need 20,000 investments to build a diversified portfolio. In fact, I would bet that if you looked at all of the holdings in your portfolio right now, you would see a lot of overlap. What I mean by this is that if you own 2 large cap mutual funds or ETFs, chances are you are holding the same companies, just a different percentage of them in each investment. Don’t fall for the “more is better” trick with investing.
- Cost of Service: Betterment costs money to use. You can easily learn the basics of investing (I preach them throughout my blog) and do it all yourself. But the fee they charge is small in comparison to what most advisors charge. And if this is what will finally get you to start investing, the small fee is more than worth it.
Betterment Versus The Competition
Below is a chart that compares Betterment to a traditional financial advisor, mutual funds providers and exchange traded funds providers.
You can read more about this chart on the Betterment Blog.
In addition the above comparison, you can see here how Betterment’s portfolios have performed over the long-term. This shows you they know what they are doing.
Now that you see the basics of how Betterment works and is a better investing option that other options, you might want to know how to get started. You can open up your account by clicking here.
If you are still on the fence or want to see what else Betterment offers (hint: it’s A LOT) keep reading.
As time passes, Betterment is always adding to the service they provide (while keeping their fees the same). Here are a couple of new features they have added that are worth talking about.
With account aggregation, you can link all of your investment accounts to Betterment. No, you aren’t using Betterment to manage all of these accounts. You are simply having these accounts show up in one place. This will allow you to have greater insight into your overall asset allocation, fees and where you can make some changes.
The only catch here is that this service is only available to Betterment customers. If you like this idea of account aggregation but don’t want to invest with Betterment, look into Personal Capital. They offer an amazing platform to see all of your accounts in one place.
This service from Betterment allows you to see how much money you can withdraw each month from your investments and not run out of money. How cool is this? You can sync all of your accounts (not just accounts you have with Betterment, but others like your 401K plan) to get a more accurate number. They currently support over 13,000 external accounts.
Betterment even allows you to input your Social Security benefits to gain an even more accurate number.
The modeling they do with this allows for a 1% failure rate. What this means to you is that you can be confident the number they give you will be a number you can safely withdraw each month. You can read more details about this service here.
This a newer feature Betterment now offers. When you choose to use this feature, you invest extra money you have. All you have to do is log into your Betterment account and set up a dollar amount threshold for your checking account and the amount you want to invest. Any time your checking account balance is over this amount, Betterment will take the money and invest it for you.
For example, let’s say you set your checking account threshold at $5,000 and investment amount of $250. If you get a bonus from work and have $7,500 in your checking account, Betterment will see this and transfer the $250 you set as your investment amount. Again, automation at its best.
When doing anything online, you have to take into account security. This is especially true with investing your money. How does Betterment protect your personal information?
They take every precaution to protect your information. This includes the following:
- Fraud Protection: Betterment will work to recover any loss that results from unauthorized use of your Betterment account
- SIPC Coverage: Securities in your account are protected up to $500,000 in the event of fraud or mismanagement
- Qualified Custodian: Betterment is subject to regulatory oversight which means they have to meet higher standards than most brokers.
- 256-bit SSL Encryption: Top level data security for all your accounts
- Personal Privacy: Your personal info is never shared without consent
- Hacker Checks: Betterment runs both internal and external security audits to makes sure things are working properly. In other words, they try to hack into their own system to find any bugs or weak areas that need attention.
- Two Factor Authentication: Instead of just entering in a password, Betterment now offers a second layer of security by having you enter a unique verification code that they will text you. No more worrying about someone gaining access to your account.
Why I Recommend Betterment
To me, it all comes down to what I am getting for my money. I’ve learned that you can’t just look at what something costs you.You have to look at the benefit it provides. For example, you might need surgery on your eye to ensure you won’t go blind. The surgery costs $10,000. Do you just look at the price and scoff, thinking it’s a waste of money? No, you look at the benefit – keeping your vision – and determine if you should pay.
The same idea holds true with Betterment. They charge a fee to invest. OK, that stinks. I’ll be the first to admit it. But, what do you get in the long run? You get an increased chance of having money for a secure retirement or any other goal you choose. On top of that, look at what else you get:
- Free Trades
- Free Reinvesting of Dividends
- Free Rebalancing
- Free Tax Loss Harvesting
- Free RetireGuide
These typically cost money with other brokers. But this isn’t the only benefit with Betterment. It’s the fact that everything is automated for you and that you can be investing in 10 minutes and never have to lift a finger again. You never have to think about making it a point to invest for your future. You set up the transfer once and you forget about it.
Automating like this works. If you automate saving money from each paycheck already, you know what I am talking about. But if you don’t, you still experience automation. Do you have any service that automatically renews? That is automation right there. I bet you never think about that. Have your credit card on file with iTunes? That is automation right there. All you have to do is tap the icon and boom, you have a song.
This is why even though Betterment charges a fee, the fee is more than worth it in the long-run. You will stay invested and will be less likely to react based on emotions. Again, this is what defeats the overwhelming majority of investors out there. They allow their emotions to interfere.
If you want to reach your financial goals, I urge you to take a look at Betterment. Betterment saves you time by automating the entire process and it saves you money in the long-run by keeping you invested and your investments optimized. Give it a try and relish in the fact that you are making one of the smartest financial moves of your life.
I highly encourage you to take the next 10 minutes and open your account at Betterment. You can open your account with as little as $25 and then set up a recurring transfer each month after that. You’ve got nothing to lose and everything to gain. By spending 10 minutes and setting up your account, you are taking the first step towards living the financial life you want.
You can’t do anything or have anything in life without taking that first step. I know you will love Betterment and how the service helps you reach your goals.
[Photo Credit: FirmBee]