Betterment Review – Now Offering Tax Loss Harvesting

Review of: Betterment

Reviewed by:
Rating:
5
Last Updated:August 20, 2015

Summary:

Betterment will build you an efficient portfolio comprised of widely diversified, low cost ETFs. If you don't want to manage your own portfolio, or hire a financial advisor, Betterment is tough to beat for the very low price.

As a Ph.D. student in financial planning, I love reading about investment strategies. But that’s not the norm, and most folks don’t like tweaking their investment portfolio. It takes time and effort that could be spent elsewhere.

Those individuals who do prefer a hands-on approach to investing often end up trading frequently and chasing performance. That was how I began investing. I’d read a few online tips, or do some research and buy a companies stock because I thought for sure “They are a great company with a strong balance sheet. They are also making great products. Therefore the stock price will appreciate.”

After devouring a number of books related to finance and investing, I later learned how foolish I was. Mountains of relevant research can be found documenting the failures of frequent stock trading, stock picking, market timing, and chasing hot investment tips.

A much better (and proven) way to invest requires very little work at all. It’s a passive, long-term strategy that ignores the ridiculous financial news and short term stock pricing.

By embracing this simple strategy, investors can bypass most of the fees and expenses related to trading that erode investment performance. These include things like commissions to buy/sell securities, sales charges or loads charged by brokerage firms and “advisors,” and unnecessary taxes. Also included are investor flaws such as overconfidence and biases, which often lead to the act of buying high and selling low during our ongoing boom and bust economic cycles.

This proven strategy involves owning low-cost index ETFs that are well diversified in a number of different markets and market segments. You can attempt to do this yourself at a firm like Vanguard, or you can have a company like Betterment do it all for a minimal fee.

I’ll admit upfront that I’m impressed with the value proposition offered by Betterment. They do everything related to portfolio management for you, and they do it very well. They even go beyond low-cost, diversified ETFs and provide tax loss harvesting, automatic rebalancing, and a slew of other valuable services for a measly 0.15% in annual fees. On a $100,000 portfolio, that’s only $150.

Introduction

Betterment is growing quickly and currently manages more than $2.2 Billion for clients. The company takes pride in offering portfolio management services that are affordable and easily accessible by the masses.

Here is a nice overview of the firm done by the CEO and Bloomberg:

Betterment’s selling point is ease of use. The online user interface is designed to be simple and minimalistic. And it works very well. For the individual who wants to automatically deposit some money each month and have it properly invested 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 it for you automatically.

With the service, you don’t own individual stocks or bonds. Investments are held in the form of exchange traded funds, or ETFs. The asset allocation between these various ETFs then ensures your account is not weighted too heavily in any specific asset class, company, country, or sector. This diversification helps to lower overall investment risk.

Betterment Investment Choices

Betterment Review

When you deposit money with Betterment, it is seamlessly invested in a blend of two baskets: Bond Fund ETFs and Stock Market ETFs. Betterment gives you control over the level of risk of your investment by letting you adjust the proportion of your money invested in each of these baskets.

A quick note on ETFs – they are tied to a broad index, but trade like a single stock. So when Betterment purchases shares of VTI: Vanguard Total U.S. Stock Market, they are buying small (weighted) slices of each publicly traded company in the U.S. This is how any index fund works. ETFs differ from mutual funds in the way they are traded, but both can be tied to the same index (like the S&P 500 or total stock market). Betterment uses ETFs instead of mutual funds because they have lower expense ratios, and they receive preferential tax treatment, making them a better overall investment vehicle.

Stock Market Basket

Betterment’s investment committee has chosen a stock market portfolio made up of ETFs that reflect the broad US market, as well as international exposure, which allows you to invest in literally thousands of companies all at once. Currently the Stock Market basket is made up of the following ETFs:

  • Vanguard U.S. Total Stock Market Index ETF (VTI)
  • Vanguard US Large-Cap Value Index ETF (VTV)
  • Vanguard US Mid-Cap Value Index ETF (VOE)
  • Vanguard US Small-Cap Value Index ETF (VBR)
  • Vanguard FTSE Developed Market Index ETF (VEA)
  • Vanguard FTSE Emerging Index ETF (VWO)
Why they recommend these options:

The U.S. exposure covers the total U.S. market with a slight tilt towards value and small-cap stocks. The value and small-cap tilt has historically outperformed the broad market, based on research by Nobel-prize winner Eugene Fama and Kenneth French.

