Betterment Review - Portfolio Rebalancing in Its Finest

Betterment Review

A growing investment niche for DIY investors in the most recent decade is robo-advisor platforms. Robo-advisors combine automated investing and low costs that make it possible not to use a traditional financial advisor and still have a managed account. In this Betterment review, you will learn how robo-advisors can be a beneficial option for many investors.

Betterment is one of many robo-advisor platforms. They happen to be one of the first and largest robo-advisors and are one of the few to offer access to a financial advisor as some investors still request a human touch.

While robo-advisors can be a cost-effective brokerage option, they aren’t a good choice for every investor. In particular, cost-conscious DIY investors and active investors that need a self-directed platform.


Brief Overview

Betterment was founded in $9 billion in managed assets from 260,000 customers!

As a robo-advisor brokerage, Betterment invests in low-cost ETFs from Vanguard and iShares. The average fund expense ratio is 0.13% and Betterment charges an account maintenance fee starting at 0.25% of the portfolio value. Annual fees cap at 0.50% and provide unlimited access to a Certified Financial Planner.

As the robo-advisor name indicates, accounts and investment contributions are managed by computer algorithms, although professional advisors oversee the model and make adjustments as market conditions change.

Betterment support taxable brokerage accounts, retirement accounts including Traditional IRAs, Roth IRAs, and trusts.

While there a minute differences in Betterment’s investment strategy for taxable and non-taxable funds, Betterment employ tax-efficient investing for all accounts so reduce your tax bill through tax-loss harvesting and tax-coordinated investing.

Unlike other self-direct brokerages or a financial advisor, you can only invest in the ETFs selected by Betterment.

Even then, they have a model portfolio based on an asset allocation that allows minimal deviation. This can be helpful for novice investors and “set it and forget it” investors looking for simplicity at a low-cost, but, active investors and DIY investors will need to invest with a different brokerage to have exposure to different asset classes like real estate or penny stocks.


Who Should Consider It

Betterment is ideal for the following investors:

  • Hands-off investors
  • Retirement Investors
  • Users with low balances
  • Investors who want automatic rebalancing and tax harvesting

Betterment isn’t a good fit for active traders or those who can successfully invest by themselves.

With Betterment, you essentially make a monthly contribution and they handle all the investment decisions based on your age and investment goals.


Likes and Dislikes

Likes

Dislikes

  • No Minimum Deposit
  • Goal-Based Savings
  • Purchase Fractional (Partial) Shares of ETFs
  • Optional Access to CFP
  • Invests in top-performing ETFs
  • High balance requirement to have CFP access
  • No Direct Indexing
  • Cannot invest in funds outside Betterment curated offerings
  • DIY investors might not benefit from managed services

Investment Offerings

Betterment invests in 13 different stock and bond ETFs from the Vanguard and iShares families. Although DIY investors and active traders will not like the flexibility, Betterment has a well-diversified portfolio.

Your portfolio might not invest in all ETFs at once as Betterment bases your portfolio on your age and projected retirement date to assess your risk level.

Betterment’s model portfolios will contain at least 55% to a maximum of 90% stocks. You can also override Betterment’s recommendation to invest in 0% to 100% stocks if you truly desire.

Theoretically, DIY investors can invest in the same funds as Betterment, without having to pay the annual management fee, but they might have to pay trade fees, cannot buy fractional shares, and are responsible for their portfolio rebalancing and tax harvesting.

Stock ETFs

Betterment invests in the following stock ETFs:

  • Vanguard U.S. Total Stock Market (VTI)
  • Vanguard U.S. Large-Cap Value Index (VTV)
  • Vanguard U.S. Mid-Cap Value Index (VOE)
  • Vanguard U.S. Small-Cap Value Index (VBR)
  • Vanguard FTSE Developed Market Index (VEA)
  • Vanguard FTSE Emerging Index (VWO)

Betterment’s stock ETFs slightly favor value and small-cap stocks. This methodology is based on the research of economist Eugene Fama that determined these funds can produce a higher yield with slightly more risk.

