Betterment Review 2020
With over $8 billion under management, Betterment is an innovative company making it easier to invest with tools previously only available to the wealthy. Whether you want a simple cost-effective investing platform or personal help, Betterment is a best in class Robo advisor and investing platform.
- No minimum deposit
- Simple and easy to use
- Friendly goal specific investing
- Exceptional customer service
- No transfer or account closing fees
- Closing an account requires snail mail
- Might be too simple for experienced investors
No minimum balance, affordable fees, an advanced yet user-friendly platform — Betterment has removed a lot of the barriers to investing.
I’m not surprised the service has emerged as a consistent leader — especially among millennials — in the fast-changing world of robo-advising.
But new Robo-advisors start up all the time. Before joining the nearly half-million people with assets managed by Betterment, let’s take a closer look at how the service works.
What Is Betterment?
Betterment is a Robo-advisor, which means the service uses a computer algorithm instead of a human broker to invest your money and rebalance your portfolio.
Your goals and risk tolerance, which Betterment learns from its questions when you open your account, will help inform the platform’s algorithms on how to build your portfolio.
For example, if you’re saving for a down payment on a house, Betterment will invest differently than it would for someone investing for retirement planning.
Betterment manages about $16 billion in assets for about a half-million customers. The service’s number of users has grown steadily over the past decade.
People with very little disposable income use Betterment to get a foot in the door as investors without paying fees to certified financial planners. Others have hundreds of thousands of dollars in their Betterment accounts.
Betterment remains popular, in part, because of its simplicity and its lack of a minimum deposit. Even a $500 minimum deposit like Wealthfront’s can turn away users who can’t set aside $500.
How Does Betterment Work?
Betterment is an easy to use platform where users can start investing with as little as $10. The platform asks you a series of questions about your age, income, risk tolerance, and financial goals.
In recent years there has been a shift towards “goals-based” investing, which I like because it helps you save towards something tangible like buying a home, college planning, taking a dream vacation, or retirement.
The Betterment platform also lets you know when you are “on-track” or “off-track” to meet your goals and tells you how much more you should be saving to achieve your goal (based on expected returns) within the time frame you have selected.
How To Open A Betterment Account
- Open an Account: When you open a Betterment account, Betterment will ask some questions to determine your investing style and goals and to get an idea about your broader financial life.
- Fund Your Account: You’ll then connect your Betterment account to your checking account and transfer some money into your Betterment account.
- Start Investing: Betterment’s algorithms will invest your money into Exchange-Traded Funds (ETFs). Each ETF share includes pieces of many different stocks, which means you can achieve a more diverse investment portfolio without investing a lot of cash.
Betterment Account Types
Betterment is always adding new account types and features. You can now open:
- An Individual Taxable Account: This is the standard account whose growth will be taxable.
- A Joint Taxable Account: If you file a joint tax return, you may want to choose this account option.
- A Retirement Account: You can hold your Betterment investments in a tax-preferred IRA (traditional or Roth) or a SEP-IRA if you’re self-employed. Tax-loss harvesting comes standard in all Betterment accounts, but this platform does not offer direct indexing which could help even more at tax time for more serious investors.
- BlackRock Target Income Portfolio: This 100 percent bond funds portfolio works well for investors already in retirement.
- Goldman Sachs Smart Beta Portfolio: Smart Beta has reached Betterment with this account which the platform hopes will compete better with Schwab’s similar offering which seeks to outperform the broader market but could require more risk.
- Flexible Portfolio: Premium account owners can get even more hands-on with their asset class allocations.
- Charitable Giving: Simplify tax season by donating capital gains directly to charities through this account.
- A Business Account: Business owners can use Betterment to manage their company’s 401(k) plans.
- Banking Accounts: Along with investments, Betterment now has a high-yield savings account and a checking account.
Betterment’s Roth IRA
For most new investors, I recommend setting up a Roth IRA if you don’t already have one.
A Roth IRA is a tax-advantaged account meaning your money grows in Betterment tax-free! The point of any IRA — a Roth or traditional IRA — is to save for retirement. If you already have a Roth IRA with a bank or another broker you could rollover your funds into a Betterment IRA.
Betterment will ask about your investing goals. If you want to focus on long-term savings and building wealth, opening a Roth IRA will be a no brainer.
If you are trying to save for another type of goal — like buying a house or a boat or your children’s college tuition — it makes more sense to save your money outside a Roth IRA.
Betterment’s Taxable Account & Auto Deposits
If you’re not necessarily investing for retirement, I’d open an individual taxable account. That’s what I did when I opened my Betterment portfolio.
