Betterment Review

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Reviewed By

Updated on Thursday, September 17, 2020

Betterment is one of the pioneers in the robo-advisory world, tracing its roots back to 2010. Its services have evolved over the years from traditional passive exchange-traded fund (ETF) investing to include access to certified financial planners (CFPs), specialized portfolio investments and cash management options.

Betterment Holdings Inc.
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The bottom line: Betterment is tailor-made for beginning investors seeking a diverse, professionally managed, low-cost portfolio, but also offers CFP access and competitive cash management services.

  • Low costs
  • Tax optimization strategies
  • Purpose-built portfolios

Best for...
  • First-time investors
  • Passive investors
  • Investors looking for more than just an index fund
  • Robo-advisory customers who want CFP access
Investment minimum
  • $0 for Digital plan
  • $100,000 for Premium plan
Management fee
  • 0.25% for Digital plan
  • 0.40% for Premium plan
Accounts offered
  • Individual taxable
  • Joint taxable
  • Traditional IRA
  • Roth IRA
  • SEP IRA
  • Rollover IRA
  • Rollover Roth IRA
  • Trusts
Access to human advisorsYes, at Premium level
Banking servicesYes

financial advisor

What is Betterment and how does it work?

Betterment offers two tiers of robo-advisory services: Digital and Premium. Pricing varies for the two tiers, coming in at 0.25% annually for Digital and 0.40% for Premium. Access to CFP professionals is available in the Premium tier, but only via Phone or Email.

You can open a broad array of accounts at Betterment, from traditional taxable accounts to IRAs and Trust accounts. In addition to its investing offerings, one of the company’s most recent ventures is the establishment of a banking branch, complete with a no-fee checking account and a high-yield cash account.

Pros

  • Low expense ratios: The internal fees charged by Betterment’s ETFs are well below the industry-average ETF expense ratio. Expense ratios for Betterment ETFs typically run from 0.07% to 0.15%, while the industry average is closer to 0.50% annually.
  • Access to CFP professionals: For the 0.40% annual fee for the Premium tier, investors can discuss major life events and financial planning directly with CFPs. This offering comes at a lower cost compared to competitors, with Fidelity charging 0.50% annually for access to personal advisors and Schwab charging $300 upfront, plus an ongoing monthly fee of $30. However, only Premium tier customers have access to CFP assistance — unless you pay additional fees — and visits must be conducted virtually.
  • Automatic rebalancing and tax management: Betterment portfolios are constantly monitored and automatically rebalanced to ensure investments stay within the targeted asset allocation. In addition, portfolios are optimized for tax reduction through the use of tax-loss harvesting and tax coordination, which places assets to ensure maximum tax efficiency.
  • No-fee cash management account: Betterment offers a checking account with no overdraft fees, no foreign transaction fees and global ATM fee reimbursement, as well as a cash reserve account that currently pays a 0.40% APY. The accounts have no minimum balance requirements and no fees.

Cons

  • No stock trading: Investing with Betterment is only available through ETF portfolios. Although this is standard for robo-advisors, many online brokerages, such as Schwab and Fidelity, offer individual and fractional stock and ETF trading for zero commissions.
  • $100,000 minimum required for Premium tier: Although customers gain CFP access in Betterment’s Premium tier, there’s also a $100,000 minimum investment requirement.
  • annual fee: Although the Betterment Digital tier fee is just 0.25% per year, some robo-advisors, like Schwab Intelligent Portfolios, charge no commissions or advisory fees at all. Fidelity Go, as another example, charges no management fees for portfolios under $10,000, and just $3 per month for accounts up to $50,000. Accounts above $50,000 pay a 0.35% annual fee.

Betterment investment approach

Betterment uses a holistic investment approach based on Modern Portfolio Theory, which attempts to achieve the highest return possible for the lowest amount of risk. A so-called optimal asset allocation will lie on this risk-reward line, which is known as the efficient frontier.

Tax-loss harvesting, portfolio optimization, rebalancing and smart beta are some of the available tools designed to enhance Betterment performance.

Investment optionsSelected ETFs
Tax loss harvesting
Portfolio rebalancing
Smart Beta
Socially Responsible Investing
Fractional shares

Asset allocation

To determine the appropriate asset allocation for your portfolio, Betterment solicits information about your investing goals and time horizon. These self-inputs are then matched with Betterment portfolios that attempt to best achieve those goals for the lowest amount of risk.

