As a PhD student in financial planning, I have a huge interest in the field of investing. But I’m an oddity. Most people don’t like studying investment theory or attempting to properly allocate their own portfolio. At the same time, those people realize that sticking all of their money in a savings account or CD won’t build any wealth. That’s why I need to post an honest Betterment review. Let’s get started.
The company prides itself on ease of use. The online user interface is designed to be simple, even more so than a savings account. And it is. 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 what asset allocation you should use. Betterment does it for you automatically.
With the service, you don’t own individual stocks or bonds. Investments are held in the form of an exchange traded funds, or ETFs*. The asset allocation between these various ETFs then ensures your account is not weighted too heavily into one specific area, company, country, or sector. This prevents holding all your eggs in one basket and helps to lower overall risk.
*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 Stock Market, they are buying small (weighted) slices of each stock throughout the entire stock market. 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). Thus, indexing greatly increases diversification and lowers overall risk.
When you deposit money with Betterment, it is seamlessly invested in a blend of two baskets: Bonds 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.
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:
- 25% VTI: Vanguard Total Stock Market
- 25% IVE: iShares S&P 500 Value Index
- 25% VEA: Vanguard Europe Pacific (EAFE)
- 10% VWO: Vanguard Emerging Markets
- 8% IWS: iShares Russell Midcap Value Index
- 7% IWN: iShares Russell Smallcap Value Index
Why they recommend these options
One key to smart long-term stock investing is proper diversification. The Betterment portfolio represents the total US market, so it’s like owning a little piece of every public company in America. It also include 35% international exposure, which is designed to lower risk through diversification, and allow you to take advantage of high rates of growth abroad.
Betterment’s investment committee has recently chosen to greatly expand their bond offerings. They originally offered simple Treasury Bonds, but they now have:
- iShares Barclays Short Treasury Bond ETF (SHV)
- Vanguard Short-Term Inflation Protected Bonds ETF (VTIP)
- iShares Core Total US Bond Market ETF (AGG)
- iShares U.S. Corporate Bonds ETF (LQD)
- Vanguard Total International Bonds ETF (BNDX)
- Vanguard Emerging Markets Government Bonds ETF (VWOB)
Why they recommend these options
Through these new expanded options, an investor can get exposure to nearly every bond market. International, domestic, treasury, corporate, even inflation protected are available.
According to Betterment, they made the change from limited treasury bonds to this new expanded bond basket for 2 reasons:
- These options can better reduce the average maturity of the bond basket for low-risk goals. Generally, the shorter the maturity of a bond, the less sensitive it is to interest-rate changes.
- Diversified away from U.S.-only bonds. International bonds are still somewhat responsive to U.S. interest rates, but that movement should be dampened significantly compared to a U.S.-only bond basket. This provides better diversification and a buffer to interest rate risk.
You can see more on their investment philosophy on their site.
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.
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 prices and the value of your account may fluctuate widely, and you could lose money, even over a long-term 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.
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%.
While you can start with no money, they do request you deposit at least $100/month. If you don’t, you get charged an additional $3 per month until you have $10,000 saved. This fee 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 underlying ETF expenses. When you invest in any ETF, you will pay an expense ratio. You won’t see these fees outright on the Betterment site, but the value of your investment is basically reduced by the fee amount. Fees are expressed annually when you look them up online.
For instance, the Vanguard Total Stock Market Index ETF (VTI) that I listed above has a fee of 0.06%. If you invest $100 in VTI, you’ll pay six cents for the fee. You’ll pay that fee everywhere, not just on Betterment.
Chances are that your total ETF fees will average around 0.15%, plus the 0.15 – 0.35% Betterment management fees. So total cost to you is somewhere between 0.25 – 0.50%. That’s cheap for ongoing wealth management.
Why Betterment Works
- Sound Principles – The company believes in index investing which has proven over time to guarantee higher returns that active trading. With Betterment, you won’t attempt to beat the stock market, but you will realize that market averages and really low fees beat actively managed mutual fund returns.
- Automatic 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 no good for risk or reward. As such, rebalancing is a yearly requirement if you handle your own money, and can result in additional taxation. Betterment does it all automatically for you, and does it in the most tax efficient way possible.
- 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 attempted diet. If you don’t enjoy managing a portfolio and reading about investing, you might neglect it altogether. Betterment does it for you and does it really well in exchange for a reasonable fee.
- Objectives – The program has a great visual outlay that tells you what to expect over a certain number of years on your investment. It also allows you to set goals and work towards them. That’s a big bonus for a lot of people.
- Price – Compared to many financial advisors, the fees are very low. I have no problem with what they are charging.
- Advice - Betterment offers free basic investment advice and articles to customers. For those willing to learn, this is worth something.
- Cost of Service – Betterment has very low fees for the service they provide. But if you are willing to learn all about investing and portfolio management, you can learn to manage your own money without any management fee. I personally buy and sell 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 – such as real estate or the ability to tilt more towards small cap or value stocks. There is nothing at all wrong with any of Betterment’s available funds, but some people might want a little more variety.
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 checking account. Money can be transferred into the Betterment account whenever you desire, or you can setup an automated deposit.
You can also set up a new IRA or rollover an existing 401k/IRA into Betterment if you’d like to let them handle your retirement funds.
Each new account is eligible for a $25 bonus that I mention below.
Betterment Review Summary + $25 Bonus
I’ll close with this thought. If you want a really simple solution to investing, I recommend Betterment. If you want something that won’t confuse you or require much effort, I recommend Betterment. If you want a 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 way to broadly diversify your investments.
I hope you enjoyed my Betterment review! Because I am a Betterment client, they now offer a $25 account bonus if you sign up here.