After setting up the goal of “savings,” I was given the option to make an initial deposit and set up automatic deposits from my linked checking account.
Automatic deposits allow you to make investing a routine part of your life, which is an essential key to success long-term.
I recommend setting up automatic deposits, even if you deposit only $10 a month. This will get you into the habit of saving into your investment account. Later, you can work to increase how much money you deposit.
Betterment Cash Reserve
The Betterment Cash Reserve high yield savings account makes it easy to move your money between a Betterment investing and Betterment savings account. This helps ensure that you’re getting the best return on your money while you pursue your investing goals. This account currently pays 0.4 percent APY on your non-invested balance.
Also, you don’t pay management fees based on your cash reserve balance. Betterment will prompt you, a lot, to move money out of your reserve account and into investments.
Betterment recently launched a new “fee-free” checking account. NO ATM fees. NO foreign transaction fees. NO overdraft fees. The list goes on…
You can even get a debit card for everyday spending that is tap-enabled. Their mobile app keeps you up-to-date on account balances and lets you deposit checks straight from your phone.
And, now that Betterment has checking and savings, you can set up Two-Way Sweep, an algorithm that analyzes your spending and isolates money you could invest then sweeps it into your Cash Reserve account so you can invest it.
Open an account today with as little as $1.
How to Pick Your Allocation Mix
When you’re young (a millennial or younger), you’ll have more time to absorb a loss and can make a stronger case for setting an aggressive profile in Betterment. If you’re approaching retirement, you’ll want a higher percentage of bonds to minimize the risk. This is overly simple, but it’s also a pretty good rule of thumb.
Here’s a slightly more advanced investment strategy formula for people in between:
Subtract your age from 120 and invest that percentage of your long-term money in stocks. If you’re 30, invest 90 percent of your long-term money in stocks. If you’re 40, invest 80 percent of your long-term money in stocks. And so on.
One of the nice features of the Betterment account is that it lets you adjust your asset allocation mix with an intuitive slider if you decide you want to change your asset allocation at any time.
However, one of the fundamental principles for successful investing says you shouldn’t adjust your asset allocation too often.
Find your ideal formula and let your investments work for you rather than the other way around.
How Much Does Betterment Cost?
Betterment charges a percentage-based fee to manage your assets. The fee works like this:
- Betterment Digital Plan: 25 percent of your assets under management each year.
- Betterment Premium Plan:4 percent of your assets under management each year; $100,000 account minimum required.
Betterment withdraws part of the annual fee each quarter based on your average level of assets during that quarter.
For reference, if you averaged $10,000 under management during a quarter, Betterment’s digital plan would charge 0.25 percent ($25) divided by 4, which would equal $6.25.
Once your account reaches $100,000 in value, Betterment would begin charging a 0.40 percent annual fee and bump you up to a Premium plan.
You can find lower fees and even some free robo-advisors which have a simpler, more streamlined approach. But a Betterment brokerage account offers a lot, especially considering its low fees.
Extra Services Betterment Offers
Betterment has continuously added new services and options, including access to a human advisor if you’d like to discuss your portfolio one-on-one.
This option comes standard with the Premium plan (0.40 percent fee on $100,000 or more annually), but you can make a one-time phone call (or Zoom conference) to an advisor — a certified financial planner — anytime for $200 to $300.
You can buy these financial advice packages separately from your annual fee which I recommend when you need to change strategies because of life events such as having children or marriage planning.
Betterment also offers socially responsible investing for investors who don’t want money in certain industries and sectors of the economy. SRI is catching on with other robo-advising platforms, too, such as Public.com.
Within the Betterment dashboard, you can import data external accounts — your bank accounts or 401(k) accounts, for example — so you can visualize where your investments fall within your bigger financial picture.
And, Betterment now has its own savings account and a checking account. The savings account offers a high-yield interest rate if you also have a Betterment checking account (or have joined the checking account waiting list).
My Experience with Betterment
I used Betterment for a year and was happy with the results. I recommend the service for any beginner or intermediate investor because you don’t have to make a significant financial commitment to invest.
Before deciding to invest, I spent time researching a number of the best robo advisors, which have grown significantly in popularity over the past few years and include Personal Capital and Wealthfront.
Betterment uses its nice mobile and desktop tools to give you a chance to learn the basics of investing while investing a smaller amount of money. I initially invested $1,000 with Betterment, for example. After the first three months, I was impressed enough to invest another $50,000.
While investing with Betterment, I found myself checking my investments a lot just because I liked using the app’s unlimited access and seeing my money grow.
But be careful checking too often! It is hard to log in to your account and see that you have lost money when the stock market is down for the day and not be tempted to pull out your money. When combined with all of the “market volatility” news about the stock market, it is tempting to touch your investments or change your stock/bond allocation to try and time the market. Just don’t do it!