To provide exposure to international markets, Betterment also invests in two international ETFs to capture the momentum of the Developed and Emerging Markets.

Bond ETFs

Your Betterment portfolio can also contain the following Bond ETFs:

  • iShares Short-Term Treasury Bond Index (SHV)
  • Vanguard Short-Term Inflation-Protected Treasury Bond Index (VTIP)
  • Vanguard US Total Bond Market Index (BND)
  • iShares National AMT-Free Muni Bond Index (MUB)
  • iShares Corporate Bond Index (LQD)
  • Vanguard Total International Bond Index (BNDX)
  • iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)

A portfolio that only holds 10% bonds will not contain all these bond funds at one time.

And, if you have a tax-advantaged IRA retirement account, Betterment will not invest in the AMT-Free Muni Bond ETF because you will not benefit from the additional tax savings.

All of the stock and bond ETFs provide a well-diversified portfolio for “hands-off” and retirement-focused investors.

One reason you choose a robo-advisor instead of a financial advisor is for low-cost funds. With fund expense ratios as low as 0.03% and an average fund fee ratio of 0.13%, Betterment invests in some of the cheapest ETFs available with broad diversification.


Fees

Betterment offers three different management plans. All three plans share the complimentary benefits of automatic rebalancing, tax-loss harvesting, and tax-coordinated investing.

The middle and top-tier plans offer different levels of access to Betterment’s team of Certified Financial Professionals.

Below are the three different pricing plans:

  • Digital Plan: 0.25% annual fee
  • Plus Plan: 0.40% annual fee
  • Premier Plan: 0.50% annual fee

Both the Plus and Premier plan require a minimum account balance of $100,000. With the Plus plan, a CFP will review your portfolio and call you once a year. For an additional 0.10%, the Premier plan gives you unlimited access to Betterment’s CFP team.

There also isn’t a trade commission every time you buy and sell. The Betterment plan fee is all-inclusive plus the individual fund fees that you must pay at any brokerage. This flat-fee pricing ensures there are no hidden fees and also helps comply with the “Fiduciary Rule.”

It is nice that all Betterment plans include automatic rebalancing and tax-efficient investing. The additional fee for CFP-access will be steep for many Betterment users as they are simply looking for a low-cost alternative to a traditional financial manager.

But, Betterment has realized that their high-wealth clients still seek the personal interaction to review their financial goals on a routine basis.

The base fee of 0.25% is very competitive with other robo-advisors. DIY investors that are are comfortable making their own investment decisions can probably do just fine following a similar strategy as Betterment without the annual fee.


Platform

Overall, the Betterment platform is really easy to use. When you first login, you will see a summary screen with your account balances for your Betterment and non-Betterment accounts.

betterment

With the click of a button, you can quickly see the estimated account value at retirement, total earnings, and current investment strategy and recurring deposit information.

The Betterment platform allows you to go into further detail, by seeing your exact portfolio allocation for each ETF owned down to the exact share count and current value.

And, you can track the historical performance with another drop-down button. The platform has a similar feel to most 401k plan platforms in terms of features and usability.

Betterment also allows you to connect your spouse’s account to view all your money in one place. This also makes it easier for Betterment to perform its tax-harvesting and tax-coordinated investing features.

As the primary reason to invest with Betterment is to have a hands-off investment experience, the Betterment platform is mostly foolproof. You can adjust your stock-to-bond asset allocation or monthly contribution amount.

They also offer a RetireGuide calculator to help you visually see your projected net worth at your current contribution amount and how much it can increase (or decrease) with any changes.

RetireGuide calculator

You can also use the RetireGuide to link your non-Betterment accounts, including your employer 401k plan, to track the performance of all your investment assets.

Betterment also offers goal-based saving. By telling Betterment the minimum balance you need to keep in your account at one time, they will automatically transfer the excess savings as often as you decide to help boost your investment contributions.