Then, client funds are allocated across a variety of equity and fixed-income ETFs divided into the following subcategories:

  • Stocks/equities
    • U.S. total stock market
    • U.S. value stocks — large-cap, mid-cap and small-cap
    • International developed market stocks
    • International emerging market stocks
    • U.S. high-quality bonds
    • U.S. municipal bonds
  • Bonds/fixed income
    • U.S. inflation-protected bonds
    • U.S. high-yield corporate bonds
    • U.S. short-term treasury bonds
    • U.S. short-term investment-grade bonds
    • International developed market bonds
    • International emerging market bonds

Betterment also offers three specialized portfolios:

  1. Smart Beta: Goldman Sachs manages a Smart Beta portfolio for Betterment, which involves taking on additional systematic risk in exchange for the potential for higher returns. Betterment classifies this strategy as between a passive and active investment management strategy.
  2. Socially Responsible Investing: This portfolio attempts to exclude companies that are deemed to have a negative social aspect, such as those profiting from environmental devastation. Only asset classes in the traditional U.S. large-cap, emerging market and developed market portfolios are eligible for replacement with socially responsible alternatives.
  3. BlackRock Target Income Portfolio: Managed by investment firm BlackRock, this portfolio is designed to maximize dividend income for retired investors via a portfolio of Bonds.

You can choose from any of these specialized portfolios, or you can use the Flexible Portfolio option to create your own blend based on your investment preferences. These options are all available in addition to the traditional Betterment asset allocation model.

Tax strategy

Betterment utilizes a variety of strategies to maximize the tax efficiency in client portfolios, including:

Asset location: This strategy automatically allocates securities based on their tax characteristics. For example, taxable bonds or other investments that throw off the most taxable income are assigned to tax-advantaged accounts, such as IRAs, while tax-free investments like municipal bonds are assigned to taxable accounts.

Tax loss harvesting: Betterment also offers tax-loss harvesting, which sells securities at a loss to offset realized taxable gains in an account. A similar security is purchased to replace the investment harvested for a tax loss.

Betterment fees

  • Annual management fee: 0.25% for Digital tier; 0.40% for Premium tier
  • Investment expense ratios: 0.03% to 0.50%

Investors in Betterment’s most basic Digital tier pay an annual fee of 0.25% of their assets under management. Those opting for the Premium tier, which offers additional services, pay 0.40% annually.

The 0.25% annual fee charged by Betterment for the Digital tier is in line with rates charged by other robo-advisors. When compared with the zero-commission cost at many online brokerages, the Betterment fee might not fit your needs. However, Betterment isn’t designed to appeal to do-it-yourself traders, and on a $10,000 account, an annual fee of 0.25% translates to just $25 in annual fees.

The 0.40% charged at the Premium level is high in comparison to other robo-advisors, but it does provide access to CFP professionals via online Chat or video conference. The rate is also much lower than what’s charged by most full-service investment professionals, though Betterment doesn’t offer in-person servicing. There’s also a $100,000 minimum investment requirement for this tier level, making the minimum annual fee $400 for Premium customers.

In addition to the annual management fees, you’ll also pay costs in the form of expense ratios for the ETFs in your portfolio. Betterment’s ETFs carry underlying expense ratios ranging from 0.03% to 0.50%.

Betterment features and tools

Betterment Cash Management account

Betterment offers a cash management account consisting of Betterment Checking, a no-fee checking account, and Betterment Cash Reserve, a no-fee, high-yield cash reserve account currently paying a 0.40% APY.

The combined account has no minimum balance requirement or overdraft fees. All ATM fees and foreign transaction fees are reimbursed, no matter where you are in the world. This account is mobile-based, providing features such as PIN changes, card locks and remote check deposits directly through the Betterment app. A contactless Visa debit card is included.

Note that you cannot take withdrawals directly from the Cash Reserve account. Money must first be transferred to the checking portion of the cash management account, at which point you can access your funds via the Visa debit card. There are no limits on the amount or size of transfers to and from your checking account.

Investment goals

Betterment offers goals-based investment planning when customers sign up. The five types of goals are:

  • Retirement savings: For those planning for their future
  • Retirement income: For those who have already retired
  • Safety net: For an emergency fund
  • Major purchase: For those planning for big-ticket items like a house
  • General investing: For non-specific future goals

Investors can choose as many of the investment goals as they like. Within each goal category, Betterment suggests investment allocations to help clients reach those goals. Account-holders are free to tweak these allocations at any time to match their personalized views.