By adding international stocks, investors benefit from growth overseas in developed markets, including the U.K., Japan, and Europe, and achieve the same expected return with lower risk. With the emerging market stock ETF, investors can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies the portfolio, and results in lower risk for a given level of return.

Bond Basket

Betterment’s investment committee has recently chosen to greatly expand their bond offerings. They now use:

  • iShares Short-Term Treasury Bond Index ETF (SHV)
  • Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
  • iShares Corporate Bond Index ETF (LQD)
  • Vanguard Total International Bond Index ETF (BNDX)
  • Vanguard Emerging Markets Government Bond Index ETF (VWOB)
  • (For IRA accounts only)Vanguard US Total Bond Market Index ETF (BND)
  • (For Taxable accounts only) iShares National AMT-Free Muni Bond Index ETF (MUB)
Why they recommend these options:

These bonds ETFs allow investors to choose a precise level of risk, and then get the best possible return at that level of risk by balancing four different growth factors: U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk. When applicable, Betterment also considers the after-tax benefits of allocating to federally tax-exempt municipal bonds.

Taking on a higher exposure to any of these factors means higher expected returns, with higher potential for short-term losses. However, by blending them together intelligently, investors can maintain the return level and reduce the severity of losses.

Market Risk is Present

In this Betterment review, I have to provide a common sense reminder. Like all market investments, Betterment’s stock and bond investments are subject to market risk. If the markets are up, your balance will likely grow. When markets go down, your balance will likely shrink. You have no guarantees and Betterment is not a FDIC insured savings account.

If you need your money in the short term, a savings account might be the best place for it, because you’re guaranteed to get back the the same dollars you put in (known as your principal).

When you invest in stocks and bonds, risk is present and you can lose money. The fact that you are taking more risk also means that you’ll likely earn higher returns over the long term.

For example, consider this graph showing real (inflation adjusted) investment performance for various asset classes:

Betterment Asset Classes

Over the very long term, historically, stock market investments have tended to outperform less-risky investments, such as bonds. Both investments have historically outperformed cash equivalents such as a savings account. But the value of your account may fluctuate widely, and you could lose money, even over a long time horizon.

At times when prices are down, it is often best to be patient and take the opportunity to add more money to your account rather than to withdraw money when your securities are worth less. You want to be selling investments when they’re up, not when they’re down.

Betterment Fee Structure

The Betterment fees are quite low overall and are presented in a standardized, tiered system. A 0.35% fee is added onto any account with a investment balance under $10,000. Once you have invested $10,000, they decrease the annual fee to 0.25%. At $100,000 or more invested, the fee lowers to 0.15%.

Betterment Pricing

While you can start with no money at all, they do request you deposit at least $100/month. If you don’t, you pay $3 per month in fees instead of 0.35% (until you have $10,000 saved). This expense gives an incentive for people to commit to saving and investing a certain amount each month.

Remember that in addition to the Betterment fees stated above, you’ll have to pay underlying ETF expenses. When you invest in any ETF, you will pay a fee. This is not unique to Betterment, and they don’t receive any kickback on the ETF expenses.

For instance, the Vanguard Total Stock Market Index ETF (VTI) that Betterment uses has a fee of 0.05%.  If that were the only ETF held in your Betterment account (it’s not, this is just an example), and you had roughly $100,000 invested, you would pay 0.15% for the Betterment services and 0.05% for the ETF. The total annual expenses would be 0.20% or $200 on a $100,000 portfolio.

When it’s all said and done, it’s quite likely that your total ETF fees will average around 0.10%, plus the 0.15 – 0.35% Betterment management fees. That’s cheap for ongoing wealth management.

Betterment Security

When researching Betterment, I wanted to verify the security measures taken by Betterment to ensure proper account safety. I was not disappointed and they do an excellent job of securing each individual account. They have the same security protection as commercial banks, including:

  • Fraud Protection – Betterment will work to recover any loss that results from unauthorized use of your Betterment account
  • SIPC Coverage – Securities in your account are protected up to $500,000 in the case of fraud or mismanagement
  • 256-bit SSL Encryption – Increased data security for all your accounts
  • Paramount Privacy – Your personal info is never shared without consent

Why Betterment Works

Tax Efficiency – Betterment includes a number of services that can reduce tax liability and increase investment returns.

