Table of Contents
- An Introduction to Betterment
- How Betterment Works
- Betterment Investment Options
- Customize Your Betterment Portfolio
- Personalized Financial Advice
- Betterment’s Tax Efficiency
- Other Betterment Features
- Betterment Fees and Pricing
- Betterment Security
- Betterment Account Options
- Betterment Limitations
- The Cash Cow Conclusion
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 eliminates 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 (with no minimum balance requirements).
An Introduction to Betterment
Betterment, which launched in 2010 as the first robo-advisor available in the U.S., is currently the largest independent robo-advisor in the world, managing roughly $15 Billion in assets for nearly 400,000 clients.
The leadership team, comprised of financial experts from a variety of disciplines, is well-credentialed within the financial planning industry (CFP, CFA, etc.) and well-educated in the science of finance and statistics (
The company takes pride in offering portfolio management services that are affordable and accessible, and Betterment has done a wonderful job blending the science of investing with beautiful design and overall ease of use.
Here is a nice overview of Betterment services, narrated by current employees:
How Betterment Works
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 through the following process:
1) Describe your goals and needs
The first step when signing up for Betterment is answering a few basic questions about upcoming life goals and financial priorities. Are you looking to purchase a home, save for college, vacation, retirement, or something else entirely?
2) Review Betterment’s recommendations
Betterment uses the answers provided in step one to recommend a personalized investment portfolio tailored to each of your goals and risk profile. If you don’t like the recommendations, Betterment allows further customization and you can add, remove, or modify your goals as life evolves.
3) Decide how much to save
After recommending a personalized investment portfolio, Betterment helps you determine how much you should be saving to reach each of the goals you’ve provided. For retirement, Betterment will suggest which retirement accounts you should use, and how much you should save into each account. Furthermore, you can schedule recurring transfers and automate your deposits/withdrawals.
4) Relax while Betterment manages your money
Once you’ve selected your goals and desired portfolio, Betterment’s technology does all of the heavy
The remainder of my review dives deep into Betterment’s investment philosophy, portfolio recommendations, tax features, and much more.
If you aren’t interested in the finer details, stop reading, create a Betterment account, and believe me when I tell you that Betterment is a bargain at 0.25% of your account balance annually (which is $25 in fees, annually, per $10,000 invested).
I’m a nerd with a Ph.D. in financial planning, so the intricacies of Betterment interest me. However, I don’t expect you or anyone else to share my enthusiasm for robo-advisors or investing.
Betterment Investment Options
When you deposit money with Betterment, it is seamlessly invested in a diversified blend of stock and bond ETFs. Betterment’s investment strategy is based on Nobel Prize-Winning Research, formally called Modern Portfolio Theory and the Capital Asset Pricing Model.
Betterment uses ETFs instead of mutual funds because ETFs have lower expenses and receive preferential tax treatment, making them a better overall investment vehicle. The asset allocation between these various ETFs ensures that your investment portfolio is not weighted too heavily in any specific asset class, company, country, or sector, which ultimately reduces overall investment risk.
As of 2019, new Betterment customers can choose between four different portfolios. The Core Betterment Portfolio is recommended by default (and is the most diversified option). New and existing clients can select one of the other portfolios at any time
Note, Betterment charges no additional fees to select any of the available portfolios. However, the portfolios contain different ETF investment options, and these ETFs will carry different expense ratios. The ETFs available in the Core Betterment Portfolio are less expensive than the alternatives discussed below.
The Core Betterment Portfolio
The Core Betterment Portfolio includes exposure to a variety of stock and bond index ETFs that represent the global economy.
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 while reducing risk.
Betterment uses the following ETFs for core stock exposure:
- U.S. Total Stock Market Index ETF (VTI)
- U.S. Large-Cap Value Index ETF (VTV)
- U.S. Mid-Cap Value Index ETF (VOE)
- U.S. Small-Cap Value Index ETF (VBR)
- Developed International Markets Index ETF (VEA)
- Emerging International 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 Core Betterment Portfolio includes exposure to the following bond funds:
- U.S. Aggregate Bond Index ETF (AGG)
- Emerging Markets Bond Index ETF (VWOB)
- Developed International Bond Index ETF (BNDX)
- U.S. Short-Term Treasury Bond Index ETF (SHV)
- U.S. High-Yield Corporate Bond Index ETF (HYLB)
- Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
- (taxable accounts only) U.S. 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.
Socially Responsible Portfolio (Optional)
The Socially Responsible Investment (SRI) Portfolio makes two changes to the Core Betterment Portfolio.
