February 28, 2017

Betterment Review: Best Robo-Advisor

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Betterment is one of the most popular robo-advisors. It has low fees and no account minimum. But is it good for you? Read this in-depth review.

Betterment may be the perfect answer for beginners who don't have the confidence or time to invest on their own.

By now, we all know that investing is the best way to build long-term wealth.

However, it's not easy. Investing requires a lot of research and a good strategy. And we totally understand that beginner investors may not have the confidence (or time).

It used to be that you would have to work with a broker. A skilled professional would guide you and help you make choices. But this means paying premium fees for the personalized service.

This results in many people who are unwilling to pay the high fees, but yet too afraid to invest themselves.

Could robo-advisors be the answer? Instead of a human, a computer algorithm figures out the best investment strategy for you. And because it's automated, the fees are much lower.

Betterment is one of the most popular robo-advisors out there. Read on for a detailed review to see how it works and if it'll fit your investing needs.

Terms to Know

First, let's define a few terms that you'll need to understand with this type of service.

  • ETF. Short for Exchange Traded Fund. An ETF is a diversified collection of assets, including stocks, commodities, and bonds. It's similar to mutual funds in that regard, but it's traded on an exchange like a stock. This gives it low management and operational fees.

  • Robo-Advisor. A robo-advisor is an automated financial management service. It uses algorithms to manage your portfolio based on your goals and risk tolerance. There's no human intervention; it's all done automatically based on the risk profile. Thus, the fees are lower.

  • Tax Loss Harvesting. Should you lose money on a particular investment, tax loss harvesting works to take a tax deduction on the loss to offset capital gains.

How Much Does Betterment Cost?

It is free to sign up for an account. And you can also download the Betterment app for free. However, like any brokerage, you pay for the service.

There are three tiers (fees are calculated based on your balance):

  • 0.25% annual fee for the basic service. Includes automated portfolio management and basic customer support.
  • 0.40% annual fee for the Plus service. Includes more account monitoring and a yearly call with real financial experts. You'd need at least a balance of $100,000.
  • 0.50% annual fee for the Premium service. Includes unlimited calls with financial experts. You'd need at least a balance of $250,000.

Did you know: Betterment never charges a fee if your balance is $0. And there are no fees for deposits or withdrawals from your account. Also, your trade fees are covered by the annual fee.

9 Reasons Why We Like Betterment

  • It does all the work for you. We understand that the investing process is complicated. Usually you need to study asset allocation and investment time horizons and other aspects (we know... blah blah blah). With Betterment, all you have to do is set a goal, transfer in money, and the automated service will do all the work.

    Once you've entered the data about your goals and timeframe to reach it, Betterment will find the investments that give you the best chance of reaching them. It automatically makes trades for you, and any profits are automatically re-invested.

  • It is a registered broker. Betterment is a registered broker with the Securities and Exchange Commission (SEC), which means you can trust that the service is legitimate. That doesn't guarantee you'll make money with your investments, but you can confident this isn't a scam.

  • Its accounts are SIPC-protected. SIPC protects against the loss of securities held by customers at a brokerage. If Betterment were to go out of business, SIPC would cover your losses (up to $500,000 per account type).

    Note: SPIC does NOT protect against losses caused by a decline in the value of your securities. Nor does it protect against bad investment advice.

  • It focuses on investing in ETFs. An ETF is a pretty simple investment tool. The broker doesn't incur many expenses to make use of ETFs. It's usually just 0.1% - 0.2% of the balance, which means fewer fees for the investor than other types of investments. And investing in a low-fee product gives you a better chance of receiving the returns you want.

  • It automatically rebalances your portfolio. When you start, you set your allocation (such as 70% stocks and 30% bonds). It's not unusual for this to drift over time, since stocks and bonds increase at different rates. If you don't pay attention, your portfolio may be have drifted and no longer be at the correct risk level for your goals. But every 3 months, Betterment automatically rebalances your portfolio to ensure that the allocation stays the same.

  • The SmartDeposit feature makes it easy to invest. The SmartDeposit feature automatically sends money to Betterment when your bank account exceeds a certain balance. You can set up a frequency and maximum transfer amount, so you still have total control. This ensures that you're investing your extra cash, instead of just letting it sit in your bank account.

