When it comes to investing, why don’t you invest? Are you scared to lose money? Maybe you have no clue where to start since everything you read tells you something different? Or maybe you want to start but investing sounds too complicated?
I have good news for you. There is a way to help you start investing without fear and possibly even help you lessen the chances of losing money. Say hello to Betterment.
Back when I started investing in the late 1990s, it wasn’t as easy as it is today. Online brokers weren’t the norm. I had to go through a discount broker. This meant calling him on the phone and telling him what I wanted to invest in and what price I wanted to buy it at.
It also meant I needed to have enough money to buy whole shares since you couldn’t buy fractional shares.
I quickly became frustrated with this process, so I switched over to investing in mutual funds. Doing this allowed me to invest less money at a time since I could buy fractional shares. It also allowed me to automate my investing to a degree.
When I filled out the paperwork to start investing in a mutual fund, I had them automatically take money from my bank account each month to invest for me.
I did nothing else but sit back and watch my investments 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? How much would I invest in each fund every month?
It got confusing very quickly.
Luckily, investing today is much easier 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 people 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 think that sounds too good to be true!
Well, it isn’t. 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, risks and rewards 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.
Betterment Review Summary
- Ease of Use
- Account Fees
- Account Types
- Customer Service
Betterment will build you an portfolio based on your goals and will do all of the work for you. The small fee they charge is worth the benefit you get of making investing hands-off. Give them a try today and see just how easy Betterment makes investing!
My Betterment Review
What Is Betterment?
Betterment is one of the most trusted online investment managers and has been around since 2010. They are an SEC-registered investment advisor and their broker-dealer is a member of SIPC and FINRA. This means you can trust them with managing your money.
Their investment approach is simple. They manage your investments so you don’t have to. And they mean it. They manage everything for you.
They do this so 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 many investors focus on. With Betterment, you are always diversified, balancing risk and reward.
And investors are realizing this. Betterment currently has over $9 billion in assets under management and over 260,000 customers.
Here is a really cool inside look at Betterment from Bloomberg:
Betterment has become so well respected that other businesses are using it.
- 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.
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 based on your goal, you can sleep well at night knowing your money is being put to work.
Once you have your goal and asset allocation set up, your next step is to set up an automatic transfer from your bank account to Betterment. Betterment will invest this money and periodically rebalance your portfolio for you.
Getting back to your asset allocation, Betterment invests your money in one of their index portfolios consisting of ETFs. Depending on the goal you selected, your portfolio will be created with a mix of ETFs in 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)
- iShares 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)
- iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Betterment Sample Portfolios
Betterment portfolios are customized for each investor based on your goals, risk and time horizon. Unfortunately, Betterment does not post the allocations to the sample portfolios they use. However, they do list an interactive chart that shows you the historical performance of the various model portfolios they invest you in.
Below are the historical returns for each model portfolio, their overall return, and their annualized returns.
As you can see, looking at the returns the portfolios perform well. When broken out on an annualized basis, things become even more clear. You can see how many of the stock portfolios have an annualized return in the 6%-8% range. This is right in line with the historical average of the stock market. In fact, during this same period, here is how the S&P 500 performed.
As you can see, the Betterment portfolios are right in line with the market. This should give you confidence that over the long term, if you stay invested, you will see success when investing with Betterment.
Finally, I want to point out one more interesting data point in these charts. Betterment shows you how other investors compared to their model portfolios by using the ARC Private Client Indices. These provide real performance of other investors from participating investment managers. In other words, you can see how other investors performed in similar portfolios compared to Betterment.
Looking at the Betterment sample portfolio returns vs the competition, you can see that Betterment overwhelmingly outperformed the competition in all allocations except the 0% stock/100% bond allocation and the 10% stock/90% bond allocation.
Overall, Betterment portfolios are tested to get you a return on your investment that is is line with the stock market.
Costs and Fees
When investing with Betterment, there is a cost. The fees they charge 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 Premium: Betterment Premium is a step up from the Digital version. Not only do you receive the automated investing service, but you also get a dedicated Certified Financial Planner who you can talk with throughout the year. You do need a minimum of $100,000 to use this service and the fee is 0.40% for balances up to $2 million. Balances above $2 million are not charged a fee.
Here are the two account options above in an easy to read chart:
Since fees matter when it comes to investing, I want to walk you through an example of how much Betterment fees will cost you.
For example, on an account balance of $5,000 and using the digital plan, Betterment’s fees come to $12.50 a year. There are no other fees that they charge.
If you have an account balance of $100,000 then the fee for the Betterment Digital plan comes to $250 a year. With the Betterment Premium plan, the Betterment fee is $400 a year.
Understand that you still pay the management fees of the underlying ETFs that you invest in. This holds true if you invest in ETFs or mutual funds 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 I’m not a fan of investment fees. But in the case of Betterment, the fee is acceptable. Here is why. The average investor earns 2% annually on their investments. That’s all, a measly 2%.
On average, Betterment returns investors 1.25% MORE than the average investor, and this takes into account the management fee they charge you. In addition to this, when you combine the fee Betterment charges and the underlying management fees of the ETFs, 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. In many cases, you are looking at 1.25% or more with a traditional investment advisor.
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.
Here is this concept as a graph.
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.
And that’s not all. With Betterment, you stay invested for the long-term. Your emotions don’t sway you into doing the wrong thing. In other words, they don’t allow 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 I’ll go through what I feel is great about Betterment and some areas where I think they could improve.
