Is Betterment a smart way to invest your money? Our detailed Betterment review gives you everything you need to make a sound investing decision.
Betterment is a different type of brokerage. Most discount brokerages want to get customers to trade as frequently as possible. But Betterment is looking to be your asset manager.
Currently, the brokerage is offering an incentive for new customers. But the way they do business is a bit different than most brokerages you may be familiar with. This uniqueness is evident as early as the account sign-up process.
When you apply for an account with a typical discount brokerage, the application asks about income, net worth, and investment experience. Betterment asks about the goals and purposes of your investments. The service encourages each new account holder to designate a main account goal, like retirement, a major purchase, or a vacation. Betterment will also ask how many years you expect to take to reach that target or the age at which you’d like to achieve a goal.
What is Betterment All About?
The core philosophy for investing with Betterment is the asset allocation. This is the type of simplicity that I’ve seen with 401(k) accounts. These retirement investments often try to take an important concept of investing–asset allocation–and make it simple. This way, busy employees can simply submit a risk profile, and the investment will use this information to determine their ideal mix of stocks and bonds. Betterment takes this concept further, making the process incredibly simple.
Because of this simplicity, Betterment’s fees can be lower than other forms of investing. Although you could have a free account with a discount brokerage and never pay a transaction fee, you may still be subject to fees built into the investments, like expense ratios or front-end load fees. Betterment’s approach is to charge a percentage of your account’s value–or assets under management. This is the custom among professional asset managers who generally work with high-net worth clients.
This fee might depend on how much you invest with Betterment. For those looking to have a hands off approach, the annual fee is 0.25% (digital plan). For those looking to take advantage of the premium service ($100,000 account minimum) the fee is 0.40%. The premium service includes everything in the digital package plus in-depth advice on investments outside of Betterment and access to their CFP professionals.
And now for a limited time, Betterment is offering a promotion of up to 1 year managed for FREE. Six different levels and timelines are available for the bonus; outlined below.
- $5,000 – $24,999 – 1 month free
- $25,000 – $49,999 – 2 months free
- $50,000 – $99,999 – 3 months free
- $100,000 – $249,999 – 6 months free
- $250,000 – $499,999 – 9 months free
- $500,000+ – 1 year free
With Vanguard investing, you’re mostly on your own. You alone decide your asset allocation, and many investors do not consider asset allocation at all. Betterment can be more expensive, but they are also providing a service that, depending on your needs and interests, may be worth the extra cost. At the same time, it’s less expensive than having a dedicated asset manager while offering many of the same features.
You’d have to be a hands-off individual to like the type of service offered by Betterment. You don’t choose your own investments like you would with a typical full-service or discount brokerage. Betterment chooses the investments for you, and their selections are based on a mix of index exchange-traded funds (ETFs). Betterment reinforces the idea that individual investors should not try to beat the market. For the most part, investors fail when they try. And their investments would have fared better had they remained diversified across a broad selection of investments and refrained from changing their risk profile.
Betterment‘s investments include baskets. Each basket represents exposure to a type of assets. To help an investment portfolio match a risk profile, the portfolio could include a combination including a stock market basket and a treasury bond basket. Betterment will rearrange the balance between the different stock index ETFs as it sees fit, but investors control the relationship between stocks and treasury bonds through the risk profile.
The treasury bond basket is split evenly between two investments, TIP: iShares Barclays TIPS Bond Fund and SHY: iShares Barclays 1-3 Year Treasury Bond Fund. The stock market basket includes these investments:
- (VTI) Vanguard Total Stock Market
- (VTV) Vanguard US Large-Cap Value Index ETF
- (VOE) Vanguard US Mid-Cap Value Index ETF
- (VBR) Vanguard US Small-Cap Value Index ETF
- (VEA) Vanguard FTSE Developed Market Index ETF
- (VWO) Vanguard FTSE Emerging Index ETF
Previously Betterment’s investing plans were limited to the form of a standard brokerage account. But the service now offers IRAs. You can now use the government-designated accounts for saving for retirement through Betterment’s service. Some of the benefits of owning a Betterment IRA are:
- IRA fees are a fraction of a standard 401(k) provider
- You choose your personal risk strategy
- Betterment regularly rebalances your portfolio
Opening a Betterment Account
Opening my account at Betterment was easy, and they approved my account right away. Like any new financial account accepting electronic deposits from other banks, I needed to confirm my ownership of the linked account through the familiar process of verifying test deposits. I’m waiting for my external checking account to receive the test deposits so I can begin investing with Betterment.
Betterment is a fairly new player in the word of finance. This is an industry where the major companies have been around for a century or more. But Betterment protects your assets just like any other major investment firm. Betterment is a Registered Investment Advisor with the Securities and Exchange Commission and is regulated by FINRA and the SEC. Accounts are insured by SIPC up to $500,000 per owner.
This doesn’t protect investors from having their investments lose value, but it does protect the value if the brokerage were to fail. If Betterment were to go bankrupt or to go into receivership, the insurance coverage would allow you to access your account.
Why Use Betterment?
For the micro-manager, Betterment might not be the perfect way to invest. It’s also not the appropriate service for someone who wants to trade their investments frequently or delve into investing in individual companies. Betterment’s services may be right for investors with the opportunity to save for their future outside of retirement accounts who want the simplicity of diversified investments, risk-based asset allocation, and a buy-and-hold-and-rebalance investing philosophy.
Their published returns are nothing to scoff at, and their fee structure works especially well for smaller investors who are looking to avoid day to day interaction.
Updated October 31, 2017 and originally published October 27, 2017.