Betterment Review: Get Up To 6 Months Commission Free!
Betterment is a robo-advisor that seeks to simplify investing for you by managing much of the heavy lifting. This Betterment review will go over how they might be able to help you reach your investment goals. If you’ve not heard of Betterment they began in 2008 and seek to lower the barrier to entry for those wanting to start investing in the stock market by offering a simple, yet solid, approach that will help them get started towards building wealth.
Before I go any further with my Betterment review, I want to be transparent in that I do not have an account with them currently. With that in mind, I’m leaning on my experience in the online brokerage industry for this review of Betterment as it allows me to understand the offerings of a brokerage as well as how the meet the needs of their clients.
What makes Betterment so unique from other brokerages is that you do not trade individual stocks or mutual funds, but you invest in a bucket of Exchange Traded Funds (ETFs) that are personalized to your specific goals. The other thing I really appreciate is that they’re geared towards those who’re looking to invest with little money or those who are just starting to invest in the stock market, which I applaud. That said, let’s get on with the Betterment review.
You Don’t Actively Trade: As I said previously, you do not actively trade stocks with Betterment. That is simply not their approach. Their approach is very similar to a buy and hold type of investment strategy where they’re looking towards the long term goals as opposed to trading individual stocks.
Buckets to Choose From: If you do not trade stocks with Betterment, then what investment options do they offer? It’s quite simple, they select buckets of ETFs based off of what information you give them. They have two main buckets they select from and you personalize from there the amount each ETF will make up of your portfolio. The first one is their stock market bucket which seeks to give you balanced exposure in the US as well as internationally. It is made up of:
- VTI – Vanguard Total Stock Market ETF
- 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 Europe Pacific (EAFE) ETF
- VWO – Vanguard Emerging Markets ETF
The second basic bucket they provide is their bond bucket, which they have completely overhauled recently to add more options. It is made up of:
- SHV – iShares Short-Term Treasury Bond Index ETF
- VTIP – Vanguard Short-term Inflation-Protected Treasury Bond Index ETF
- BND – Vanguard US Total Bond Market Index ETF
- MUB – iShares National AMT-Free Muni Bond Index ETF
- LQD – iShares Corporate Bond Index ETF
- BNDX – Vanguard Total International Bond Index ETF
- VWOB – Vanguard Emerging Markets Government Bond Index ETF
They Personalize Your Service: The nice thing about Betterment is they don’t just stick you in a grouping of funds, but offer something that is personalized for you. When you open an account with Betterment they ask you questions to get at your goals which allows you to personalize what bucket they’ll put you in. The questions are relatively straightforward and should be able to answer them within 10-15 minutes. This approach is similar to that of Wealthfront and of the other players within the robo-advisor space.
Retirement Income: This is a new feature added by Betterment that allows you set up a system for sustainable cash flow for those that are in retirement. Decumulation during retirement can be tricky to balance and Betterment provides investors in retirement a way to better balance that.
RetireGuide™: This is a new feature Betterment recently added to help differentiate them from other robo-advisors, like Wealthfront. The purpose behind RetireGuide™ is to provide you personalized retirement planning advice. RetireGuide™ looks at things like income when you retire (based off of your current investments), help you make plans based on if social security will be available to you or not and how much you should be saving each year. The thing I really like about the new RetireGuide™ is that it looks at all of your investment accounts – this is something other robo-advisors have yet to be able to offer.
Straight Forward Pricing: By having no trading of individual stocks, you avoid any commission fees which is great. However, Betterment doesn’t offer you their service altruistically thus there is a charge for what they offer. Their pricing is as follows:
- Builder Plan – .35 percent of your balance, but requires a monthly deposit of at least $100
- Better Plan – .25 percent of your balance with a $10,000 minimum balance
- Best Plan – .15 percent of your balance with a $100,000 minimum balance
Those fees are annual and accrue on a quarterly basis. If you’re unable to make the $100 monthly deposit and have under $10,000 in your account they’ll move you up to the Better plan with a $3 monthly charge.
