If you’ve not heard of Betterment before, then you’re not entirely alone as they’re fairly new to the brokerage scene. In fact, their beginnings go back to 2008. What sets Betterment apart is their unique approach to investing in the stock market in order to make it as simple as possible for their clients.
To be transparent, I’ve not had an account with Betterment currently or in the past. I’m leaning on my experience in the online brokerage space as I look at them and with the uniqueness they offer I thought they’d be worth taking a more in-depth look at.
If you’re looking for another online brokerage option, then check out my Scottrade review.
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 in the stock market with little money or those who are just starting to invest, 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 them, then what on earth are you investing in? It’s quite simple really, they select buckets of ETFs based off of what information you give them. They have two main buckets they go from and personalize from there. 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:
- 25% VTI – Vanguard Total Stock Market
- 25% IVE – iShares S&P 500 Value Index
- 25% VEA – Vanguard Europe Pacific (EAFE)
- 10% VWO – Vanguard Emerging Markets
- 8% IWS – iShares Russell MidCap Value Index
- 7% IWN – iShares Russell 2000 Value Index
The second basic bucket they provide is their bond bucket, which is made up of:
- 50% TIP – iShares Barclays TIPS Bond Fund
- 50% SHY – iShares Barclays 1-3 Year Treasury Bond Fund
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.
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.
Straight Forward Pricing: By having no trading of individual stocks, you avoid any commission fees which is nice. That said, they don’t offer you their service altruistically thus there is a charge for what they offer. Their pricing is as follows:
- Builder Plan – .35% of your balance, but requires a monthly deposit of at least $100
- Better Plan – .25% of your balance with a $10,000 minimum balance
- Best Plan – .15% 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 decent 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 work 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.
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 at Betterment do this in order to stay abreast of what’s going on in the market while also positioning investors to succeed.
Check out my Motif Investing Review for another great alternative to the traditional online brokerage.
Disadvantages of Betterment
Pricing Structure: The main disadvantage I see with Betterment is their pricing structure. It is clear and straightforward, but I’m not personally a fan of quarterly fees. That said, you also have to look at the fact that you’re paying nothing to trade, you’re paying nothing to do any of your rebalancing and no other fees. In light of that, I think what you pay could be low in some cases.
Not Many Options: The other disadvantage I would see is the limited option in funds to choose from. I know they’ve improved this over time and are always adding to them. That said, I’m not their target market, so for others it might not be a disadvantage.
My Take on Betterment
I think if you’re new to investing and don’t want to deal with the “stress” of picking out investments then Betterment could be a good option for you. Betterment really does seem to 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.
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. If you’re looking to open a new account with Betterment they do offer a new account promotion of $25 for opening a non-IRA account worth at least $250 with them. They also offer a 30 day money back guarantee if you get in and don’t like what you see.
What do you think of the Betterment approach to investing?
Photo courtesy of: 401(k)2012