  • Its investment options are tax-smart. Betterment helps you minimize the amount of taxes you'll pay. It has a Tax Coordinated Portfolio feature that puts your most highly-taxed assets into accounts with tax breaks (like IRAs). Assets with lower taxes will be diverted to the standard taxable account.

    Betterment has an automated Tax Loss Harvesting feature. This is when your securities with losses are sold and then replaced with a similar one. This offsets capital gains, and thereby reduces taxable income.

    Betterment's graph shows how over 13 years, Tax Loss Harvesting provided additional after-tax returns.

  • It has a helpful RetireGuide. This feature allows you to link all external financial accounts to Betterment, and it'll come up with personalized retirement planning advice. You can say how much you plan to spend per year in retirement, and Betterment will calculate how much you need to be saving.

    This RetireGuide helps you gain an understanding of your future and what you need to do to reach your goals.

  • It's not an app-only service. If you have questions or need additional information, Betterment has phone representatives, web chat reps, and e-mail access options available.

Why Betterment May Not Be For You

  • Limited number of investments. If you're expecting Betterment to work like an E*TRADE account, you're going to be disappointed. Betterment only invests in ETFs. For beginners and those with simple goals, this is probably plenty. But for people who have more complex investing needs, Betterment is too simplistic in its offerings.

  • It's more expensive if you have a lot to invest. If you have quite a bit of money to invest, the annual flat rate fee can be a significant amount. $100,000 in investments will cost $400 in fees at the 0.40% tier. If you have a large amount of money to invest and you primarily buy and hold, a broker with a per transaction fee is probably better. And if you understand investment strategy, you could be making more profits by selecting investments yourself.

Is Betterment Safe?

Betterment is a registered broker with the SEC, meaning that it's legit. Betterment also recently added a two-factor authentication to accounts. You can use an authenticator app on the smartphone or SMS text to secure the account.

Now, if you're asking whether you'll lose money by using Betterment, this service - like any investment service - cannot guarantee against that. Any kind of investment has the possibility of losing money. Betterment's robo-advisor service attempts to maximize returns while minimizing risk, but there's still risk.

You can further minimize risk by the goals and timeframe you set. If you set long-term goals and don't require large returns in a short amount of time, Betterment will select investments with less risk to your principal.

How Betterment Compares

To wrap up the review, let's take a look at how Betterment stacks up against other popular advisors.

Betterment compared to Vanguard:
Vanguard is a huge established investment management company. Vanguard offers a Personal Advisor service, which gives you an actual person managing your account. The person will select your investments based on your goals and financial situation. Vanguard does require a minimum investment of $50,000 for this service. And it charges a flat 0.30% annual fee.

Just like robo-advisors, Vanguard will do the work for you, including rebalancing the portfolio. Clients can contact the advisor whenever they like. For a low 0.30% flat fee, this is a great service if you have more to invest.

Betterment compared to Wealthfront:
Betterment is also similar to Wealthfront, another robo-advisor. Currently, Wealthfront has a $500 minimum deposit (as of March 2017). It used to be $5,000, so the number may change again. Wealthfront is also currently offering to manage the first $10,000 of your investment with no annual fee, which is a better feature than Betterment. However, these aspects of robo-advisors are constantly changing, so keep an eye on it.

If you have a lot to invest, Wealthfront has a few advanced features that Betterment lacks. Wealthfront can create more complex investment structures and can do a better job at avoiding taxes.

Neither Wealthfront nor Vanguard offer the SmartDeposit feature that Betterment provides, which is a great option if you have a hard time budgeting.

Bottom Line

Betterment has made some nice improvements in the past several months to its service, incorporating a new fee structure and adding investment options. That said, this is still a very simple brokerage investment service. If you have a lot of money to invest, or if you have a decent amount of knowledge about how investing works, you'll probably want more control over the process with another brokerage service.

But if you're just starting out and uncomfortable with choosing your own investments, Betterment is pretty cool and makes a lot of sense. Or if you're someone who has a hard time making yourself save, the automatic SmartDeposit feature with Betterment is a great one. If you follow the simple plan from Betterment, there's no guarantee your investment will grow, but we like your odds. After all, you can't start growing a nest egg without a little bit of risk.

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