My recommendation, which is shared by many of the top personal finance experts, is to not touch or look at your portfolio too often.
When it comes to money, we as humans don’t behave very rationally – it is very common for new investors who haven’t experienced “market volatility” to freak out when they lose money.
New investors don’t always have a reliable sense about risk levels. If you’d invested in the emerging markets sector, for example, and your Betterment portfolio took a big hit, you might be tempted to move toward a more bond-oriented asset allocation.
But millennials have more time to absorb volatility. We are still better off investing over the long term, and there is a strong chance that if you are investing over a 10+ year time horizon your investments in a low-cost index fund-driven portfolio will give you positive returns and help to grow your money.
Betterment offers precisely this kind of investment option for a low cost and without requiring you to become an expert.
Note: I closed my account after a year because I like having a hands-on approach to balancing my portfolio. If I didn’t have time to balance my portfolio and compare ETFs, which I buy directly from Vanguard, I probably would have kept my Betterment account active.
Betterment’s Mobile Experience
Betterment also excels because of its mobile experience. The smartphone app has a bunch of useful features – like deposits and the ability to your progress towards your investing goal.
Frequently Asked Questions
Here are some frequently asked questions from readers.
Can You Take Your Money Out of Betterment?
Yes, your money flows both ways with Betterment. Your linked bank account can deposit and receive funds from your Betterment account.
This process works a lot like making a transfer between two banks. Expect to wait 4 to 5 business days before the transfer finalizes, and your money becomes available in checking.
Betterment will not charge any fees for withdrawals. But withdrawing invested money requires Betterment to sell some, or all, of your investments, and this process could have tax consequences for you.
The good news: Betterment will sell your investments in a way that minimizes your tax loss.
Betterment also offers tax-friendly retirement accounts such as Roth IRAs, which can allow your money to grow — but not be withdrawn — tax-free.
Is Betterment a Good Investment?
Readers ask me this question a lot, but a better question is “Does Betterment make good investments?”
Betterment isn’t an investment strategy in and of itself — it’s just a way to connect you with the market just like any other broker. Betterment’s algorithms assume the role of a broker, connecting you with the market but without requiring the fees and commissions a human broker charges.
Betterment puts your money into quality ETFs provided by Vanguard, and it chooses ETFs based on the guidelines and goals you share with the system. It’s still not a thorough substitute for a CFP who can discuss the nuances of your portfolio with you. But there’s a low bar for admission and you can learn on your own time.
What Does Betterment Invest In?
Based on your answers to its initial questions, Betterment will recommend an asset allocation mix between stock and bond ETFs based on your age, tolerance for risk, and goals. Betterment offers ETFs from 12 asset classes.
Historically, stocks come with higher risks of loss, but the higher potential for gains, while bonds have less volatility but less potential for growth.
So a conservative investor will have a higher percentage of bonds in his or her portfolio while a more aggressive investor may have all or mostly stock-based ETF shares.
Although Betterment recommends a ratio to meet your goals most effectively, you can change the ratio of your asset allocation.
If you’re not sure whether you’re conservative or aggressive, consider this question: How would you feel about losing 30 percent of your invested money in a short time?
If that makes you sick to your stomach, then you might be a more “conservative” investor who should opt for a higher percentage of bonds in your Betterment asset allocation mix.
Can I Trust Betterment?
Betterment has been in business since 2008. Compared to a legacy brokerage house like Charles Schwab or Goldman Sachs this isn’t very long.
But robo-advising is a new sector of investing, and Betterment has been a pioneer. Betterment has a solid track record and a simple and straightforward approach to investing.
We all have to make our own decisions about how to invest, but so far, Betterment has shown no signs of instability.
And, your account will be protected, up to $500,000, by the SIPC, which works a lot like the FDIC to safeguard your bank account balances.
The SIPC will not keep you from losing money in securities that have lost value. But it can protect the money you have in your Betterment cash reserve account in case something went wrong and Betterment could no longer guarantee your deposits.
While your money’s in Betterment’s cash reserve and not invested in ETFs, it would gain 0.4 percent APY.
How Could Betterment Be Better?
Betterment uses Modern Portfolio Theory to guide its algorithms. Investors who’d like a more nuanced approach or more direct control of their portfolios may want a human financial advisor.
Betterment could also add 529 plans for college savers. The platform also lacks direct indexing which some Robo-advisors use to maximize tax-loss harvesting.
Betterment also makes it difficult to transfer your assets out of Betterment and into another brokerage account. You’d have to request paperwork and then mail it in.