Algorithms seem to be in control of everything these days, from the ads we see on Facebook, the shows we watch on Netflix, to what we find when we search on Google.
But what if there were an algorithm that could help you invest smarter? Something that could maximize returns and minimize risk, while possessing smart features such as automatic rebalancing and tax-loss harvesting?
Especially for new investors, wouldn’t it make sense to give this a try?
That’s the idea behind the newest crop of automated investment platforms called robo-advisors – and Betterment is one of them.
What is Betterment?
Formed in 2008 by Jon Stein, Betterment was one of the first online investing and financial advising platforms available. With currently $16.4 billion in assets under management, it’s also one of the largest firms out there.
Commonly called “robo-advisers”, these investing platforms are designed to take the fear and guesswork out of investing in the stock market by actively investing, managing, and trading stocks and bonds on your behalf. Their goal is to make investing super easy for novices.
But Betterment’s goal isn’t just to get you to start investing – they want you to get your entire financial house in order.
How Does Betterment Work?
Betterment uses “Modern Portfolio Theory” to make investments based on the risk tolerance of the investor.
When you sign up, Betterment will ask you a number of different questions – such as your goals and timeline for investing – to determine your risk tolerance. This risk profile determines your asset allocation, which Betterment uses to pull together a unique portfolio for you, picking an optimal amount of stocks and bonds based on your particular situation.
What Does Betterment Invest in?
Betterment uses globally diversified Exchange Traded Funds (ETFs) to build your portfolio. An exchange traded fund is a collection of funds that tracks an index, like the S&P 500, but trades like a stock.
These stocks and bonds are highly diversified across market caps, in emerging or developing markets, and long term or short term.
By purchasing baskets of stocks and bonds that hold assets from hundreds of different companies, we can diversify our portfolio, which helps to minimize risk while maximizing returns.
While every customer will have a portfolio completely unique to them based on their risk tolerance, time until retirement, etc., every portfolio uses a mixture of the following 14 funds:
- S. Total Stock Market
- S. Value Stocks – Large Cap
- S. Value Stocks – Mid Cap
- S. Value Stocks – Small Cap
- International Developed Market Stocks
- International Emerging Market Stocks
- S. High Quality Bonds
- S. Municipal Bonds
- S. Inflation-Protected Bonds
- S. High-Yield Corporate Bonds
- S. Short-Term Treasury Bonds
- S. Short-Term Investment-Grade Bonds
- International Developed Market Bonds
- International Emerging Market Bonds
Based on your goals, Betterment will pick an asset allocation for you.
Betterment does not currently offer investing in assets such as real estate, gold/silver or cryptocurrency.
Additional Portfolio Strategies
Betterment does offer a few different portfolio options for those who have specific goals or needs that can’t be met with a standard portfolio.
A few of the portfolios available are:
- Socially Responsible Investing (SRI): This portfolio focuses on reducing your exposure to companies that have a negative social impact on the world, such as companies that profit from poor labor standards or environmental devastation, and increasing exposure to companies that have a positive social impact, such as inclusive workplaces or environmentally sustainable practices.
- Goldman Sachs Smart Beta: This portfolio uses a factor-based strategy in an attempt to outperform a conventional market-cap strategy.
- BlackRock Target Income: This is a 100%-bond portfolio aimed at people at, or near, retirement who want to generate income from dividends while preserving capital and limiting their exposure to the stock market.
- Flexible Portfolios: This option allows you to pick the asset classes that make up your portfolio to your liking, including the percentages of each, rather than using a predetermined portfolio. This feature is only available to account holders with more than $100,000 in assets.
Types of Accounts
Whether you want to save for retirement, fund your child’s education or just beef up your emergency fund, Betterment offers a wide range of accounts that can accommodate many of your personal goals, including joint accounts for spouses and trust accounts for beneficiaries.
Betterment offers the following types of accounts:
- Individual taxable accounts: The most common type of brokerage account for investors.
- Joint taxable accounts: For people who file joint tax returns, such as married couples.
- Retirement accounts: You can hold investments in tax-advantaged accounts as well, such as Traditional IRAs, Roth IRAs, Rollover IRAs, Rollover Roth IRAs, and SEP IRAs.
- Trust accounts: For people who want to leave wealth to their families.
You can choose any of these account types when you sign up. You can also align each of your accounts to a different investment goal, whether that’s investing, saving, or setting up a beneficiary.
What Features Does Betterment Have?
- Mobile & Desktop App: Betterment offers a sleek mobile application that has the same features as the web version. It’s compatible with iOS devices running 11.0 and up, including iPhone, iPad and iPod touch. It’s also compatible with Android devices running 6.0 and up.
- Tax Loss Harvesting+: Tax loss harvesting is the strategic practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. This is done automatically for you and can save money over the long term.
- Automatic Rebalancing: Over time, market gains and losses can offset your asset allocation so that you may be more exposed to stocks or bonds than you’d like. Betterment automatically sells and purchases ETFs to make sure your portfolio is at the correct asset allocation for you.
- Two-Way Sweep: A feature unique to Betterment, the two-way sweep feature will identify available cash in your checking account and move it to their high-yield cash reserve account so your idle cash isn’t losing money to inflation. Worried about not having enough cash on hand for bills? The two-way sweep feature can place money back into your account so you’re always covered.
- RetireGuide: Input your age, income, and account type and Betterment will recommend a portfolio, including the asset allocation, to help guide you to retirement. You can even connect data from all of your retirement accounts so you can get a complete picture of your finances.