- No Researching Investments: All I have to do is pick a goal and set up a monthly transfer and I am done. This saves me time from researching what to invest in. It also keeps me from worrying if I picked the right investments or not.
- 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 fees and taxes are what really determine performance. By managing the entire investment process for you, Betterment returns you more money than other investment options.
- Fees: They have to charge a fee for what they offer you, but the Betterment fee is more than reasonable. In fact, it is a fraction of what you would pay a financial planner for the same level of service.
- 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 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 who have millions of dollars. You get the same benefit while having less money! Below is a great video explaining this concept.
- 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 Betterment 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 be.
- Free Advice: Betterment has a terrific blog and they offer basic investing advice to their investors free of charge.
- Fractional Investing: With some 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 only buy 1 share. Your remaining $25 will sit in cash, earning you virtually nothing. With Betterment, you can invest in fractional shares, meaning all of your money is working for you, all of the time.
- User Friendly Website: 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. The 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 their 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 they will continue to introduce new features in the future.
- Great For New Investors: I know that for many newcomers to investing, it can be overwhelming. With most advisors wanting nothing to do with beginners because they don’t have the assets, they are left on their 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 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 goals more of a reality. This includes playing with the amount you save each month, adding a one-time deposit like a tax refund, and changing your time horizon or your investment allocation.
- Investment Options: There are only a few ETFs 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 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 this “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. I even put the basics together into my book. But the fee they charge is small in comparison to what most advisors charge and the benefits you stand to gain. 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 including Vanguard.
You can read more about this chart on the Betterment Blog.
In addition to 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.
What about other brokers? I love investing with Schwab. You can invest with them and have them do all of the work for you as well and it won’t cost you a dime. It’s 100% free. The main downside is you need $5,000 to invest in their Intelligent Portfolios.
In addition to that, most of the portfolio allocations are on the conservative side. This means they tend to hold a large amount of cash at all times, which equates to less of your money working for you.
Another automated option is Ally Invest. Their option is very similar to Betterment except that you need $2,500 to start investing. The fee on an account with Ally Invest is just 0.30%, which is right in line with what Betterment charges. You can learn more about Ally Invest here.
Finally, there is a newcomer on the robo-investing scene called Wealthsimple. Just like with Betterment and Ally, Wealthsimple does everything for you.
They even have some advantages over the competition. With Wealthsimple, your first $5,000 is managed for free. After that, the fee is 0.50% and they offer financial advice as well. They also offer another service for investors with over $100,000 to invest.
If you’ve read through all of this and think Betterment is a good fit for you, 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. Note that you aren’t using Betterment to manage all of these accounts. You are simply having these accounts show up in one place. This allows you to have greater insight into your overall asset allocation, fees, and where you can make some changes.
The only catch here is 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. The bonus is that Personal Capital is completely free!
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 that? 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 allows for a 1% failure rate. That means you can be confident the number they give you will be an amount you can safely withdraw each month. You can read more details about this service here.
This is another new feature Betterment now offers. When you choose to use this feature, you can invest any 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, that is automation at its best.
Socially Responsible Investing
Recently, Betterment began to offer a socially responsible investing portfolio to clients. This allows clients to better align their portfolios with their personal values.
This is a globally diversified portfolio that reduces exposure to companies that don’t meet certain social, environmental, and governance criteria.
And this portfolio is supported by the tax loss harvesting and tax coordinated portfolios. You can learn more about the socially responsible portfolio here.
Target Income and Beta Portfolios
In addition to the Betterment portfolio and the socially responsible portfolio, Betterment now offers 2 alternative portfolios to invest in.
- BlackRock Target Income: this portfolio is a low risk, 100% bond portfolio offering steady income to investors.
- Goldman Sachs Smart Beta: this portfolio attempts to outperform the market by investing in the next generation of ETFs that offer stronger risk adjusted returns to investors.
With this feature, you can donate shares from your account directly to charities that have accounts with Betterment. Doing this allows you to get a tax deduction for the donation and also helps you avoid any potential taxes on capital gains.
You can read more about charitable giving with Betterment by clicking here.
When doing anything online, you have to take security into account. This is especially true when investing your money. How does Betterment protect your personal information?
They take every precaution necessary. 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 get 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, when I worked for a financial planning firm, we had a client tell us at the end of a meeting that he paid us over $10,000 in fees to manage his money for him. He then explained that this was the best money he ever spent.
It turns out, if he tried to invest on his own, he admitted the drops in the market would have caused him to sell his investments and never come back in. But because we helped him stay invested for the long term, he was able to retire sooner than he planned and experience a lot more of life.
The same idea holds true with Betterment. They charge a fee to invest. OK, that stinks. I’ll be the first to admit I would love to invest for free.
But, what do you get in the long run for paying this fee?
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 those aren’t the only benefits of Betterment. It’s also the fact that everything is automated for you and you can begin investing within 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 then forget about it.
Automating like this works. If you automate saving money already, you know what I am talking about.
Even if you don’t, you still experience automation in other ways. Do you have any service that automatically renews? That is automation right there. I bet you never think about that. Is 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; that fee is more than worth it in the long-run. You will stay invested and 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 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.
You can’t do or have anything in life without taking that first step. I know you will love Betterment and how they can help you reach your financial goals.
[Photo Credit: FirmBee]