ADVANTAGES OF BETTERMENT
Great for beginners: The thing I really like about Betterment is they’re great for beginners. Having spoken with many beginner investors in my past, I know investing can be confusing. If you’re a new investor and simply want to get started then Betterment is a good option as it does a lot of the work for you without having to figure out on your own what funds to buy.
They do the heavy lifting: The other big thing I like about Betterment is they do a lot of the heavy lifting for you. They rebalance your account for you as well as reinvest any dividends for you. For the beginning investor this really makes Betterment unique among some of the alternatives. This is where someone like Motif Investing differs from Betterment. Betterment offers dividend reinvesting whereas Motif Investing does not. That might not be big to some, but it is something to look out for.
Their portfolios stay on top of the market: Their buckets are not a ‘set it and forget it’ approach. They’re not changing them willy-nilly either. They recently changed their bond bucket in light of what is going on in the bond world to put their clients in a better position. The powers that be at Betterment do this in order to stay abreast of what’s going on in the market while also positioning investors to succeed. I also love that many of the funds chosen are low in fees so more of your money is working for you. I use the free service available at Personal Capital to stay on top of this myself.
There is no minimum account balance to open: You will pay a little more for the service, but I love that Betterment does not require a certain balance to open an account. This is great for those with little to invest, or those simply wanting a secondary investing option to what they’re doing elsewhere.
Tax Loss Harvesting: This is a relatively new feature Betterment has added and love it! In simplistic terms, Tax Loss Harvesting (TLH) allows you to boost the return of your portfolio by selling losing holdings which in turn lowers taxable liability on gains and income. You don’t need to do anything to take advantage of this feature and is automatic to those who have at least $50,000 invested with Betterment. This is a feature Wealthfront offers as well, but starts at portfolios of $100,000 or more. Update as of 4/01/15: Betterment has removed the balance requirement for TLH so it is now available to all Betterment clients!
DISADVANTAGES OF BETTERMENT
Pricing Structure: The main disadvantage I see with Betterment is their pricing structure. It is clear and straightforward, I’m personally not a fan of the tiered pricing though isn’t all that uncommon. That being said, you’re paying nothing to trade with Betterment and there are no other fees on top of their pricing structure. That’s also not to mention that Betterment offers things like TLH and rebalancing free of charge. If you were to start off with a balance of $5,000, for example, you’d pay roughly $17.50 per year for your investing – that’s relatively cheap when compared to other options.
The other thing I will mention is that when you look at Betterment vs. Wealthfront it depends on your given situation as to which you should pick. Wealthfront allows to get to $15,000 managed for free and charges .25 percent after that – regardless of account size. However, Betterment charges .15 percent on accounts over $100,000 so that would give them a slight edge over Wealthfront. If you have a taxable account over $100,000 though you might benefit somewhat more by housing that account with Wealthfront. Again, it just depends on your given situation.
BETTERMENT review – my take
I think if you’re new to investing and don’t want to deal with the “stress” of picking out investments then Betterment is a great option to consider. Betterment really does take a lot of the work out of investing for you and allows you to go with a balanced buy and hold strategy. In addition to that, they allow you to personalize an investment approach that is applicable to you personally as opposed to an advisor who may put you in something without knowing much about you or what you really want. That’s not to say that advisors are “bad” in any sense, just that you can have more control by managing it yourself. Essentially, a robo-advisor like Betterment gives you the benefit of a financial advisor without having too many fees or minimums to meet.
If you’re new to investing and looking for a service to help you get your feet wet and take some of the leg work out of investing for you then Betterment could be a solid option to look at. That’s also not to say Betterment is only for newer investors as their core approach is one I’d recommend for most that are investing in the stock market. With that being said, depending on your circumstance, Betterment could be a great option to consider for your investing needs.
If you’re looking to open a new account with Betterment they do offer a new account promotion based on the amount you fund your account with. The breakdown of the Betterment promotion is as follows:
- Fund with less than $5,000 = 1 month free of charge
- Fund between $5,000 and $24,999 = 3 months free of charge
- Fund between $25,000 and $99,999 = 4 months free of charge
- Fund over $100,000 = 6 months free of charge