- Charitable Giving: You can donate shares directly to charity right from your account. While donating shares has the same tax deduction as donating cash, donating shares with appreciated gains can save you on taxes.
How Do Pricing and Fees Work with Betterment?
Betterment has two tiers of service, each with their own account minimums and fees: digital and premium.
- The digital service has no account minimum and charges a management fee of 0.25% per year. This fee drops to 0.15% after your portfolio reaches 2 million.
- The premium service has a $100,000 account minimum and charges a management fee of 0.40% per year. This fee drops to 0.30% after your portfolio reaches 2 million.
To most people, these fees probably sound like peanuts. But properly understanding fees goes a long way to understanding how much of your money gets eaten up by fees. For an investor with $1,000 in a portfolio, you’ll be paying $2.50 per year to have Betterment manage a portfolio with the basic digital service.
Premium also comes with unlimited access to Betterment’s certified financial planners, who can give you advice on your portfolio, whether your assets are inside or outside of Betterment. They can also advise you on events outside of investing, such as saving for a child’s education, or helping newlyweds merge their finances together (more on that below).
Choosing between Betterment digital or premium will depend on how much you plan on investing with Betterment and if you want access to Betterment’s more robust features.
Betterment Financial Planning Features and Pricing
Whether you’ve reached a new stage of life or just need some general guidance, Betterment financial advisors can help you plan for many of life’s most common milestones. If you’re a premium member, you’ll pay no additional fees for these calls.
Each financial package comes with a phone call, an action plan written by your expert and exclusive educational content.
You can speak to a financial adviser about the following topics:
- Getting Started Package: This 45-minute phone call with a certified financial planner can help you set up your Betterment account to maximize their investment, tax, and savings features so you can reach your goals. Price: $199
- Financial Checkup Package: This 60-minute phone call with a certified financial planner will review your current financial situation. your investment portfolio and provide advice. Price: $299
- College Planning Package: This 60-minute phone call with a certified financial planner will review your family’s financial situation and plans for higher education, including helping you understand how much you need to save, how to invest, and which accounts will work best for you. Price: $299
- Marriage Planning Package: Getting married soon? This 60-minute phone call takes place with a certified financial planner and your partner so you can go over your goals, how to budget and merging your finances with your loved one. Price: $299
- Retirement Planning Package: This 60-minute phone call with a certified financial planner reviews your current account and holdings, employer plans and more. Price: $299
And if you need more regular and comprehensive financial planning than what’s offered above, Betterment can set you up with your own dedicated certified financial planner via the Betterment Advisor Network (minimum $100,000 investment).
Betterment Everyday Cash Reserve Account
In addition to investing, Betterment also offers users a high-yield savings account that earns 1.83% APY*. It requires just $10 to sign up and has no additional account fees. Deposits are FDIC insured up to 1 million dollars, and the account comes with several noteworthy features, such as unlimited withdrawals and deposits (you can typically only withdraw from a savings account six times per month).
Betterment is also preparing to launch a checking account with a host of cool features, such as no overdraft fees, no minimum balances, ATM-reimbursement and FDIC-insurance protection for up to $250,000, but it’s not yet available in every market. You can join the waitlist here.
*You can see the current APY here.
Is Betterment Safe?
While no financial advisor can keep your portfolio from losing value in the stock market, Betterment’s algorithms do their best to help reduce your exposure to risk.
Additionally, Betterment takes precautions to safeguard your money. One of the ways they do this is by making sure your assets and Betterment’s assets are kept completely separate. This way, you have full access to your assets, and can add, withdraw and transfer them as you wish.
Furthermore, your Betterment account is protected by insurance from the Securities Investor Protection Corporation (SIPC), insuring each of your Betterment accounts up to $500,000 in the event of a broker error or the failure of the company. (Note that market losses are not SIPC covered).
Betterment also encrypts all of your personal data, such as your financial information like bank account and your tax identification number, to personal data such as your social security number and security questions. This ensures that your data is kept private as it makes its way through the Internet.
A few additional ways you can keep your assets safe:
- Enable two-factor authentication
- Keep all records and statements from your accounts
- Periodically check statements
- Never give out your login information to anyone, including Betterment employees
- Use Betterment over a secure internet connection
Who should use Betterment?
People who should use Betterment:
- New investors
- Investors with little start up money
- Investors who want to set it and forget it
- Investors who don’t have time to manage investments
People who shouldn’t use Betterment:
- People who want to trade frequently
- People who want more flexibility over their investments
- People who want to manage their portfolios more actively
Is Betterment Worth It?
If you’re a beginner investor just starting to build wealth and are looking for an automated, hands-off approach to investing with tons of extra features, then Betterment may work great for you. Whether you need general investment advice or financial planning for many of life’s significant events, Betterment can help.
Betterment also offers investing at a great price, as its fees are right in line with similar robo-advisers like Wealthfront, who charges an identical management fee of 0.25%.
Betterment offers additional features such as financial planning and two-way sweep you can’t get from places like Wealthfront, making it an even more attractive option among robo-advisors.
Before you decide where to place your money, it’s crucial to identify your long-term goals. For investors looking to get their feet wet in the world of investing, you could do a lot worse than Betterment. Their investments are highly diversified, charge low fees, and are fully-automated.
If you’re wanting to actively trade stocks or want a little more control over your portfolio, then a robo-advisor like Betterment may not be the investing platform for you. But if you’re a new investor and want someone to manage your money for you, Betterment may be right up your alley.
Sign up and deposit $10 to get started.