Betterment Review – Now Offering Personalized Retirement Advice

Review of: Betterment

Reviewed by:
Rating:
5
Last Updated: March 16, 2017

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.

I enjoy reading and writing about investment strategies. But that’s not the norm, and most individuals don’t enjoy tinkering with 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 individuals stocks which appeared undervalued.

But after studying a number of books, articles, and research related to finance and investing, I began to question my strategy. Mountains of relevant research can be found documenting the failures of 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 market commentary. This proven strategy involves owning low-cost index funds that represent the global economy.

By embracing this long-term approach, investors can bypass most of the fees and expenses that erode investment performance. These include commissions to buy/sell securities, loads and hidden fees charged by brokerage firms, and unnecessary taxes. This strategy also helps mitigate some of the costly behavioral flaws that are common to individual investors.

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 reasonable 0.25% in annual fees.

Betterment Review Introduction

Betterment is growing quickly and currently manages more than $6 Billion in assets for more than 200,000 clients. The company takes pride in offering portfolio management services that are affordable and easily accessible by the masses.

Here is a nice Betterment review done by the CEO with Bloomberg:

Betterment’s selling point is ease of use. The online user interface is designed to be simple and easy to understand, 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 all of that, and more, 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

When you deposit money with Betterment, it is seamlessly invested in a blend stock and bond ETFs. 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 Funds

Betterment ReviewBetterment’s investment committee has chosen stock ETFs that reflect the broad U.S. market, as well as international markets. These ETFs allow you to invest in thousands of publicly traded companies at once, providing huge diversification benefits. Betterment uses the following ETFs for core stock exposure:

  • 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. stock 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 winners Eugene Fama and Kenneth French.

By adding international stocks, investors benefit from growth overseas in developed markets, including the U.K., Japan, and Europe, which lowers portfolio risk.  The emerging market stock ETF allows investors to 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 Funds

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 bond ETFs allow investors to balance four different risk factors: U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk.

Betterment also distinguishes between taxable and retirement accounts when allocating bonds. Taxable accounts hold federally tax-exempt municipal bonds. Retirement accounts maintain exposure to U.S. investment-grade bonds. This strategy optimizes after-tax returns.

What Does Your Betterment Portfolio Look Like?

When it’s all said and done, the stock and bonds ETFs listed above are blended together to create your ideal investment portfolio. Betterment will ask you a set of questions to determine your risk tolerance and age, then use that information to create your unique portfolio.

If you are young, that probably means holding more stocks than bonds to maximize long term growth. As you age, your bond allocation slowly increases to provide more stability. In my example, Betterment suggested that I have 90% stocks, and 10% bonds. Here is how that looks:

Betterment portfolio allocation review

Betterment Fees

Betterment offers 3 different service tiers, each with a different fee.

Betterment Digital is the core offering. You can upgrade to Betterment Plus or Betterment Premium to receive financial planning advice from a professional.

  • Betterment Digital: Complete portfolio management with tax-efficient algorithms and digital advice
    • Cost = 0.25% of your account balance, annually
  • Betterment Plus: Includes Betterment Digital plus one annual financial planning call from a team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.
    • Cost = 0.40% of your account balance, annually ($100,000 minimum balance required)
  • Betterment Premium: Includes Betterment Digital plus unlimited access to a team of CFP® professionals and licensed financial experts who monitor accounts and give advice and financial planning throughout the year.
    • Cost = 0.50% of your account balance, annually ($250,000 minimum balance required).

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. The ETF fees are typically around 0.10% annually.

A Betterment Review of Security

When reviewing 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 many banks, including:

  • SIPC Insurance 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
  • Fraud Protection – Betterment will work to recover any loss that results from unauthorized use of your Betterment account

Betterment’s Tax Efficiency

Betterment includes a number of services that can reduce tax liability and increase investment returns. All of these services are all included in Betterment Digital at no extra charge.

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 market exposure) to replace it. Here is a good video on the mechanics:

This process provides tax alpha, which increases after-tax returns over time. Free for all customers with a taxable account, Betterment now provides a sophisticated, fully automated service called Tax Loss Harvesting+ (TLH+)

According to Betterment’s Research, this service would have increased Betterment returns by approximately 0.77% each year over the last decade. This feature alone more than covers the annual Betterment fee.Betterment Tax Loss Harvesting

Spousal Tax Loss Harvesting – Betterment now offers TLH+ for married couples. When you enable TLH+ on your Betterment account, you will now be asked to provide your spouse’s Betterment account information as well. If your spouse uses Betterment, this service will optimize the investments across all accounts and help prevent wash sales (simplifying your annual tax return).

Tax-Coordinated Portfolios – Tax-Coordinated Portfolio optimizes and automates your asset location. It places your assets that will be taxed highly in your IRAs, to reduce current tax drag. Then, it places your lower-taxed assets in your taxable accounts. Betterment research shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years.

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 available 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, further saving you tax dollars.

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. This is a more efficient way to handle portfolio transactions, and minimizes short-term capital gains.

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 that mutual funds in taxable accounts.

Personalized Retirement Advice (RetireGuide)

Betterment’s RetireGuide service uses details about your personal retirement goals to recommend a globally-diversified portfolio tailored to your needs. This  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.

RetireGuide automatically updates based on synced account balances, and helps you stay organized with a display of all of your retirement accounts in one place. You can also now update the age at which you expect to receive Social Security benefits and even upload a Social Security statement file from SSA.gov for precise estimates and advice.

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.

Other Important Features

SmartDeposit – Betterment’s new feature which allows you to automatically invest any excess savings that are sitting in your bank account. You tell Betterment how much you want to keep in your bank account at all times, and specify how much you want to invest, then Betterment uses those guidelines to automatically transfers funds from your bank account to Betterment on a regular basis. This allows you to continue building a bigger investment portfolio without holding too much cash.

Beautiful Design – Betterment has a wonderful, easily accessible interface that can be accessed 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 your 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 a New Year’s 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 helps reinforce positive investment behavior 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.

Possible Drawbacks

  • Cost of Service – Betterment charges very low fees for the service they provide, and I think the features that are provided more than cover the management fee. But if you are willing to learn about investing and portfolio management, you can learn how to invest your own money without any management fees. Just remember that most DIY investors are unable to properly utilize tax loss harvesting and the other advanced tax features provided by Betterment.
  • Investment Options – There are only a set number of ETFs available through Betterment. Although that number has increased, some investors 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 2016/2017. Or you can create a regular taxable account with no funding limits. Betterment also allows the creation of trust accounts.

Betterment now 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 2017).

Betterment Review Summary + Signup Bonus

If you are looking for a low-cost investment service that won’t confuse you or require much effort, consider Betterment.

Betterment is a fairly priced, hands-off approach to successful investing (based on decades of investment research).

Betterment is currently offering our readers a promotion to receive the Canary – a free intelligent home security system. New customers who deposit at least $100,000 into a taxable Betterment account will receive a free Canary device. No other promotional offers are available.

I hope you enjoyed my Betterment review. Please leave a comment below if you have additional feedback.

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