  1. Tax Loss Harvesting – Capital losses can lower your tax bill by offsetting gains, but the only way to realize a loss is to sell the depreciated asset. At its most basic level, tax loss harvesting is selling a security that has experienced a loss—and then buying a correlated asset (i.e. one that provides similar exposure) to replace it. This provides tax deferral, which increases returns over time. Free for all customers with a taxable account, Betterment now offers a sophisticated, fully automated service called Tax Loss Harvesting+ (TLH+) According to Betterment, this service would have increased Betterment returns by 0.77% each year over the last ten years.
  2. Smart Rebalancing – Portfolio rebalancing is basically shifting money between the asset classes you’ve decided to invest in. If your defined portfolio was 60% stocks, 40% bonds, the goal is to keep that asset allocation in balance. Over time, you might end up with 70/30 if you never rebalance your portfolio. That’s not good because you’ll have greater risk than you originally intended. As such, rebalancing is a good idea for most investors, but it often involves selling one asset class and buying another, which can result in additional taxation. Betterment uses all cash flows and reinvested dividends to rebalance your portfolio. This reduces the need for selling to rebalance, which should lower your capital gains liability over time. Betterment also never triggers short-term capital gains to rebalance.
  3. TaxMin Lot Selling – Better uses a unique algorithm to sell securities with losses before gains, and securities with long term gains before short term gains. It is a more efficient way to handle accounting, that can save thousands in taxes.
  4. Tax Efficient ETFs – Betterment uses ETFs instead of mutual funds, which can result in additional tax savings each year. ETFs are a much more tax-efficient investment vehicle.

Personalized Retirement Advice (RetireGuide) – Betterment uses details about your retirement goals to recommend a globally-diversified portfolio tailored to your needs. The retirement advice takes into account all sources of income, your savings rate, where you live, and what you will spend during retirement. It also considers all of your assets and investment accounts, even if they are held outside of Betterment.

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 help maximize how far your nest egg can go.

Sound Principles – The company deeply believes in passive, index investing which has been academically proven to outperform active trading strategies. With Betterment, you’ll get wide diversification and really low fees, which are primary indicators of investment success.

Beautiful Design – Betterment has a wonderful interface that can be acceessed on any computer, tablet, or smartphone. The interface allows investors to easily control and edit any investment accounts held at Betterment.

Fractional Investing – Betterment can buy fractional shares of an ETF which means 100% of you money is working for you 100% of the time. If a share costs $100 and you only have $60 remaining, you’ll still buy 0.6 shares. This isn’t possible for the individual investor.

Behavioral Realities – Many people begin investing with good intentions, only to see the idea fade away like last year’s New Years resolution. If you don’t enjoy managing and rebalancing your portfolio, and reading about investing, you might neglect it altogether. Betterment does everything for you and does it really well in exchange for a reasonable fee.

Great Customer Service  – Betterment employees are on hand 7 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.

Price – Compared to many financial advisors, the fees are very low. I have no problem with what they are charging.

Possible Drawbacks

  • Cost of Service – Betterment charges very low fees for the service they provide, and I think they provide great value. But if you are willing to learn all about investing and portfolio management, you can learn how to invest your own money without any management fee. I personally buy and sell most of my own ETFs, but I also enjoy doing it. Most people do not, and Betterment is a great option.
  • Investment Options – There are only a set number of ETFs available through Betterment, although that number has increased. Some people might desire a few more investment options.

How To Get Started

The signup process is easy and takes less than five minutes. During the process you respond to a series of short questions about your investment needs to help determine proper asset allocation, or you can manually set the asset allocation of your choosing (ie: 70% stocks and 30% bonds). Once the choices are selected, you must then link your personal bank account. Money can be transferred into the Betterment account whenever you desire, or you can setup an automated deposit from your paycheck.

You have the ability to create a new Traditional or Roth IRA and fund up to $5,500 (+$1,000 if you are age 50+) in 2015. Or you can create a regular taxable account with no funding limits. Betterment also allows the creation of trust accounts.

Betterment also allows you to rollover an existing qualified plan (401k, 403b, pension, IRA, etc.) into a Betterment IRA if you’d like to let them handle your retirement funds instead of a past employer. This process can be done entirely online, and is impressively efficient.

They also recently added the ability to create a SEP-IRA account for self employed individuals. The SEP-IRA is flexible, easy to setup, and has large contribution limits (up to $53,000 in 2015).

