I enjoy reading and writing about the investment strategies discussed in this Betterment review. But that’s atypical, and most individuals would rather spend their time doing something other than managing an investment portfolio.
If you aren’t interested in tinkering with your investments, Betterment provides a straightforward approach to successful investing that requires very little time, money, or energy.
Based on decades of relevant investment research, Betterment’s investment strategy involves owning thousands of publicly traded financial assets that represent the global economy. This approach bypasses most of the fees and expenses that erode investment performance. These include commissions to buy/sell securities, hidden fees charged by brokerage firms, and unnecessary taxes. This strategy also helps mitigate some of the costly behavioral flaws that are common to individual investors.
I’ll admit upfront that I’m impressed by Betterment’s value proposition. They do everything related to portfolio management for you, and they do it very well. Beyond providing a low-cost, diversified portfolio, Betterment provides advanced tax-loss harvesting, tax-advantaged rebalancing, financial planning, and a slew of other valuable services for a reasonable 0.25% in annual fees.
Table of Contents
- Betterment Review Introduction
- Betterment Investment Options
- Your Betterment Portfolio
- Personalized Financial Advice
- Betterment’s Tax Efficiency
- Other Betterment Features
- Betterment Fees
- Betterment Security
- Possible Drawbacks
- Betterment Review Bonus
Betterment Review Introduction
Betterment is growing quickly and manages more than $11 Billion in assets for more than 275,000 clients. The company takes pride in offering portfolio management services that are both affordable and easily accessible.
Here is a nice overview created by the CEO and Bloomberg:
One of Betterment’s selling points is ease of use, and the online user dashboard is very intuitive and easy to understand.
If you are looking to invest your savings without having to worry about anything else, Betterment is for you. There’s no researching which investments you need to purchase, or deciding when to rebalance your portfolio. Betterment does all of that, and more, automatically.
With Betterment, you don’t own individual stocks or bonds. Investments are held in the form of exchange-traded funds (ETFs). The asset allocation between these various ETFs ensures that your account is not weighted too heavily in any specific asset class, company, country, or sector, which ultimately reduces overall investment risk.
Betterment Investment Options
When you deposit money with Betterment, it is seamlessly invested in a diversified blend of stock and bond ETFs. Betterment uses ETFs instead of mutual funds because ETFs have lower expenses and receive preferential tax treatment, making them a better overall investment vehicle.
As of September 2017, new Betterment customers can choose between four different portfolios. The standard Betterment portfolio is recommended by default. New and existing clients can opt into one of the other portfolios at any time.
1) The Betterment Portfolio
The Betterment portfolio includes exposure to a variety of stock and bond index ETFs.
Betterment’s investment committee has chosen stock ETFs that reflect the U.S. market, as well as international markets. These ETFs allow you to invest in thousands of publicly traded companies at once, providing huge diversification benefits. Betterment uses the following ETFs for core stock exposure:
- Vanguard U.S. Total Stock Market Index ETF (VTI)
- Vanguard US Large-Cap Value Index ETF (VTV)
- Vanguard US Mid-Cap Value Index ETF (VOE)
- Vanguard US Small-Cap Value Index ETF (VBR)
- Vanguard FTSE Developed Markets Index ETF (VEA)
- Vanguard FTSE Emerging Markets Index ETF (VWO)
Why Betterment recommends these funds:
The U.S. exposure covers the total U.S. stock market with a slight tilt towards value and small-cap stocks. The value and small-cap tilts have historically outperformed the broad market, based on research by Nobel-prize winners Eugene Fama and Kenneth French.
By adding international stocks, investors benefit from growth overseas in developed markets, including the U.K., Japan, and Europe. The emerging market ETF allows investors to capture growth in expanding markets such as Brazil, India, and China. These international securities further diversify the portfolio, resulting in less risk and volatility over time.
The Betterment Portfolio includes the following bond funds:
- iShares Corporate Bond Index ETF (LQD)
- Vanguard US Total Bond Market Index ETF (BND)
- iShares Short-Term Treasury Bond Index ETF (SHV)
- Vanguard Total International Bond Index ETF (BNDX)
- Vanguard Emerging Markets Government Bond Index ETF (VWOB)
- Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- (For Taxable accounts only) iShares National Municipal Bond Index ETF (MUB)
Why Betterment recommends these funds:
These bond ETFs allow investors to balance four different risk factors: U.S. interest rate risk, U.S. credit risk, international interest rate risk, and international credit risk.
Betterment also distinguishes between taxable and retirement accounts when allocating bonds. Taxable accounts hold federally tax-exempt municipal bonds. Retirement accounts maintain exposure to U.S. investment-grade corporate bonds. This strategy optimizes the after-tax return of your portfolio.
2) Socially Responsible Portfolio
In July of 2017, Betterment began offering an optional Socially Responsible Investment (SRI) Portfolio. This service is provided at no additional cost, but Betterment clients must opt into this portfolio. Existing clients can choose the socially responsible portfolio from within the “advice” tab of their account. New Betterment clients can choose this option when signing up.
