Betterment Review
Betterment is one of the largest automated investing services available today. Find out if Betterment deserves your money today in our review.
What is Betterment?
Betterment is an automated investing service that promises to build your wealth through intelligent algorithms. After taking a questionnaire about your aversion to risk, users can invest money, setup target goals, and watch the automated system growth their wealth over time while lowering taxes.
Betterment is particularly popular among younger investors and those who may not have hundreds of thousands of dollars to invest. It provides a simple fee structure and hands-off management system that leaves you little room for customization – which is what many people like in their robo advisor service.
How Does Betterment Work?
Betterment has a unique signup process. You gradually work backwards from your end goal to your initial starting point.
Throughout the course of that signup process, you’re asked to input the steps required to meet your end goals, including your initial deposit, monthly savings, and time horizon. Based on that information, and your aversion to risk, Betterment will give you the chances of achieving that objective.
After you’ve signed up, there’s no need to research investments or do any hard work – that’s what you’re paying Betterment to do (we’ll talk about fees down below).
Betterment uses something called Modern Portfolio Theory, or MPT, to manage your assets and allocate them according to your aversion to risk.
The ultimate goal is to maximize returns while minimizing risk. Betterment tries to do this by investing in a diverse pool of assets while also considering your personal preferences, long-term goals, and aversion to risk.
Betterment basically gives you a personalized financial advisor. The only difference is that the personalized financial advisor, in this case, is a software program and algorithm instead of a person you can call.
Betterment doesn’t let you purchase individual stocks or bonds. Instead, all investments are held in the form of exchange traded funds (ETFs). ETFs expose you to a portion of the market via indexing. By purchasing multiple ETFs across multiple sectors, you can avoid being weighted too heavily in any particular area, company, country, or sector.
At the end of the signup process, Betterment lets you manually choose the allocation of your assets (you can choose 80% stocks and 20% bonds, for example).
Betterment Features
Types of Accounts: Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts, Non-Profit, Individual, and Joint
Initial Deposit: None required ($100 per month minimum, however)
Custom Asset Allocation: Algorithm takes into account your risk profile and account type (taxable vs tax-deferred), with asset allocation being customized.
Tax-Loss Harvesting: Minimizes your taxable investments by offsetting gains with losses and is available to all taxable accounts.
Automatic Portfolio Rebalancing: Betterment automatically buys and sells ETFs within your portfolio in order to maintain your initial ratio in case it even becomes unbalanced.
Automatic Deposits: Deposit money into your account automatically on a weekly, monthly, or bi-monthly basis.
SmartDeposit: Automatically deposits money into your investment account if your bank account goes over a specific amount.
RetireGuide Calculator: Helps you plan for retirement by showing you your current assets and your long-term retirement goals (like your planned age of retirement)
Pricing
Initial Deposit: None required
Annual Fees: Builder Account (0.35% of average balance with a $100 per month automatic direct deposit); Better Account (0.25% of average balance with a $10,000 minimum account balance); Best Account (0.15% of average balance with a $100,000 minimum account balance).
Betterment offers custom portfolio creation for accounts with over $500,000. Under this amount, you won’t be able to customize your account’s portfolio exposure – although if you’re using a robo investor, then you may have never planned to do that anyway.
Although there’s no minimum deposit amount, you effectively have to deposit at least $100 per month. If you don’t do that, then you’re charged an additional $3 per month (provided your account balance is under $10,000). This is a great forced savings strategy, but it might not be the right choice for anyone who can’t always afford $100 taken out of their account every month).
In any case, the Betterment fee structure translates to a reasonable $17.50 per year on accounts with a $5,000 balance.
Types of Stocks and Bonds Available
All of the following investment options are available through Betterment. As you can see, these options are heavily weighted in favor of Vanguard (which isn’t unusual in the robo investing world). However, you also have the option to purchase several iShares ETFs.
Stocks
Vanguard U.S. Total Stock Market Index ETF (VTI)
Vanguard U.S. Large-Cap Value Index ETF (VTV)
Vanguard U.S. Mid-Cap Value Index ETF (VOE)
Vanguard U.S. Small-Cap Value Index ETF (VBR)
Vanguard FTSE Developed Market Index ETF (VEA)
Vanguard FTSE Emerging Index ETF (VWO)
Bonds
iShares Short-Term Treasury Bond Index ETF (SHV)
Vanguard Short-Term Inflation Protected Bonds ETF (VTIP)
Vanguard U.S. Total Bond Market Index ETF (BND)
iShares National AMT-Free Muni Bond Index ETF (MUB)
iShares Corporate Bond Index ETF (LQD)
Vanguard Total International Bond Index ETF (BNDX)
Vanguard Emerging Markets Government Bond Index ETF (VWOB)
Tax Loss Harvesting
Betterment’s tax loss harvesting strategies are automatically available on all Betterment accounts. There’s no need to take any action on your part and it’s all fully automated. Betterment claims that its tax loss harvesting (TLH) strategies can add 1.94% onto your annual investment growth.
Obviously, if you’re in a higher tax bracket, your tax savings can be even greater.
Betterment RetireGuide Calculator
There are plenty of online calculators that let you input your current assets, input your current income, and input your desired retirement age, and then see how close or far you are away from achieving that goal.
With the RetireGuide calculator through Betterment, you get a little more information about your retirement goals. It’s personalized retirement planning advice that includes things like:
-When and where you can retire
-How much you should be saving per year
-Where to invest your money to achieve your goals
-Estimated amount you’ll be able to spend on retirement once you reach retirement age (also takes other information, like your age, amount of savings, and Social Security benefits into account)
If you’re using your Betterment investing account to save for retirement, then it can give you a coherent look at your future and the likelihood of your investing goals.
You can also sync RetireGuide with over 13,000 different types of external accounts, so it does provide a coherent overall look at your investments across multiple services.
Betterment SmartDeposit
Betterment’s SmartDeposit feature is an optional add-on for your account. If you activate SmartDeposit, then Betterment will automatically invest any money over a specific amount from your bank account.
This feature is useful for those who have trouble manually putting away money for savings. If you have, say, $2,100 in your bank account and your SmartDeposit limit is $2,000, then Betterment will take that $100 from your bank and invest it in your portfolio.
Conclusion: Who Should Use Betterment?
Betterment is typically popular with beginner investors who are a little lost when it comes to investing. It provides an easy-to-understand fee structure and fixed portfolio management with little customization required (or available). When compared to Wealthfront, you will see many of the same variations and approaches towards wealth preservation and management.
Betterment, however, isn’t an ideal choice for high net worth individuals simply because there aren’t many benefits available to those with over $500,000 ready to invest. Above that amount, you can customize your portfolio, but that’s the only reward with Betterment.
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