Betterment Review Summary + Signup Bonus

If you want a really simple solution to successful investing, I recommend Betterment. If you want something that won’t confuse you or require much effort, I recommend Betterment. If you want a simplified, low cost wealth management service based on sound investment principals, look no further.

Betterment is a brilliant idea for what it is – a fairly priced, hands-off and accessible approach to successful investing.

I hope you enjoyed my Betterment review! They are offering our readers up to 6 months of free service if you sign up here.

If you enjoyed this article, Join 60,000+ Monthly Readers

Comments

  1. By Zoe

    Reply

    • By Jacob

      Reply

  2. By Len

    Reply

    • By Jacob

      Reply

  3. By Evelyn

    Reply

  4. By Elizabeth

    Reply

    • By Jacob

      Reply

  5. By Chuck

    Reply

    • By Jacob

      Reply

      • By Chuck

        Reply

  6. By Jarod

    Reply

    • By Jacob

      Reply

  7. By Jenny

    Reply

    • By Jacob

      Reply

      • By Jenny

        Reply

        • By Jacob

          Reply

  8. By Kelton J

    Reply

    • By Jacob

      Reply

  9. By Mike B

    Reply

    • By Jacob

      Reply

      • By Mike B

        Reply

        • By Jacob

          Reply

          • By Mike B

  10. By Larry

    Reply

  11. By LARRY

    Reply

  12. By Moe

    Reply

    • By Jacob

      Reply

  13. By Mason

    Reply

    • By Jacob

      Reply

      • By Mason

        Reply

        • By Jacob

          Reply

  14. By Jeremy

    Reply

    • By Jacob

      Reply

  15. By Joe

    Reply

    • By Jacob

      Reply

  16. By Tom

    Reply

    • By Jacob

      Reply

  17. By Dave

    Reply

    • By Jacob

      Reply

  18. By Reuben

    Reply

    • By Jacob

      Reply

      • By Reuben

        Reply

  19. By rick

    Reply

    • By Jacob

      Reply

  20. By Jeff

    Reply

    • By Jacob

      Reply

    • By Lamont Cranston

      Reply

    • By Chris

      Reply

    • By Chris

      Reply

  21. By Rachel

    Reply

    • By angelia

      Reply

      • By Jacob

        Reply

    • By Jacob

      Reply

  22. By Peter

    Reply

    • By Jacob

      Reply

      • By Peter

        Reply

        • By Jacob

          Reply

  23. Reply

    • By Jacob

      Reply

  24. Reply

    • By Jacob

      Reply

  25. By Colin

    Reply

    • By Jacob

      Reply

  26. By John

    Reply

    • By Jacob

      Reply

  27. By Dan

    Reply

    • By Jacob

      Reply

  28. By Tom

    Reply

    • By Jacob

      Reply

  29. By Ron

    Reply

    • By Jacob

      Reply

      • By Angela

        Reply

        • By Jacob

          Reply

  30. By Karla

    Reply

    • By Jacob

      Reply

  31. By Megan

    Reply

  32. By Mickey

    Reply

    • By David

      Reply

  33. By Van D

    Reply

    • By Jacob

      Reply

  34. By Jay

    Reply

    • By Jacob

      Reply

  35. By Ryan H

    Reply

    • By Jacob

      Reply

  36. By Maria

    Reply

    • By Jacob

      Reply

  37. By Eddie

    Reply

    • By Jacob

      Reply

  38. By Elliott

    Reply

    • By Jacob

      Reply

  39. By Andrew

    Reply

    • By Jacob

      Reply

  40. By nomad_manhattan

    Reply

    • By Jacob

      Reply

  41. By David

    Reply

    • By Jacob

      Reply

  42. By berniek

    Reply

    • By Jacob

      Reply

  43. Reply

    • By Jacob

      Reply

    • By scott

      Reply

  44. By Joshua Wheeler

    Reply

    • By Jacob

      Reply

  45. By Tammy

    Reply

    • By Jacob

      Reply

  46. By Kalyan

    Reply

    • By Jacob

      Reply

  47. By VXS

    Reply

    • By Jacob

      Reply

  48. By Richard

    Reply

    • By Jacob

      Reply

  49. By Old dude

    Reply

  50. By Bryan Jenkins

    Reply

  51. By ETF_lover

    Reply

    • By Jacob

      Reply

      • By Amir

        Reply

        • By Jacob

          Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge