Why aren’t you investing when you know you should be? This is a simple question with many complicated answers. And perhaps that is the most frequent answer – investing is complicated. But it doesn’t have to be. The idea that investing can be easy was the driving force behind the creation of Betterment, a new brokerage firm whose goal is to help people break down the barriers to investing with a simplified, goal-based approach to investing.
Betterment works to break down common barriers and myths to investing, such as not knowing how or where to start, believing you don’t have enough money to invest or believing you need to constantly monitor the stock markets to be a good investor. None of these investing myths are true, but they can seem that way when you are a beginning investor.
Anyone can invest with a minimal amount of time, energy, expertise, and most importantly, a minimal amount of money. If the barriers listed above sound familiar to you, then read on. And if you are an experienced investor, you may still find value in this service. Betterment’s goal is to tackle all of these obstacles at once, and still offer a product and service that will appeal to a wide audience of beginning and more sophisticated investors.
Betterment – a Better Way to Invest?
What is Betterment? Betterment is an investing service designed to simplify the investing process and remove the guesswork. At the core of their investing model is giving investors a way to match the market with low-cost investments and a hand’s off portfolio. If it sounds a little like investing in index funds, it is similar – but Betterment also offers investors more customization and automation than you can get just by buying index funds.
Betterment focuses on goal-based investing. Betterment is an asset management company, rather than a means for day trading. In fact, you won’t find streaming stock quotes, in-depth technical analysis tools, options tutorials, or a variety of other tools frequently used by day traders.
Betterment’s purpose is to help you set and achieve investment goals, not entice you to make as many commission based trades as possible. And this is evident from the moment you open your account and are greeted with questions about your investment goals and timeline. Why are you investing? When do you want to achieve your goals? How many investment goals do you have?
Once you create your account you will need to select your main investment goal and a target date at for achieving your goal. Betterment will then make a portfolio suggestion based on your investment goals. Select your main account goal and a target date when you want to achieve the goal. Some investing goals include retirement, buying a house, saving for college, or any other major purchase.
How Does Investing with Betterment Work?
Betterment offers a low-cost way to invest in a wide variety of market-based investments at a low cost, hands-off approach. In layman’s terms, that means offering investors a simple, automated investment process so the investor can spend less time worrying about his investments and keep more money in his pocket.
- Goal-Based Investing – Choose an investment goal and time frame, and Betterment will recommend an investment mix to help achieve your goals.
- Dollar Cost Averaging – DCA removes the element of market timing and smooths your investment approach.
- Fractional Investments – Because Betterment is pooling money from many investors, you don’t need to buy full shares. Every penny you invest will go toward a fractional share, ensuring more of your money is working for you at all times.
- Automatic Portfolio Balancing – Your portfolio is automatically rebalanced once every quarter, or when your portfolio strays more than 5% from your target asset allocation.
- No Transaction Fees – Betterment doesn’t charge you to make trades, or make deposits or withdrawals from your account. And there are no account minimums or monthly fees.
Betterment’s Investment Options
Betterment uses two main types of investments: Exchange Traded Funds, or ETFs, and US Treasury Bonds. ETFs are very similar to index funds (they typically track a major index like the S&P 500), but they are traded on the stock exchange much like regular stock shares.
ETFs can often have lower expenses over time, and can be traded at different price points throughout the day, whereas mutual funds and index funds are bought and sold at the closing price, regardless of when the buy or sell order was placed. These investments are further broken down into a Stock Market Basket and a Treasury Bond Basket (investment mix accurate at time of publication).
The Stock Market Basket consists of:
- 25% VTI: Vanguard Total Stock Market
- 25% IVE: iShares S&P 500 Value Index
- 25% VEA: Vanguard Europe Pacific
- 10% VWO: Vanguard Emerging Markets
- 8% IWS: iShares Russell Midcap Value Index
- 7% IWN: iShares Russell 2000 Value Index
The Treasury Bond Basket is:
When you select your risk tolerance and investment goals, Betterment recommends a mix of stocks and treasury bonds to meet your needs. Your investments will contain a mix of the Stock Market Basket and the Treasury Bond Basket. The process is more or less automated, but you have the final say over the proportion of stocks and bonds you want in your investments. This gives you the ability to create a balanced portfolio with a minimal amount of time, energy, or money.