Financial planning

Investors in the Betterment Digital tier can access various financial planning packages by paying a fee. Each package includes a Phone call with a CFP and a post-call, personalized action plan drafted by the advisor.

There are currently five packages available. Note that Premium tier users have unlimited access to CFP professionals, so the package prices listed below do not apply.

  • Getting Started Package: A 45-minute general call with a CFP for $199. This tutorial outlines how best to use a Betterment account to maximize its tax, investment and savings features.
  • Financial Checkup: A 60-minute call with a CFP to review your overall financial situation and investment portfolio for $299.
  • College Planning Package: A 60-minute call with a CFP covering educational financing for $299. The call covers how to save and invest for college and which types of accounts offer your best solutions.
  • Marriage Planning Package: A 60-minute call with a CFP regarding overall budget, goals, debt and merging finances for $299.
  • Retirement Planning Package: A 60-minute call with a CFP covering employer plans, current personal retirement holdings and other retirement planning topics for $299.

Betterment user experience

Betterment was originally created as a largely web-based experience, but it’s come a long way in adding features to its mobile app to make it a more seamless experience. It takes some time to set up an account and get a portfolio designed, especially on the app, but once your account is established, the user experience is intuitive and full of helpful information.

Betterment customer service is somewhat limited. Phone support is only available five days a week, Monday through Friday, from 9 a.m. to 6 p.m. EST. For cash management inquiries, hours are Monday through Friday from 9 a.m. to 8 p.m. EST.

Betterment safety and security

  • SIPC insurance
  • FDIC insurance
  • Encrypted data
  • Two-factor authentication

Betterment’s investment portfolios are protected by SIPC insurance for up to $500,000, including up to $250,000 in cash protection. The Betterment Checking and Cash Reserve accounts carry FDIC insurance. Limits are up to $250,000 for the checking account and up to $1 million for the cash reserve account. Note that SIPC and FDIC insurance only cover firm failure, not market losses.

To protect customer data, Betterment utilizes data encryption, fraud protection and two-factor authentication. Once you’ve identified a device as safe to use Betterment, the firm remembers it for two years before requiring additional codes.

Is Betterment worth it?

Betterment can be a great option for beginner-to-intermediate investors who want professional help with their investments at a low cost. Its optimized ETFs can offer a good value for those without the time, inclination or ability to construct and monitor a long-term investment portfolio. Beyond smart beta and tax optimization, Betterment also offers CFP access, a good online and mobile experience and cash management options.

DIY stock traders should look elsewhere, however, as Betterment doesn’t offer individual stock trading. Numerous brokerages offer commission-free trading of Stocks, ETFs and mutual funds for individual investors.

Alternatives to Betterment

While Betterment is a leading robo-advisor in the industry, it’s not the only game in town. Wealthfront and Vanguard Personal Advisor Services are two of its most prominent competitors.

 Account minimumAnnual feeAccounts offered
Betterment$0 or $100,0000.25% or 0.40%Individual taxable, joint taxable, IRAs, trusts
Wealthfront$5000.25%Individual taxable, joint taxable, IRAs, trusts, 529 accounts
Vanguard Personal Advisor Services$50,0000.05% to 0.30%Individual taxable, joint taxable, IRAs, trusts

Betterment vs. Wealthfront

Wealthfront charges the same 0.25% annual fee as Betterment does for its Digital tier, but unlike Betterment, Wealthfront requires a $500 minimum. However, Wealthfront offers a broader array of account types, including 529 Plans, which Betterment does not offer. Wealthfront also manages the first $5,000 of an investor’s account at no cost.

Wealthfront doesn’t offer access to financial advisors, so that may be a dealbreaker for some. Still, it does offer a cash management account with similar features to Betterment, including a debit card, but it doesn’t reimburse global ATM fees. Additionally, its current yield is a bit shy of Betterment’s 0.40% APY, at a 0.35% APY.

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Betterment vs. Vanguard Personal Advisor Services

Vanguard has built its brand on the strength of its mutual fund lineup, but it has branched out into no-fee commission trading and robo-advising as well. Its Personal Advisor Services program carries a hefty $50,000 minimum and charges 0.30% annually, although this can be lowered to as little as 0.05% annually for deposits of at least $25 million.

All Vanguard Personal Advisor Services clients have the benefit of speaking with a Vanguard financial advisor directly to help them plan their portfolios. Although the minimum of $50,000 is high, it’s lower than the $100,000 required at Betterment to access a financial advisor directly.

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All information included in this profile is accurate as of 09/17/2020. For more information, please consult Betterment’s website.

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