Betterment Review- Worth trying?

What is Betterment?

Betterment is a very popular robo-investor. The company has over $15 billion of assets under management and an excess of 400,000 users. These figures put it up there amongst the best robo-investors in the market today. Therefore, if you are looking for a simple investment opportunity, you might want to consider Betterment seriously. Why is that? Read on to understand why thousands of investors have entrusted their funds to this company.

Betterment Overview

Betterment was founded back in 2008, but it didn’t start operating until 2010. Immediately after getting launched, the company ventured into online investment opportunities by utilizing algorithmic portfolio instead of the expensive, labor-intensive human management that we were used to. They focus on ETF portfolios to provide tax-efficiency and automatic diversification to their clients.

Betterment is a clear testimony of what simplified investment looks like. Through their algorithms, they assess the finances, goals and risk tolerance of their users to come up with investment portfolios that are unique to each client. The fact that they use algorithms for this complex analysis in place of humans has also made the investment affordable. This opens the door for more people to make valuable investments.

Betterment offers two types of services to potential clients; Betterment Digital and Betterment Premium:

Betterment Digital is the standard service that comes with no minimum balance requirements. The annual charges for assets under management is just 0.25%. All the customers using Betterment Digital will also have access to a financial advisor through in-app messaging.

Betterment Premium comes with more features, unlike the Digital alternative. The investor here gets unlimited phone access to financial planners. On the flip side, the service requires a minimum account balance of $100,000. This may be a bit steep for new investors, but it’s reasonable for experienced investors with a more significant investment portfolio. The annual charges for assets under management is 0.40%.

How does Betterment Work?

Betterment is tailored to make achieving your financial goals super easy. The company uses MPT or Modern Portfolio Theory to boost your returns while keeping the risks as low as possible.

Through their algorithms, Betterment will assess your current financial situation, take into account various factors including your existing accounts and comes up with a clear path that will take you to your goal.

To get a clear picture of your financial situation and develop an accurate and achievable plan, Betterment allows you to link different accounts including external investments and retirement savings accounts among others. These external accounts will be analyzed before you’re advised on asset allocation. You will also receive a report on how the money would be if you were to move the accounts to Betterment.

Why do we love Betterment?

Investment

The investment philosophy at Betterment is based on the successful modern portfolio theory. This encourages diversification of assets to maintain stable returns while keeping the risks very low.

Betterment uses ETFs representing 12 asset classes for varying risk tolerance levels and goals of the different clients.

The investors are also given the opportunity to choose a socially responsible portfolio, but the company will conduct what’s called “Negative Screening” to separate the companies with poor records (which are riskier investments) from the more successful companies.

In case you are a more “hands-on” investor, you can control the percentage of your money being invested in any ETF by using Betterment’s flexible portfolios tool. You must have at least $100,000 in your account to access this tool.

Investor’s portfolios are automatically rebalanced every time cash flows in or out in the form of contributions, withdrawals, or dividends. Your portfolios will also be rebalanced when allocation to a certain class shifts to over 2% to 3% from the set target level. Betterment algorithms perform daily checks where it screens for any portfolios that may need rebalances.

We also liked the fact that Betterment buys fractional shares which makes sure that all the cash in your portfolio is invested.

If you’re using Betterment Premium, you’ll also be glad to know that your accounts are being monitored by financial advisors as well.

Management Fees

The management fees will depend on the plan you select.

If you choose Betterment Digital, you will pay 0.25% in annual fees which is much better than what most other robo-advisors charges. Under the Digital option, you will have access to in-app messaging where you can interact with licensed financial experts. They are not certified financial planners though. All messages are usually responded to within 24 hours.

The Betterment Premium costs 0.40% in annual fees. It might seem a bit high, but it is very reasonable considering the services that you’ll receive.  For one, you will have access to certified financial planners who will not just be answering your queries, but they also keep an eye on your accounts. You will also have access to unlimited emails and phone calls.

