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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 balance your portfolio.
Here’s the process to get started:
- 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 more diversity without investing a lot of cash.
Your goals and risk tolerance, which Betterment learned from its questions when you opened 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.
How Does Betterment Work?
Betterment is an easy to use platform where users can start investing with as little as $10. The way the platform works is Betterment 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 tuition, 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.
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 in and of itself — it’s just a way to connect you with the market. 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.
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.
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.
How to Pick Your Betterment 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 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.
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.
- 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 is to save for retirement.
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 account.
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.
How Much Does Betterment Cost?
Betterment charges a percentage-based fee to manage your assets. The fee works like this:
- Betterment Digital: 0.25 percent of your assets under management each year.
- Betterment Premium: 0.4 percent of your assets under management each year; $100,000 minimum deposit required.
Betterment withdraws the 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 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 0.40 percent annually and bump you up to a Premium plan.
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 to an advisor anytime for $200 to $300.
Betterment also lets you invest in socially conscious ways by avoiding certain industries and sectors of the economy.
Within the Betterment dashboard, you can import data from non-Betterment 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 (coming soon) a checking account. The savings account offers a high-yield interest rate (2 percent+) if you also have a Betterment checking account (or have joined the checking account waiting list). Otherwise, you’ll get somewhere in the 1.75 percent range, which is still pretty solid.
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.
Can I Trust Betterment?
Betterment has been in business since 2008. Compared to a legacy brokerage house like Charles Schwab, 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 account in case something went wrong and Betterment could no longer guarantee your deposits.
Does Anyone Use Betterment?
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. Some people 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.
My Personal 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 gives 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.
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.
While investing with Betterment, I found myself checking my investments a lot just because I liked using the app 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 I had more than $50,000 in Betterment, I lost thousands of dollars in my portfolio some days. 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 financial thinkers, 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.
As Millennials, we are 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 opportunity for a low cost and without requiring you to become an expert.
These recommendations are heavily weighted in Europe, which is the majority focus of the VEA: Vanguard FTSE Developed Markets ETF, which Betterment recommends at 37.5% of the portfolio. It is worth noting that a majority of the funds in this recommended profile are from Vanguard.
Betterment At A Glance
Minimum Deposit To Invest
- 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