Investing with Betterment
Once you open your Betterment account, you answer some questions about your financial goals and your risk tolerance. Then you transfer funds to your account. It’s easy to link an online savings account to your Betterment account to transfer funds. Once the funds hit your account, you can invest them. Betterment will automatically allocate your funds for you and automatically balance your Betterment portfolio based on market changes.
This includes automatic tax-loss harvesting based on market changes. Tax-loss harvesting is selling an investment at a loss, which gives you, the investor, a tax benefit. You can deduct your losses against your capital gains. You can also deduct $3,000 per year of losses against your ordinary income in any given tax year. Any additional losses can be carried forward to future years. This can be a very valuable tax benefit. But there are certain associated rules called the wash-sale rule, which states you can’t sell a security at a loss and repurchase it within 30 days and still receive the benefit. Thankfully, Betterment handles all of this for you.
Betterment Financial Advice Packages
One way Betterment is beginning to help its customers invest with confidence is with financial advice packages. These personalized plans give you access to advice from a licensed financial expert to ensure you’re on track to meet your investment goals.
Here’s a quick breakdown of what you get with each of the packages, which are built to help you at various monumental stages of life:
- Getting Started package: With this package, Betterment customers get confirmation that they’ve set up their account and investments properly.
- Financial Checkup package: This package goes below the surface, providing you with a checkup on your investment allocations in conjunction with your financial goals.
- College Planning package: If your goal is to send your kids to college in the next two decades, this package can help you get them there successfully.
- Marriage Planning package: With marriage comes the integration of multiple accounts and finances. This package helps you wade through the process and strategize together.
- Retirement Planning package: Betterment’s retirement planning package helps you to assess and meet your investment goals and strategies to retire with ease.
These packages come at an affordable flat-rate and give you an individualized plan and educational resources.
Betterment Fees – Low-Cost, and Easy to Understand
OK, so we know Betterment doesn’t charge transaction fees. How do they make money? The answer is they charge a portfolio based fee based on your total assets in your Betterment account. This is the same concept as paying an annual maintenance fee for using a mutual fund or index fund, or paying a financial planner a fee based on assets under management.
Betterment changed their fee structure in early 2017. The old structure was based on a sliding scale based on how much you had under management. The new basic plan, Betterment Digital, chargers a flat 0.25% fee.
To put this in perspective, investors would only pay a $25 annual fee to maintain a balance of $1o,000 in their Betterment account.
Betterment now offers two plans, which you can see here:
Betterment Digital Plan – No Minimum Balance
The Betterment Digital Plan charges account holders a flat fee of 0.25%, based on account balance. There is no minimum balance requirement to open a Betterment Digital Plan account.
Here are some of the benefits you will find with this account:
- Personalized financial advice
- Low-cost, globally diversified investment portfolios
- Automatic rebalancing
- Advanced tax-saving strategies
- View everything in one place (sync external accounts to Betterment to view balances)
Betterment Premium Plan – Get Individual Professional Advice
The Betterment Premium Plan charges account holders a flat fee of 0.40%, based on account balance. There is a $100,000 minimum balance requirement to open a Betterment Premium Plan.
That said, you do get access to additional services that may be valuable, based on your situation. For example, the Premium Plan includes everything found in the Digital Plan, as well as access to a team of CFP® professionals and licensed financial experts who can provide advice on your investments throughout the year.
This Betterment Premium Plan includes the following benefits:
- Everything in the Digital Plan, plus
- In-depth advice on investments outside of Betterment
- Unlimited access to Betterment’s CFP® professionals for guidance on life events
Betterment Fee Reductions on Large Balances:
Betterment offers a 0.10% discount on the portion of your household balance above $2M.
- On the Digital plan, you would pay 15 bps for the portion of the balance above $2M.
- On the Premium plan, you would pay 30 bps for the portion of the balance above $2M.
How Do Betterment Fees Compare?
As we mentioned, Betterment charges 25 basis points (0.25%), or $25 per $10,000 under management. Many discount brokerage firms charge more than $5-$10 to place a single stock trade (which you never have to do with Betterment). And many financial planners charge 1% of assets under management (AUM). That would be $100 per $10,000 invested.
On the flip side, it is possible to create your own portfolio with slightly lower fees if you were to do everything through one of the major brokerage houses such as Vanguard or Fidelity.
However, you would lose out on the automation offered by Betterment, as well as the ability to make investments with minimal balances – most large brokerage houses such as Vanguard or Fidelity have minimum investment requirements which can range from a few hundred dollars to a few thousand dollars. Betterment has a minimum investment requirement of $10.
To top it off, Betterment automates trading and investing to maintain your preferred asset allocation. Not to mention the access to automated tax-loss harvesting.
Is Your Money Safe with Betterment?
Yes. Betterment LLC is a Registered Investment Advisor with the SEC and they are regulated by the SEC and by FINRA. Betterment accounts are SIPC insured and insured for up to $500,000. This means your money is safe if something happens to Betterment. This does not, however, protect you from market risk. These are investments and it is possible to lose money.
Betterment just announced they have added IRAs as an investment option. Investors are able to open Traditional and Roth IRAs, and will also have the ability to roll over old 401k plans or IRAs from other custodians. This makes Betterment a solid option for investors who are looking for a place to open a retirement plan and places them among the best places to open an IRA due to the simplicity of their service, the low barrier to entry they offer, and the low expense ratios for their investment options.
Downsides of Betterment
Based on what I’ve seen, there aren’t many downsides to Betterment – it is great at what it does, which is to simplify investing and make it accessible to anyone, regardless of income or previous investing experience.
The primary downsides revolve around the types of investments, which are limited to index funds and similar types of investment vehicles. This gives fewer investment options for people who like to trade individual stocks or wish to own a variety of mutual funds. This can still be accomplished, but only through using another investment account.
It is also possible for some savvy investors to beat the expense ratio with a little knowledge and effort. However, the new rate schedule makes this more difficult to accomplish. The trade-off for both of these downsides is a simple to use a system with built-in automation.
Another downside is the tax forms. Betterment does a lot with tax-loss harvesting, which can certainly be a good thing. It can save you a lot of money on your taxes. However, that means that Betterment does a lot of buying and selling within your account. That’s not a problem with things like commissions since the rates Betterment charges are all-in (they don’t charge additional fees for trades within your account). But it does create a little extra work come tax time. I had to download a csv file with all the trades and send it to my accountant to take care of all the capital gains and losses. He was able to import it into his tax software, and you probably can too, with most commercial software programs. So it’s not too much of a hassle. But it is worth considering for those who like to keep taxes simple.
Who is Betterment for?
Overall, I am impressed with Betterment and like what they have to offer. I believe Betterment can be a good fit for a variety of investors, especially those who are just starting or are looking for a hands-off investment approach.
Earlier we identified three barriers to investing:
- Not knowing where to start
- Not having enough money to start investing
- Believing you need to be an expert to invest
Betterment has done a good job of eliminating all of these investment myths. Anyone with $10 can open a Betterment account and begin investing with no previous investing experience. You don’t need to be an expert you don’t already need to be rich or have a lot of extra cash to invest, and you don’t need to constantly monitor the markets.
If any of these concerns are preventing you from investing, then consider Betterment as an option to get started. And if you are a seasoned investor, you may also find that Betterment can help you simplify your investment portfolio and make asset allocation a breeze.
Bottom line: Betterment is a fast and easy way to start saving and investing for retirement and other life events.