This feature can be helpful as you can create savings goals to hit certain investment milestones. Doing so, can require additional contributions and this is another way Betterment can make investing easier.


Mobile Platform

You can also access Betterment with their mobile platform. It is as easy to use as the web platform.

You can check your account performance, manage your portfolio allocation, schedule deposits and withdrawals, and review your goals. The app is available for Apple and Android devices.

Betterment has one of the easier-to-use platforms for the robo-advisors. If you have a question, it can be quickly answered with their live chat support.

While you don’t have the investment flexibility at Betterment as you might with a self-directed brokerage, you can easily track your account performance, adjust the asset allocation, and schedule money transfers.


Opening an Account

It doesn’t get much easier than opening an account at Betterment. The entire process might take five minutes. You start the enrollment process by entering your age, current salary, and planned retirement age.

INVESTMENT PLAN

Based on that information, Betterment will ask you to choose one of three investment goals: Safety Net (i.e. emergency fund), Retirement, or Build Wealth.

 portfolio

You can create multiple goals as well whether you have one account or a taxable and non-taxable account.

After selecting the investment goal, you will be taken to a screen with your recommended stock-to-bond ratio based on the original information provided to Betterment.

After choosing your asset allocation, the final step is funding your account.

By typing the dollar amount you plan to invest each month, Betterment will give you a projected net worth at retirement with different dollar amounts. One is the projected amount assuming normal market conditions and the other projection is a “worst-case” scenario.

Once you decide how much you want to contribute, the final step is linking your bank account to schedule the first deposit.

An initial contribution of $1 is also accepted because Betterment buys fractional shares that allow every penny to be invested even when you cannot buy a full share.

After opening your account, you can adjust your asset allocation or contribution amount at any time. You can also create savings goals too.


Automatic Rebalancing

One reason you might choose Betterment is that you are tired of rebalancing your portfolio every six months to a year. Betterment will automatically rebalance your account with each deposit.

As a basic example, if your target allocation is 90% stocks and 10% bonds, but you are currently 91% stocks, Betterment will buy more bonds with your next contribution to bring your stock allocation back down to 90%.

Within each stock and bond portfolio, Betterment will also buy more of “lagging” stocks (i.e. more small-cap if large-cap is overweight) to do a more thorough rebalancing when necessary.

Each time you sell, Betterment will sell the assets that are overweight to bring your portfolio back to its target investment mix.

When you do not buy or sell, Betterment will also periodically rebalance your portfolio when the investment drift exceeds 3%. Betterment checks for portfolio drift daily and try to rebalance as sparingly possible to increase your tax efficiency.

As you near retirement, Betterment will automatically rebalance your portfolio as your target allocation shifts from stocks to bonds.

Overall, Betterment’s rebalancing is a great feature. You don’t have to worry about deviating too far from your investment strategy because Betterment watches it daily. By primarily relying on rebalancing your portfolio each time you buy or sell, the portfolio turnover is kept to a minimum.


Unique Features

Betterment has a few unique features that can win over casual investors that might be hesitant to pay the extra management fee for a managed portfolio.

Tax-Loss Harvesting

Tax-Loss Harvesting isn’t exclusive to Betterment, but, it helps add value to using a robo-advisor.

Betterment will automatically scan your accounts to sell investments for a loss and reinvest in similar assets.

This simple action lowers your tax bill and allows you to remain invested in the market with similar ETFs.


Tax-Coordinated Investing

As Betterment supports retirement and non-retirement investment accounts, they will put more tax-expensive investments in your tax-advantaged retirement accounts to improve your potential yield without paying more in taxes.

If you have multiple Betterment accounts or your spouse also has an account at Betterment, they will look at the portfolio allocation of both accounts to avoid duplicate trades. 


Trade Fractional Shares

DIY investors that buy ETFs at a traditional brokerage can only buy full shares.