The Socially Responsible Portfolio replaces the standard U.S. large-cap stock allocations listed above with a large-cap socially responsible ETF (DSI). Other asset classes are not replaced with an SRI alternative because an acceptable alternative doesn’t yet exist or because the higher fees or lack of liquidity make for a prohibitively high cost.
The SRI portfolio reflects a 42% improvement in social responsibility scores for U.S. large-cap stocks when compared to the standard portfolio, and works with all existing Betterment tax features, including tax-loss harvesting and tax-coordinated portfolios.
3) Blackrock Income Portfolio
In September of 2017, Betterment began offering two additional portfolios. The first is an all-bond portfolio designed by Blackrock to provide regular income.
In the Income Portfolio, all stock market funds are replaced by bond funds (including lower-quality, high-yield bonds). The result is a lower risk portfolio that provides more income than the Core Betterment Portfolio.
However, the portfolio offers far less growth potential without any allocation to stocks. Additionally, bond interest is usually taxed as ordinary income, making this portfolio far less efficient when held inside of a taxable account.
4) Goldman Sachs Smart Beta Portfolio
The other portfolio introduced in September is the Smart Beta Portfolio designed by Goldman Sachs. This portfolio replaces the market-cap weighted indices in the core Betterment Portfolio with smart-beta ETFs designed to outperform the broad market.
This portfolio includes exposure to four factors designed to improve portfolio performance, including value, quality, momentum, and low volatility. The underlying ETF expenses are significantly higher than the core Betterment Portfolio.
Your Betterment Portfolio
After you select a portfolio, the stock and bonds ETFs listed above are blended together to create your ideal investment portfolio.
When you create a Betterment account, you will be asked a series of questions to determine your risk tolerance and investment time horizon. The Betterment algorithm then uses that information to create a portfolio tailored to your preferences.
If you are young and looking to build wealth, Betterment will recommend that you hold more stocks than bonds to maximize long-term growth. Here is how that appears in a taxable account:
If you are looking to establish an emergency fund, or if you have a shorter investment horizon, Betterment will recommend a more conservative portfolio that includes a larger allocation to bonds.
The Betterment process is designed to align your financial goals with the correct amount of investment risk. If you don’t like the portfolio recommendation, you can manually adjust your asset allocation at any time.
Personalized Financial Advice
In addition to creating and managing your investment portfolio, Betterment provides two forms of financial advice at no additional cost.
The first feature is unlimited messaging through the Betterment mobile app. If you have any financial questions — big or small — you can securely message Betterment and receive answers from a licensed professional. The application also provides an ongoing record of every conversation that you can reference at any time.
If you aren’t yet a Betterment client, you can use the messaging service to answer potential questions that you may have. For example, deciding which funds to move to Betterment, setting goals (like saving for college, a house, or retirement), choosing appropriate risk levels in your account, and selecting the correct type of investment account.
In addition, all Betterment clients also have access to a comprehensive retirement planning tool called RetireGuide.
Betterment’s RetireGuide service uses your retirement goals to recommend an appropriately diversified portfolio. This recommendation takes into account all sources of income, your savings rate, where you live, and what you expect to spend during retirement. Betterment reviews all of your financial accounts to make this recommendation, even if they are held outside of Betterment.
RetireGuide automatically updates with any changes in your accounts and helps you stay organized with a display of all of your retirement accounts in one place. You can also now update the age at which you expect to receive Social Security benefits and even upload a Social Security statement file from SSA.gov for precise estimates and advice.
The result is a comprehensive view of your financial progress, with personalized advice on how to achieve your financial goals and retirement goals. The RetireGuide system will recommend the amount that you should be saving in order to achieve your goals. If you’re approaching, or in retirement, the system optimizes investment returns and recommends sustainable withdrawal rates to improve the longevity of your portfolio.
Betterment’s Tax Efficiency
Betterment includes a number of services that can reduce your annual tax liability.
Tax Loss Harvesting – At its most basic level, tax-loss harvesting is selling a financial asset that has experienced a loss — and then buying a correlated asset (i.e. one that provides similar market exposure) to replace it.
Free for all customers with a taxable account, Betterment now provides a sophisticated, automated tax-loss harvesting service. According to Betterment’s research, this service would have increased Betterment returns by approximately 0.77% per year over the last decade. That means this feature alone more than covers the 0.25% annual fee.
Spousal Tax Loss Harvesting – Betterment now offers TLH+ for married couples. When you enable TLH+ on your Betterment account, you will now be asked to provide your spouse’s Betterment account information as well. If your spouse uses Betterment, this service will optimize the investments across all accounts and help prevent wash sales (simplifying your annual tax return).
Tax-Coordinated Portfolios – Tax-Coordinated Portfolio optimizes and automates your asset location. It places your highly-taxed assets in your IRA accounts (tax-sheltered until retirement), and your lower-taxed assets in your taxable account. Betterment research shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years.