- Standard U.S. large-cap stock allocations are replaced with a large-cap socially responsible ETF (DSI)
Emergengmarket stock allocations are replaced with a emerging-market socially responsible ETF (ESGE)
Other asset classes are not replaced with an SRI alternative because an acceptable alternative doesn’t yet exist or
The SRI Portfolio reflects a 42% improvement in social responsibility scores for U.S. large-cap stocks when compared to the
Core Betterment Portfolio, and works with all existing Betterment tax features, including tax-loss harvesting and tax-coordinated portfolios.
Income Portfolio (Optional)
The Income Portfolio (designed by Blackrock) replaces all stock market ETFs with bond funds (including lower-quality, high-yield corporate bonds). The result is a lower risk portfolio that provides more interest income than the Core Betterment Portfolio.
However, the bond ETFs included in this portfolio offer far less growth potential than stock ETFs and carry higher fees than the bond ETFs include in the Core Betterment Portfolio. Additionally, bond interest is usually taxed as ordinary income, making this portfolio less tax efficient when held inside of a taxable account.
With this portfolio, the target market is investors who are looking for income at the expense of potential growth. Retirees are an obvious example, but personally, I prefer a conservative allocation to the (lower-fee) Core Betterment Portfolio to achieve a similar result.
Smart Beta Portfolio (Optional)
The Smart Beta Portfolio (designed by Goldman Sachs) 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 higher than the core Betterment Portfolio, and performance to date has been lackluster (no better than the Core Betterment Portfolio after accounting for higher fees).
Customize Your Betterment Portfolio
Remember from the intro, when you first create a Betterment account, you will be asked a series of questions to determine your goals, risk tolerance, and investment time horizon. The Betterment algorithm then uses that information to recommend a portfolio tailored to your preferences.
The stock and bond ETFs listed in the section above are blended together by the Betterment algorithm to create your ideal investment portfolio. The weight of each ETF recommended by Betterment (called asset allocation) will vary according to your specified goals and risk tolerance.
For example, if you are a young adult saving for retirement, Betterment is going to recommend a stock-heavy allocation to maximize growth potential. If you are a retiree looking to preserve your accumulated wealth, Betterment will recommend a bond-heavy allocation. The recommendation for a middle-aged saver will fall somewhere
If you designate multiple goals, each of those goals will have a unique asset allocation recommendation (blend of stock/bond ETFs) that can be modified by you. This is of great value, allowing flexibility in your investment strategy.
How to Customize Your Portfolio
For every goal that you specify, Betterment will offer a recommended asset allocation. However, you can ignore this recommendation and modify the asset allocation according to your own preferences at any time through your online account dashboard.
Furthermore, if you have a minimum of $100,000 invested across all Betterment accounts, you have access to Betterment’s Flexible Portfolio feature.
The Flexible Portfolio feature takes customization one step further. In addition to having the ability to modify and select the asset allocation for each of your accounts (available to all customers, with no minimum balance requirements), you can actually modify the weightings of every single ETF held in the account.
For example, if you if you don’t like Betterment’s recommended allocation to large stocks, you can remove that ETF from your portfolio and replace with any of the other ETFs available.
These modifications have no impact on other Betterment features (for example, all of the advanced tax features discussed below will continue to function without issue).
In the example below, my goal is to “build wealth” and I have specified an aggressive asset allocation of 90% stocks and 10% bonds.
Notice how the various stock and bond ETFs presented in the last section are blended together to create my portfolio:
Here I can select “Adjust target allocation” to modify the 90% stock / 10% bond asset allocation I previously selected.
Because I don’t have $100,000 invested in the account, I cannot access the Flexible Portfolio feature to modify the specific ETFs held in my account.
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.
In addition, all Betterment clients 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.
Paid Financial Advice
In addition to the free services described above, Betterment offers an optional paid financial planning service called Betterment Premium.
As described in the “Fee” section later, Betterment Premium costs 0.15% more than Betterment’s Core Digital Service (0.25%) for a total cost of 0.40% annually and is only available to investors with a minimum of $100,000 invested with Betterment.
For the extra fee, you receive unlimited access to Betterment’s team of CFP® professionals and advice on all investments/accounts held outside of Betterment.
Betterment’s Tax Efficiency
To enhance the portfolio management services discussed earlier, Betterment includes a number of features (at no cost) that can reduce your annual tax liability and increase your after-tax returns.
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 offsets 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 the process of asset location. It places highly-taxed assets in your tax-sheltered retirement accounts, and less-taxed assets in your taxable account. Betterment research suggests that this strategy can boost after-tax returns by an average of 0.48% each year, which amounts to approximately 15% over 30 years.
Smart Rebalancing – If your ideal investment portfolio is 60% stocks / 40% bonds, according to your risk tolerance and goals, the goal is to keep that asset allocation in balance over time. 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 automatically rebalance your portfolio. This reduces the number of asset sales, which will 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, and further 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.
