Betterment Review

by Jon Dulin on April 21, 2014 · 14 comments

betterment reviewI 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.

My Betterment Review

What Is Betterment?

Betterment is the most trusted online investment manager and has been around since 2010. 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).

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.

betterment investments

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%

Betterment fees

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).

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.

The reason why this is, 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.

Pro’s

  • 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% 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.
  • 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.
  • 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.

bettermnet potential

Con’s

  • 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.

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

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.

Betterment

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.



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{ 14 comments… read them below or add one }

Simon @ Modest Money December 30, 2013 at 12:17 am

Betterment has removed the hassle from investing and given even the newbie investor a platform on which they can invest in a clear, consistent and well researched manner; in investments that have been demonstrated over time to be the better option for the average investor – index funds.
The beauty of it all, simplicity and affordability!
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Jon January 2, 2014 at 9:56 am

That’s why I love it – it’s really simple to open an account and start investing. You don’t need to have a degree in investing. Just understand some of the basics, set it and forget it!

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Jef Miles April 21, 2014 at 9:15 am

Very comprehensive post there Jon.. This seems to be the way that the financial services sector in the states and probably Australia in 5 – 10 years is going..

Good write up and awesome to see services like these being actively promoted. Those management fees are very low and impressive but I suppose it is what you would expect to see from a provider with reasonably vanilla investment options
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Jon Dulin April 21, 2014 at 1:00 pm

A lot of these types of services are popping up here. I think it is because you have financial advisors, who target higher net worth individuals and you have the discount “no frills” brokerages that target the people with little money at all and just want to buy a stock here and there. These isn’t a service for those in the middle, that want good investments and be on a plan that the “big guys” tend to get. With Betterment, you get a plan and good solid investments, all for a low fee.

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Jef Miles April 22, 2014 at 8:36 am

@Jon Dulin: Yeah, if I had a crystal ball and wasn’t in high school 10 years ago that’s probably the type of business that I would have looked to start :)..

Btw Jon, what is the best way to contact you directly? Probably though the contact tab above?
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Jon Dulin April 23, 2014 at 9:24 am

There is a contact me tab all the way at the top of the page. That would be the easiest.

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Little House April 22, 2014 at 9:51 am

I definitely need to check out Betterment. Mr. LH has dabbled in stocks, but he always gets too emotionally involved. I personally like mutual funds and play it safe. This sounds like a good option for us to still invest in stocks and ETFs, but have someone else manage the account.
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Jon Dulin April 23, 2014 at 9:24 am

When I started my account with Betterment, I invested in 80% stocks. As time went on, I decided to change my allocation to 90% stocks because I was able to handle the volatility in the market. All I had to do was click on a button to make the change and Betterment did the rest for me. It’s great having someone else do all of the work for me.

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MoneyAhoy April 22, 2014 at 2:06 pm

If you are investing less than $2,000 a month, you’ll come out ahead with Betterment because of their low fees. If you have more than this to invest each month and a couple extra minutes, you’ll come out ahead if you manage things yourself. From the looks of it, Betterment is an awesome tool!
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Jon Dulin April 23, 2014 at 9:22 am

You will definitely come out ahead by doing things yourself. Unfortunately for many investors, going alone is what limits them because they give in to their emotions. If you can ignore your emotions and stay invested for the long term, then going alone is a great choice.

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Suburban Finance April 22, 2014 at 6:56 pm

This sounds like a great app, I think I’ll check it out. Nevertheless, I don’t like the lack of investment options. See, we don’t need to have a lot of investments to have a diversified portfolio, but I like to have the freedom to choose which investment to invest in, so it’s a big con for me.
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Jon Dulin April 23, 2014 at 9:20 am

I can see how the lack of options can turn some people off. Of the choices they do offer, the entire spectrum is offered – from small cap to large cap and everything in between. But as you said, some people just want to pick their own investments, which is fine. For those that don’t understand everything or don’t have the time, having a set basket of funds is a great option.

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Grayson @ Debt Roundup May 2, 2014 at 1:12 pm

I have been with Betterment for close to two years. I do like the ease of use and I have my Roth with them. I like what I am doing so far, so I have no need to change.
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Jon Dulin May 3, 2014 at 2:23 pm

Glad you like them Grayson! I haven’t been with them for that long, but in the time I have been with them, I love what I am seeing.

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