Smart Rebalancing – Portfolio rebalancing is basically shifting money between the asset classes you’ve decided to invest in. If your ideal portfolio was 60% stocks, 40% bonds, the goal is to keep that asset allocation in balance. Over time, you might end up with 70/30 allocation if you never rebalance your portfolio, resulting in more risk than you originally intended. The problem is that rebalancing often involves selling one asset class and buying another, which can result in additional taxation. Betterment uses all available cash flows (your deposits) and reinvested dividends to rebalance your portfolio. This reduces the number of asset sales, which should reduce your tax liability over time.
TaxMin Lot Selling – Betterment uses a unique algorithm to sell securities with losses before gains, and securities with long-term gains before short-term gains. This process minimizes short-term capital gains, which reduces your annual tax liability.
Tax Efficient ETFs – Betterment uses ETFs instead of mutual funds, which can result in additional tax savings each year. ETFs are a more tax-efficient investment vehicle than mutual funds when held inside of a taxable account.
Other Betterment Features
Smart Deposit – Allows you to automatically invest any excess savings that are sitting in your bank account. You tell Betterment how much you want to keep in your bank account and how much you want to invest, then Betterment uses those guidelines to automatically transfers funds from your bank account to Betterment on a regular basis. This allows you to continue building a bigger investment portfolio without holding too much cash.
Beautiful Design – Betterment has a wonderful, easily accessible interface that can be accessed on any computer, tablet, or smartphone. The interface allows investors to easily control and edit any investment account held at Betterment.
Fractional Investing – Betterment can purchase fractional shares of any investment, which means that 100% of your money is working for you 100% of the time. If an ETF share costs $100 and you only have $60 available in your account, you’ll purchase 0.6 shares and remain fully invested.
Behavioral Realities – Many people begin investing with good intentions, only to see the idea fade away like a New Year’s resolution. If you don’t enjoy managing your portfolio or reading about investing, you might neglect it altogether. Betterment does everything for you in exchange for a reasonable fee.
Great Customer Service – Betterment employees are on hand seven days a week to answer your questions by phone, email or live chat. Everyone we have talked with at the company has been kind and helpful.
Betterment offers two different plans for customers to choose from.
|Plan||Annual Fee (% of account balance)||Annual Cost (per $10,000 invested)||Features|
|Betterment Digital||0.25%||$25||All services mentioned in this review|
|Betterment Premium||0.40%||$40||Betterment Digital + unlimited financial planning advice|
Betterment Digital is the core offering, which includes all services mentioned in this review. Betterment Premium builds upon Betterment Digital by including financial planning advice from a team of licensed, CFP® professionals.
It’s also worth noting, both service tiers are subject to a $2 million fee limit. Betterment waives all fees on the portion of your account balance that exceeds $2 million.
Remember that in addition to the Betterment fees stated above, you’ll have to pay underlying ETF expenses (which average about 0.10% annually). When you invest in any ETF, you will pay a fee to the ETF provider (such as Vanguard). This is not unique to Betterment, and they don’t receive any kickback on the ETF expenses.
Betterment charges no other fees. No trading commissions, no minimum required balance, no transfer fees, and no account closure fees.
When reviewing Betterment, I wanted to verify the measures taken by Betterment to secure each account. Unsurprisingly, Betterment offers the same security protections provided by commercial financial institutions, including:
- Two-Factor Authentication – You can create an additional layer of security beyond your account password.
- SIPC Insurance Coverage – Securities in your account are protected up to $500,000 in the case of fraud or mismanagement.
- 256-bit SSL Encryption – All parts of the Betterment website are encrypted and protected by monitored firewalls.
- Paramount Privacy – Your personal info is never shared without consent.
- Strict Regulations – Betterment is regulated by the SEC and FINRA, and subject to all regulations set forth by the federal government.
Features – Betterment’s biggest competitor (Wealthfront) recently began offering a number of services not yet available at Betterment, including a variety of advanced tax-loss harvesting features. Betterment responded by providing Tax-Coordinated Portfolios (discussed earlier in the review), but Wealthfront still maintains the edge for taxable accounts.
Cost of Service – Betterment fees are reasonable, and I think the included features more than justify the 0.25% annual fee. But if you are eager to learn about investing, you can manage your own portfolio.
Investment Customization – Some investors might prefer to invest in asset classes that are not available through Betterment, such as real estate. Other investors might be interested in choosing the individual securities in their portfolio, which is allowed at M1 Finance.
Betterment Review Bonus
Betterment is currently offering Cash Cow readers up to one year of free service as a limited time offer.
The signup process takes less than five minutes. Betterment will ask you a series of short questions about your investment preferences to help determine your risk tolerance and the correct type of investment account. Once you accept or modify the Betterment recommendations, you can link your bank account and fund your Betterment account. Money can be transferred between your bank and Betterment account at any time, or you can establish an automatic deposit from your bank account.
You can open a taxable brokerage account or IRA (Traditional or Roth). If you are self-employed, you can also open a SEP-IRA account. Betterment also allows you to rollover an existing employer-sponsored retirement plan (401k, 403b, pension, etc.) into a Betterment IRA if you’d like to let Betterment handle your retirement savings instead of a past employer. The entire transfer process can be completed online in a few business days.
If you are undecided about the service, my Betterment vs Wealthfront vs M1 Finance article can help you make an informed decision.