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Betterment Review

Betterment Review

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Description

Betterment is a top-rated choice in the robo-advisor industry. Still, tax-efficiency may be an issue for some investors. Click here to find out why.

Betterment Review

Introduction

Investing can be risky, but it's the best way to build long-term wealth.

For beginners, that risk can be especially scary. One of the most crucial pieces of advice given is to never invest in anything you don't understand – but when you're just starting out, you don't understand very much.

And with financial advisors pushing for people to start investing as early as possible, you may be feeling a lot of pressure to make a decision.

But what if you make the wrong decision?

This is where companies like Betterment come in.

With about $15 billion in assets under their management, Betterment is certainly one of the most popular online discount brokerages. This is especially true when considering robo-advisors, an industry that Betterment pioneered (alongside Wealthfront) in 2008.

To start, all you need to do is create an account, provide data like age, pre-tax annual income, your investment goals, and eventually your desired account type. Based on this data, Betterment's computer-generated algorithms develop a personalized investment strategy and portfolio for you. Your financial goals will determine the allocation ratio between stocks and bonds. If you're not happy with the allocation ratio, you can adjust this.

Betterment currently offers two service options:

  • Betterment Digital carries no account minimum and charges an industry-standard management fee of 0.25% (plus fund fees ranging from 0.7% to 0.15%). Digital clients can contact financial advisors via Betterment's in-app messaging feature.
    • Betterment Premium has an account minimum of $100,000 and charges 0.50% in management fees – again, with additional fund fees of 0.7% to 0.15%. You'll also enjoy unlimited access to certified financial advisors via phone.

Once you've linked your bank account to fund your Betterment portfolio, their algorithms start automating the investment process within two days. The company focuses on exchange-traded funds (ETFs), which is why the fund fees are relatively low.

All this sounds great, but is Betterment the right robo-advisor for you? We'll help you make an informed decision with our review.

Quick Facts

  • Management fees: 0.25% (Betterment Digital) to 0.50% (Betterment Premium)
  • Account minimum: $0 (no minimum)

Betterment is Best For

While Betterment is one of the best robo-advisors on the market, the company isn't necessarily for everyone. The following types of investors will best appreciate what they have to offer:

  • Investors who prefer and/or appreciate a hands-off approach to investing
  • Those who want the benefit of automatic account rebalancing
  • Beginner investors (as well as others with a low account balance)
  • Those investing for retirement purposes
  • Investors who are goal-oriented and want the investment tools to match

Pros

Having been the first company to develop and launch the automated robot-advisor model, Betterment has been in the game for longer than their competitors – even Wealthfront, who only joined a few months later.

That longevity has given Betterment time to iron out most of the kinks in their system. And, as they continue to grow, their service continues to impress.

Here are the service's positive features:

+No Account Minimum

There aren't many robo-advisors on the market with no account minimums, but Betterment is one of them.

However, it bears repeating that the no minimum requirement applies to Betterment Digital only. In order to qualify for the Betterment Premium portfolio, there's an account minimum of $100,000.

+Investment Philosophy

Betterment, like most of the robo-advisors that have followed in its footsteps, follows the modern portfolio theory in its investment philosophy. This means Betterment recognizes and highlights the benefits of portfolio diversification.

Portfolio diversification refers to the spreading of one's assets across investment opportunities that aren't directly connected. For example, while bonds and stocks are somewhat related, having both in your portfolio provides a measure of diversification.

This affords investors a layer of protection against market fluctuation by balancing your risk-to-reward ratio. When one asset is performing negatively, another's positive performance can offset your losses and ensure an overall gain.

An investment in real estate gives even stronger diversification, as real estate performs wholly independent of the stock market. However, Betterment doesn't currently support real estate investments, as the company focuses entirely on ETFs representing twelve asset classes.

These classes each carry varying levels of risk. Betterment's computer-generated algorithms divide your assets across six to eight of these classes on average, based on your personal risk-tolerance and financial goals.

+Socially Responsible Investing (SRI)

The younger generation is especially concerned with being socially responsible regarding the companies they support.

Naturally, this carries over into their investments, which is why Betterment offers a socially responsible investing (or SRI) portfolio.

The SRI portfolio focuses on ETFs representing companies that align their business practices with certain social causes. The process of identifying such companies for inclusion is called “positive screening.” Betterment uses “negative screening” to exclude any companies with poor practices in such areas.

Bear in mind that not all of the ETFs Betterment offer meet the definition of SRI. Some of the asset classes include standard portfolio ETFs, as Betterment was unable to find suitable alternatives.

Sometimes, even when there are ETFs available on the market that do meet SRI standards and would fall into the specified asset classes, Betterment won't offer them due to cost. The company does its best to maintain a low-cost standard, with ETF fees between 0.7% and 0.15%.

However, Betterment reports that they plan to include additional SRI funds once they become available.

+Flexibility & Rebalancing

Betterment offers a “flexible portfolios” tool for customers who still want to maintain a measure of direct control. Although limited to Premium clients, the tool allows you to adjust the percentage of your money that is invested in any individual ETF.

Regardless of your account balance, however, the company will continue to perform automatic account rebalancing.

Whenever you deposit or withdraw funds from your account, or dividends are paid out, Betterment rebalances your asset allocations. This also happens if the allocation levels for any asset class drifts as little as 2% to 3% from target, helping investors to maintain portfolios that are focused on achieving their goals.

