I talk all of the time about making investing easier, not harder for yourself. 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 do 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 earn the returns you want without putting in all of that time researching investments. Remember, when it comes to investing, risk and rewards are related, time invested researching investments and returns are not.
(Be sure to also check out my other reviews of online brokers, including:
Also, you can get detailed information about all of these in my online broker comparison chart.)
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 (what successful investors do) and ignore the short-term volatility (what most investors focus on). With Betterment, you are always diversified, balancing risk and reward. And investors are starting to realize this. In 2013 they tripled its assets under management (AUM).
Here is a really cool inside look at Betterment from Bloomberg:
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. For most, this allocation will work fine. But, you have the power to tweak the allocation. Do you want 90% stocks and 10% bonds or more of a mix of both? You aren’t left to slaughter here either. They will guide you along the way, letting you know if you are on track to meet your goal or not.
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.
To learn more about these investments, you can click on the links below:
- 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 in a tiered system, as seen below:
$0 – $10,000: Management Fee of 0.35%
$10,001 – $100,000: Management Fee of 0.25%
$100,001 or more – Management Fee of 0.15%
When you are first starting out, Betterment takes a fee of 0.35% to manage your money and that decreases as your account size increases. There are no other fees that they charge. (Note that if you forgo the $100 monthly deposit and have less than $10,000 invested, you will be charged $3 monthly. While this sounds harsh, the goal is to get you to save and invest for your future. By simply saving $100 each month, you are more likely to reach your long-term goals. Also, note that right now, you can invest without paying a management fee!)
Understand that you still pay the management fees of the underlying ETF’s that you invest in. This hold true if you invest in ETFs with any broker. In other words, the ETF fee is one you cannot avoid.
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 miniscule 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%. This is much less than what most investors pay in management fees 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 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. For me, I honestly forget that I have a Betterment account sometimes because they do everything for me (more on this below). I get an email telling me that my automatic deposit was just invested or that I earned dividends and they are being reinvested. In other words, they don’t allow for my emotions to derail my goals by doing everything for me.
Pro’s And Con’s To Betterment
As with anything in life, there are both pro’s and con’s. Below are what I feel are the pro’s and con’s to 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. Plus, you can combine accounts to get the lower fee. In other words, if you have an IRA account and general investing account, the balances of both are added up and that total amount determines the fee you pay.
- 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% bonds 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. On the other side, 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 right 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 will millions of dollars. You get the same benefit when having less money!
- Tax Impact Preview: This new 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 both Betterment and the user as well as stronger portfolios.
- Great For Beginners: I know that for many newcomers to investing, investing can be overwhelming. With its simple approach, a beginner will feel at ease from the start and that will translate into long-term investing success.
- Always Improving: The people at Betterment are just sitting back doing nothing. They are constantly working to make things better. How do I know this? I’ve updated this post at least 3 times since I wrote it because of some new amazing features. While I can’t say they will be offering new features this frequently in the future, I am certain that they will continue to introduce new features in the future.
- 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 many, this lack of investment options is a turn-off, which is why I list it as a con. But in reality, this is secretly a pro 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 virtually the same companies, just a different percentage of them in each investment. You don’t need 20,000 investments to be diversified. As I have shown in my model portfolio post, you can get by on just 3 holdings. 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.
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.
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 – not going blind – and decide to 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, look at what 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 that only benefit with Betterment. It’s the fact that everything is automated for you. You never have to think about making it a point to invest for the 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 screen 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. In fact, it won’t even cost you anything to try. If you open an account with less than $5,000 they will give you 1 month free – no management fee. If you open your account with more, you will go longer without paying a management fee.
$1 – $4,999: Receive 1 month free
$5,000 – $24,999: Receive 3 months free
$25,000 – $99,999: Receive 4 months free
$100,000 and above: Receive 6 months free
Therefore, there is no reason not to try it out. 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 for free for 30 days 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 click here (or the picture below) to 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.
Full Disclosure: I am not getting paid for this review. I have had a Betterment account for over a year and absolutely love it. If you do click on the link or the picture below and open an account, I will earn a referral fee. (Thank you in advance to those that go this route.) This post was originally published in 2013 but was updated to reflect updated features of Betterment.