Charitable Giving – Betterment can help you donate appreciated assets directly to charity, through your online dashboard. This maximizes any tax deductions on your behalf while eliminating taxation on assets received by the charity.
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.
Smart Saver – Much like the feature above, Smart Saver allows you to move excess cash into Betterment. Instead of investing that cash in your standard Betterment investment portfolio, Smart Saver is a unique account designed by Betterment to mimic a traditional savings account. For reasons discussed later, I don’t currently use or recommend the Smart Saver account.
Auto-Withdrawal – In addition to automated deposits, you can establish automatic withdrawals from any Betterment account to an external checking account. This is especially useful for retirees who hold reitrement accounts at Betterment.
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 Fees and Pricing
Betterment offers two distinct plans at this time. Betterment Digital is the core offering, which includes all services mentioned in this review. Betterment Premium builds upon Betterment Digital by including unlimited financial planning advice from a team of licensed, CFP® professionals.
|Plan||Annual Fee (% of account balance)||Annual Cost (per $10,000 invested)||Annual Fee (account balance > $2M)|
Prior to September 18th, 2018, Betterment waived all management fees on account balances in excess of $2 million. All existing customers (with funded accounts) are grandfathered into that fee waiver for life (even if you don’t yet have $2 Million, but obtain that figure in future years).
As of today, accounts in excess of $2 million receive a 0.10% fee reduction as shown in the table above.
Remember that in addition to the Betterment Management Fees stated above, you’ll have to pay underlying ETF expenses (which average less than 0.10% annually). When you invest in
Betterment charges no other fees. There are no trading commissions or brokerage fees, no minimum balance requirements, no incoming/outgoing transfer fees, and no account closure fees.
When reviewing Betterment, I wanted to verify the measures taken by Betterment to secure each individual account.
Unsurprisingly, Betterment offers the same security protections provided by all reputable 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 with any external party, without your explicit consent.
- Strict Regulations – Betterment is regulated by the SEC and FINRA, and subject to all financial regulations set forth by the federal government.
Betterment Account Options
When investing through Betterment, you may open any (or all) of the following accounts:
- Taxable Brokerage Account
- Taxable Smart Saver Account
- Self-Employed Retirement Account (SEP-IRA)
- Individual Retirement Account (Traditional or Roth)
- Rollover Existing Employer-Sponsored Retirement Plans (401k, 403b, 457, etc.)
If you transfer (rollover) outside brokerage accounts or existing retirement plans into Betterment, the process can be initiated through your online Betterment Dashboard and completed in a few business days. You can also contact Betterment and they will assist with any questions or transfer requests.
Tax 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 competitive, and in my opinion, the included features more than justify the 0.25% annual fee. However, if you are eager to manage your own portfolio, you can purchase the ETFs recommended by Betterment (or any other robo-advisor) for free though M1 Finance.
Smart Saver Account – Betterment’s Smart Saver Account is a low-risk investing account comprised of bonds (80% Short-Term U.S. Treasury Bonds, 20% Short-Term Corporate Bonds). Betterment is advertising the account as a substitute for a traditional savings account (to hold short-term cash reserves), but there are better alternatives available (see my Smart Saver Review).
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.
Employer-Sponsored Plans – In the account section above, notice that you must transfer (rollover) existing employer-sponsored retirement plans (401k, 403b, 457, etc.) in order for Betterment to manage those assets. For regulatory reasons, Betterment cannot manage employer-sponsored plans directly. However, if you are still employed and actively participate in one of these plans, you cannot initiate a rollover (to Betterment) until you sever employment, but you can hire Blooom to manage your assets for $10/month.
The Cash Cow Conclusion
Betterment is delivering a stellar investment experience and helping thousands of clients build wealth by participating in financial markets. From the moment Betterment launched, I knew they offered something unique from traditional wealth management services.
The service is not perfect, as I discuss in the section above, but Betterment’s value proposition has continued to improve through technological updates and the regular addition of new features. The current goal-based approach to investing is supported by decades of finance research, and at this point, Betterment is offering better advice than many practicing financial advisors (brokers).
The online dashboard, smartphone application, and overall user experience are probably the finest among all robo-advisors, making Betterment’s investment process aesthetically pleasing, and dare I say, even enjoyable.
If you are undecided about the service, my Betterment vs Wealthfront vs M1 Finance article can help you make an informed decision.
If you would like to start investing, Betterment is currently offering the Cash Cow Community up to one year of free service as a limited time promotion.
Thank you for reading my Betterment Review, and please let me know if you have additional questions in the comment section below.