Betterment's algorithms crawl accounts daily to check whether any rebalancing is required. They also buy fractional shares, which means you won't experience cash-drag. Betterment Premium portfolios are additionally monitored by certified financial planners.

+Management Fees

As mentioned, Betterment has two portfolio plans along a pricing tier: Betterment Digital at 0.25% and Betterment Premium at 0.50%.

0.25% is fairly industry-standard, with most other robo-advisors charging the same or more. The fact that Betterment Digital also gives clients the ability to contact financial planners via their in-app messaging feature is a nice perk, especially when you consider the fact that the company's biggest rival – fellow pioneer Wealthfront – charges the same management fee but doesn't give you access to any human support whatsoever.

Even though these financial planners aren't certified, Betterment assures us that they are licensed financial experts.

Betterment Premium's 0.50% management fee may be more expensive, but is still reasonable. Competitors such as Ellevest charge the same for their premium accounts, and Wealthsimple for their lower-tier portfolios. In fact, considering Betterment Premium affords clients unlimited access to fully certified financial planners via telephone, 0.50% is actually relatively inexpensive.

Additionally, if your account balance exceeds $2 million, Betterment lowers their management fees for you: Digital to 0.15% and Premium to 0.30%. This makes them one of the most affordable robo-advisors on the market.

+Financial Planning Packages

Betterment has also introduced five financial planning packages that are goal-specific. These range from $149 to $399 in price, covering topics from “Getting Started” to “Retirement Planning.”

Each carries its own set of perks. For example, the amount of time you get for talking with a financial planner via phone call varies by package. Two of the packages also only give you access to licensed financial planners, while the other three are with their certified colleagues.

+Goals-Oriented Saving

Betterment's registration process includes an exercise on goal-setting. Their algorithms suggest a series of lifetime financial goals, with a target emergency fund amount, retirement savings target, and general investing goal.

You can choose to adjust each goal's suggested target and asset allocation, as well as add extra goals and auto-deposits. These allow the robo-advisor to better dictate what account types are set.

With regards to retirement specifically, Betterment offers RetireGuide. This lets you link retirement accounts (such as your 401k) that aren't held by the company, giving you comprehensive advice by taking all your investment and savings activities into consideration.

+Smart Saver

Keeping with the theme of better savings, Betterment offers a low-risk bond portfolio called Smart Saver to maximize the interest you're earning on your savings.

While traditional banks typically carry an interest rate of around 1%, Smart Saver boasts an expected return of 2.44% (subject to fluctuation). Once you take fees into consideration, this drops to about 2.19% for Betterment Digital clients and 2.04% for Betterment Premium.

You can also link Smart Saver to your checking account to benefit from Betterment's Two-Way Sweep feature. This analyzes your spending patterns and sweeps any unused cash into Smart Saver. And if your checking balance drops to your set target, Two-Way Sweep will also sweep money back, or give you the option of canceling the proposed sweep into Smart Saver.

Smart Saver isn't FDIC-insured, so be sure to weigh all your options before committing.

+Charitable Giving Tool

If you've got a charity (or charities) supporting a cause you believe in, you can use Betterment's charitable giving tool to make tax-efficient donations directly, using your appreciated securities.

Cons

As you've no doubt realized, there's a lot to love about Betterment as a robo-advisor.

But as is the case with all things, there are still a few areas where the company falls somewhat short of some competitors.

-No Direct-Indexing

While Betterment does offer tax-loss harvesting to reduce tax using poorly performing investments to your advantage, they lack the direct-indexing tools offered by competitors like Wealthfront.

Direct-indexing buys individual securities rather than the ETF tracking that index, which allows for more tax-loss harvesting opportunities. It's a strong contention point, as direct-indexing has been known to save investors rather significant sums of money.

Betterment attempts to make up for this with their Tax-Coordinated Portfolio. As an asset location investment strategy, this automatically puts tax-deficient assets into tax-advantaged accounts and shifts tax-efficient assets into taxable accounts. The Tax Impact Preview tool helps investors to gauge the strategy's effectiveness.

-Difficulty Canceling

For a variety of reasons, you may decide to transfer to a different online discount brokerage. Betterment makes the process unnecessarily complicated and lengthy: there's a plethora of paperwork that they require you to send via snail mail in order to cancel your account(s).

Is Betterment Right For You?

There are some serious considerations required to properly answer this question. And at the end of the day, the only person who can answer the question, is you (perhaps in conjunction with a financial advisor).

This is because investment is a highly personal activity. Decisions need to be made based on your individual scenario.

What we can say is that Betterment is certainly one of the best robo-advisors on the market. Compared to other hybrid advisors like Personal Capital, Betterment give you access to licensed and certified financial advisors for a relatively cheap price, and their goal-oriented focus is ideal for many.

However, in regards to tax-efficiency, you might want to think on whether a competitor – such as Wealthfront – is more suitable.

Conclusion

At the end of the day, Betterment is one of the best-recognized robo-advisors for good reason. The speed with which the pioneering company gained assets and attracted clients is nothing less than impressive.

But as always, there are a lot of factors to take into consideration before selecting an investment platform.

At the very least, we trust that our review has helped you toward making an informed decision.

Related:  Fidelity Review

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