Betterment enjoys name recognition in the robo-advising space. This means if you want a company that’s modern, easy to use, and widely known, this might be the robo-advisor for you. There’s no minimum investment, but you will pay a management fee of 0.25% with any balance up to $100,000.
The company also offers tax-loss harvesting and a large variety of account types. If you have $100,000 or more, you can enjoy the services of certified financial planners (CFP). The human element is not something you’ll find with the majority of robo-advisors (since the whole point is investing without traditional human advisors to keep the costs low), but if you have enough money to enjoy the best of both worlds, the company's premium service might be perfect for you.
Low-maintenance investors who appreciate a clean user interface; Investors who are starting out and don't have much money to deposit; Customers who prefer goal-based investing
Direct indexing, which can minimize taxes on taxable accounts, is not offered
Pricing: How Much Does Betterment Cost?
|Option Name||Management Fee||Minimum Balance||Features|
|Betterment Digital||0.25%||$0||Comes with unlimited access to automated portfolio management, tax-loss harvesting and customer support|
|Betterment Premium||0.40%||$100,000||Comes with the benefits of the Betterment Digital plan, as well as unlimited phone calls with CFP(R) professionals and Betterment experts|
Betterment prides itself on minimizing investor fees. The company doesn’t charge trade fees, transfer fees or rebalancing fees. Its annual fees vary depending on the level of service you want and the minimum balance you have to invest.
The “Digital” level has no minimum balance necessary and charges an annual fee of 0.25%. The “Premium” level requires a minimum balance of $100,000 and charges an annual fee of 0.40%. It comes with the robo-advisory features of the “Digital” plan, plus unlimited calls with a CFP®.
The fees you owe will be taken out of your account. You won’t need to mail a check or make an online payment. If you don’t have a balance in your account, you won't be charged a fee. There is no fee for having a $0 balance.
You can cancel your account at any time. If you cancel, your fees will be prorated. That means that if you leave before the end of a month you’ll only pay fees for the part of the month that you had an investment balance.
In addition to an annual fee, you’ll pay the fees associated with company's investment funds. However, the company says it seeks to structure its ETF funds to minimize fees.
Betterment's Investing Strategy
The company follows modern portfolio strategy, which emphasizes maximal diversification across a broad asset class. To achieve this in its offerings, Betterment uses a portfolio entirely made of exchange-traded funds (ETFs). The reasoning is that ETFs are low cost and have a high liquidity. It tries to choose the lowest-fee ETFs that offer the best performance.
Your portfolio is selected based on what risk level and financial goals you indicate during the onboarding process. You can choose from goals, such as safety net, build wealth or retirement. For those who are less risk-tolerant, the company will add more bond ETFs which include short-term treasuries, municipal bonds, emerging market bonds and more. If you’re open to more risk, your portfolio will have stock ETFs include emerging market, international developed, U.S. mid-cap value stocks and more. Each portfolio has different allocations of ETF types depending on what financial goals you indicate.
If you have a taxable account, your bond allocations will take advantage of tax-exempt municipal bonds. Retirement accounts, which are tax-advantaged, will have more investment-grade bonds. While Betterment is considered “passive investing,” each account type is optimized for tax advantages and other concerns. And if you want to learn more about how the company's portfolios perform compared to active investor portfolios, there's data available for potential customers to analyze.
You can choose from a large variety of products, including traditional, SEP or Roth IRAs, 401(k)s, and joint and trust investing accounts. However, despite a robust product offering, the company doesn’t offer 529 college savings plans or custodial IRA accounts.
- Roth IRA
- Rollover IRA
- Personal or joint savings
- 529 college savings
Betterment offers what it calls Tax Loss Harvesting+™. Tax-loss harvesting is a term that refers to a portfolio management practice that minimize taxes. When an investor sells a security that has experienced a loss, he or she can then use that loss to offset, for tax purposes, the gains from another security or asset that has increased in value. After selling for a loss the investor can then re-purchase a similar security to the one that experienced a loss, keeping the portfolio in balance.
If you choose to invest, Tax Loss Harvesting+™ will run throughout each day on your investments. The company’s technology will automatically crawl your investments, looking for losses that can be harvested to minimize tax liability. Tax Loss Harvesting+™ is available at no additional cost – you don’t have to pay extra to take advantage of the company’s tax-loss harvesting technology.
In addition to Tax Loss Harvesting+™, the company offers what it calls “Smart Rebalancing.” This is automatic rebalancing that times your sales and purchases so that you don’t run the risk of buying high and selling low when you’re trying to rebalance your investments.
The company's features are designed to keep you from making mistakes that can cost you money. They’ll flag times when you may be keeping too much money in cash that could be working harder for you if you invested it in the stock market. They’ll warn you against selling assets off after a market downturn. They’ll take the work out of tax-loss harvesting and rebalancing for you, so you don’t have to do it yourself (and so you don’t do it incorrectly). If you want help with your investing but don’t want to pay for a real-live financial advisor, this could be a good fit for you.
Who Betterment Is For
What kind of customer would benefit from this service? The “Betterment Digital” pricing plan is open to anyone, with no minimum investment required. But should an investor whose money is tight opt for this robo-advisor? That depends.
The company’s investment products (ETFs), are available through competitors, including Wealthfront and Vanguard. In fact, Betterment and Wealthfront put investors’ money into Vanguard ETFs. If you really wanted to save on fees you could skip the middle man and invest directly with Vanguard.