If a share costs $58 to buy, you need exactly $58 to buy the share. Having less money (i.e. $55) means the order will not be filled until you have $58 and having extra money (i.e. $60) means $2 will remain uninvested.

Betterment will buy fractional shares of every ETF. It doesn’t matter if you invest $1 or $1,000, it all gets invested in the market.

Most robo-advisors support fractional investing and it makes trading ETFs like trading a mutual fund, except with lower fund fees.


RetireGuide

One reason you might switch from being a DIY investor to a managed portfolio is to help ensure you saving enough for retirement.

Betterment’s RetireGuide provides excellent visual examples to help you see if you are meeting your goals.

If not, you can easily see what changes you need to make to accomplish your goals.


Access to Certified Financial Planners

Betterment is one of the very robo-advisors that offer access to a CFP. The $100,000 requirement means only established investors can qualify for this service. But, this service can be very useful if you are nearing retirement and want an extra set of eyes on your portfolio.

Many people like Betterment because of their fractional investing and tax-efficient investing that can sway a DIY investor that are cost-averse but do not have the time to manage their portfolio on a regular basis.

Access to CFPs is also a very nice touch that can help produce lifelong Betterment clients that would otherwise switch to a more expensive traditional financial advisor once they transition to the wealth management stage in their investing career.


Research

Betterment’s research

As you cannot personally trade any individual stocks, bonds, mutual funds, or ETFs at Betterment, their research resources are different than you might expect.

Betterment’s research is primarily white papers intended to explain how they select the stock and bond ETFs in your portfolio, how the tax-efficient investing features improve your yield potential, and how market factors influence their investment methodology.

The Betterment research might not allow you to research expert opinions of the actual ETFs, except the fund prospectus, but it can be helpful in convincing investors that investment portfolios managed by algorithms are still overseen by humans and factor current market conditions to maintain a well-diversified investment model.


Educational Materials

Investing 101 section

Betterment has a wide array of educational materials. They have an Investing 101 section that can help new investors learn more about basic investing principals primarily catering to the Betterment model.

There are also materials that explain more advanced investing topics including trading individual stocks or behavioral investing. While you cannot trade stock on Betterment, this knowledge can come in handy if you invest outside of Betterment.

Unlike other brokerages, Betterment also has podcasts on a variety of topics that are current to the market.

You can listen to discussions about how cyberhacking affects the market, tax planning, and basic personal finance advice from financial experts. These resources help make Betterment more “personal” as investing is only one aspect of financially preparing for the future.

Overall, Betterment’s educational materials are very thorough for a robo-advisor and more diverse than most self-directed brokerages too.

Much of the content isn’t required and can be helpful to any Betterment user. While some clients will still like the personal interaction with a CFP, they can help provide basic financial advice that you might also receive from a traditional financial advisor.


Support

Betterment also has high-quality customer support with many positive reviews. Their support team is available seven days a week with quick response times and professional service.

Phone support is available Monday-Thursday 9:00 AM ET to 8:00 PM ET and on Friday from 9:00 AM ET to 6:00 PM ET. No phone support is available on the weekends.

Live chat is available during the same weekday hours as phone support. It is also available on Saturday and Sunday from 11:00 AM ET to 6:00 PM ET.

And, you can send an e-mail 24/7 for help outside their phone and live chat hours. They will usually respond within one business day.

While Betterment’s customer support isn’t 24/7, you can still reach them seven days a week with urgent questions or needs. Their staff is courteous and professional and very helpful.


Betterment Review Verdict

Betterment is one of the largest and most successful robo-advisor platforms for a reason. They charge a low annual fee, are easy to use, and have excellent investment offerings.

Casual investors and retirement-minded investors that want a managed portfolio should consider Betterment. You can still talk to a CFP later when you feel the need and truly keep all your money at Betterment if you choose to.

Summary
Review Date
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Betterment
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Andrew
 

My name is Andrew and I run Slick Bucks to help folks learn to manage money cleverly, and how that clever management can make you wealthier.

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