If your Betterment Digital account balance is over $2 million, the annual fees will be dropped to 0.15%. The same balance in Betterment Premium will attract an annual fee of only 0.30%. All investors whose accounts were funded before September 18, 2018, will continue receiving free management for all balances over $2 million.

Account Minimum

The Betterment standard service does not have a minimum deposit requirement as is the case with most robo-advisors. However, you will need a minimum balance of $100,000 to upgrade to the Betterment Premium services.

Financial Planning Packages

Betterment offers different planning packages including college, getting started and retirement plans. These packages will not only provide you with strategies on how to achieve your goal, but Betterment will also get you in touch with a certified financial planner who will help you further with strategizing. The packages cost as little as $149 while others may cost you up to $399.

Goal-based savings strategy

When setting up your account with Betterment, the website will request for various details such as your current annual income, age, etc. Their software will use the information to come up with various potential goals that you can save towards. They will suggest a general investing goal, retirement savings and a safety net of between 3-6 months of expenses. Under each goal, you will find more information on the recommended target and asset allocation. All of these are just recommendations, and you will have the chance to adjust them depending on your financial situation and general needs. Betterment also allows you to set up your own personal goals.

You can also set automatic deposits for each goal.

RetireGuide

The Betterment Retireguide program allows the account holder to sync non-Betterment accounts such as 401(k)s. Retireguide links and updates your other accounts on a daily basis. Even the data on your social security will also be kept up to date. With all the information on your account in one place, you will get a holistic picture of your savings and investment accounts. With this information in one place, making investment and savings decisions becomes a lot easier and more beneficial.

The Retireguide tools will also project the spending levels during retirement. This ensures that your current saving levels are in tune with your future retirement plans.

Smart Saver Account

The Smart Saver Account is designed for people who feel like their traditional checking or savings accounts are not earning them enough cash. In early February 2019, the Betterment Digital had a return of approximately 1.98% after fees while the Betterment Premium had a yield of around 1.83%. Unfortunately, Betterment Smart Saver Accounts are not insured by the FDIC. The returns also tend to fluctuate.

These rates may seem enticing, but it’s best if you compare them with other savings accounts first before opening an account.

Drawbacks of Betterment

No Direct Indexing

The lack of direct indexing may cost the account holders a lot of cash. Direct indexing buys single securities of an index preventing the ETC from tracking the index. This is very helpful in protecting tax-loss harvesting opportunities.

To solve this issue, Betterment introduced the Tax-Coordinated Portfolio. This tool helps in putting the tax-efficient investments in the taxable accounts while the investments with heavier tax burden are transferred into tax-advantaged accounts. This saves the customer a lot of cash. Unfortunately, you will need both the tax-advantage and taxable retirement accounts at Betterment for this to work.

Emergency Fund Goals

Having an accessible emergency fund is crucial for every investor. However, Betterment advice their clients to invest 60% of the fund in bonds and 40% in stocks which is against most financial expert’s advice who recommend that emergency funds should never be invested due to the risk of losing the cash.

Also, transferring the money from your emergency fund docket may be subject to capital gains taxes.

Betterment Vs. Wealthfront

Wealthfront is another key robo-advisor in the market. How does Betterment stack up against it? Well, if you are in need of human, financial advisors, Betterment will offer you such experts at an affordable rate. If you don’t need the advisors, Wealthfront will be a better option. That’s because Wealthfront charges just 0.25% in annual fees (which is similar to the standard Betterment Digital service plan) and they also have superior tax optimization that will help you to save a lot of cash. On the flip side, you need a minimum account balance of $500 to get the Wealthfront account.

Bottom Line

Betterment is not the best option for investors with taxable accounts. Let’s just get that out of the way. Apart from that, everything else measures up really well, and that’s why the company has managed to accumulate over $15 billion assets under management and over 400,000 users in such a short period. The goal-based savings tools and the human advise offering are also very essential, and they come at an affordable rate.

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