On the other hand, Betterment’s automated Tax Loss Harvesting+™ and rebalancing take a lot of the work out of investing for you, so you may decide that these added services are with paying more in fees. In short, if you want low fees but you don’t want to do the DIY investing needed to get the absolute lowest fees, this could be a good choice for you.
This robo-advisor is also a good choice for someone who tends to dread logging on to clunky websites to deal with financial admin. Why? The user interface is clean and clear.
In addition, Betterment lets you sync outside accounts so you can keep an eye on other pots of money. This way you are looking at your full financial picture all in one place. The company can alert you to missed opportunities in your other accounts. These could be accounts that are subject to high fees, or “cash drag,” money that’s not earning much in the way of returns and is dragging down your portfolio performance.
- Tax-Loss Harvesting
- Fractional Shares
- Human Advisors
- Automatic Rebalancing
- Direct Indexing
How Betterment Works
Say you decide you want to give it a try. How does it work? Well, you might have access to a Betterment for Business account through your employer’s 401(k) plan. If not, you can go online and start the process of opening an account. Unless you have at least $100,000 you’ll be limited to a “Betterment Digital” account. With $100,000 to invest you can opt for “Betterment Premium.”
During the onboarding process, you’ll be guided through a series of questions about your financial goals. You’ll need to share details such as your age and income to help set a retirement savings target and other investing goals. The company will tell you a suggested asset mix based on your goals and targets. You can customize your asset allocation, however; you don’t have to follow the company's suggestions to the letter.
One feature that sets this robo-advisor apart is its approach to the emergency fund/safety net. Like many other financial firms, it recommends that you keep three to six months of living expenses in a safety net. However, Betterment recommends that you invest that money rather than keeping it in a low-return money market fund or savings account.
Once your account is set up you’ll be able to view your dashboard and check on your investments. You’ll also have access to the company's customer service. At tax time, you'll be provided with the relevant tax forms you need to fill out your return. Come February, your 1099 tax forms will be imported to your account. The company also integrates with tax preparation software like Turbo Tax.
What’s the Catch?
An investor willing and able to take the DIY approach to investing could pay lower fees by building his or her own ETF portfolio and taking on the work of rebalancing and tax-loss harvesting. Not surprisingly, investors who turn that work over to Betterment will pay higher fees than they would if they went straight to the source and built a portfolio of Vanguard ETFs. So, depending on your perspective and how hands-on you want to be with your investing, you might consider the fees to be a “catch.”
One of Betterment’s most attractive features, Tax Loss Harvesting+™, only benefits investors who open taxable accounts with the company. If you use the robo-advisor for a tax-deferred account like an IRA you won’t reap the benefits of the company’s Tax Loss Harvesting+™ technology.
Finally, if you have less than $100,000 to put in your accounts you won’t have access to the company’s CFP® professionals. You won’t be able to get a financial tune-up or seek human advice on how to meet your financial goals.
Competition: How Betterment Stacks Up?
How does the robo-advisor compare to its competitors? We’ve mentioned that you could pay lower fees if you were willing to build and manage your own portfolio of Vanguard ETFs rather than having Betterment do the work for you. But comparing Betterment and Vanguard isn’t exactly an apples-to-apples comparison.
Most people don’t have the time, desire or know-how to go totally DIY when it comes to investing. Even if they built their own ETF portfolio they might not be able to achieve the tax-optimized portfolio management that is one of Betterment’s biggest selling points.
Betterment’s closest competitor may be Wealthfront. Wealthfront’s annual fee is the same as the annual fee for the Betterment Digital pricing plan: 0.25%. Wealthfront requires a minimum investment amount of $500. However, Betterment offers fee-free management for funds over $2 million. So once you hit the $2 million mark, Betterment becomes cheaper than Wealthfront.
What Wealthfront doesn’t offer is the option to talk to a human. Unlike Betterment, which allows clients to step up a higher pricing plan and get access to human financial experts, Wealthfront only offers robo-advising. Wealthfront also doesn’t let you sync outside accounts or follow a goal-based investing plan, both of which are key Betterment features.
However, Wealthfront has an additional feature that Betterment lacks: Wealthfront offers 529s for college saving.
One final difference between the two robo-advisors that’s worth flagging is what’s called direct indexing. For balances over $100,000, Wealthfront offers direct indexing. Betterment does not offer this service. Direct indexing is basically tax-loss harvesting on steroids. With direct indexing, Wealthfront purchases up to 1,001 individual series on a client’s behalf and takes advantage of tax-loss harvesting opportunities on all of those securities. However, like regular tax-loss harvesting, direct indexing is only applicable to taxable accounts. If you plan to use either robo-advisor to open an IRA, you don’t need to consider the tax-loss harvesting offerings.
Check out this chart to see how the fees compare.
|Robo-Advisor||Management Fee||Minimum Balance||Best For|
|0.25% - 0.40%||$0|| |
Bottom Line: Should You Use Betterment?
Betterment has been growing rapidly since it launched – and with good reason. The company offers low fees for the services it provides. Its user experience and customer service are consistently well reviewed. Particularly if you have taxable accounts and don’t feel the need to take the DIY approach to investing, you could get a lot out of what this robo-advisor has to offer.