Betterment.com Review – Investing Made Simple

What is Betterment?

Online brokerage firm Betterment was formed in 2007 by Jonathan Stein and Eli Broverman to make saving and investing simple and accessible.  Betterment is not a savings account it is a brokerage account however, it does not offer the services of a typical full service brokerage or discount broker.

Betterment Features

  • A straightforward pricing model without hidden fees.
  • No minimum balance.
  • Ability to set up automatic deposits to minimize your average investment cost.
  • Focus on the two investments that matter the most – a great stock basket and a conservative bond portfolio.
  • An incredibly simple user experience that makes it easy to understand your money and control your exposure to risk.
  • Automatic, seamless diversification (which means higher returns with lower risk).
  • Automatic rebalancing every quarter, or any time your allocation strays 5% away from target.
  • Automatic dividend re-investment to save you time and energy.
  • The ability to see how others like you invest.
  • Transactions in exact dollar amounts, instead of whole shares.
  • Goal-based advice and accounting.
  • Access to your account, whether at home or on the go.
  • Dedicated customer service, so in addition to receiving advice online, you can chat with real people when you need them.

How Does it Work?

Investing with Betterment is simple.  Open a free account, link it to your checking account, and select your asset allocation with Betterment's asset allocation tool.  You can select between a pre-selected basket of ETFs and a basket of Treasury Bonds, those are your only choices.  Betterment offers a great tool to help you decide what the allocation between stock ETFs and bond ETFs. Once you select your asset allocation, shares of the ETFs will be purchased and placed in your account.  There are no transaction fees for purchases or when your holdings are rebalanced.

One of the tools available with a Betterment account is a dashboard (screenshot below) that gives you the ability to see where you are according to retirement or savings goals you setup.  This is useful for tracking your progress towards your goals and analyzing the impact of changing your asset allocation on your projected balances.  A word of caution when using a tool like this is that investment returns can not be predicted accurately by anyone so use this tool as one piece of information when making your investment decision. Betterment provides an Asset Allocation tool that allows you to see ranges of how your account might perform (based on historical data) if you were to change your allocation in different ways.

What Investment Options Do I Have?

With Betterment's model of simple investing they choose the investments you choose the asset allocation.

At this time, these are the six stock index ETFs Betterment.com has in their stock basket:

  • 25% Vanguard Total Stock Market (VTI)Betterment
  • 25% iShares S&P 500 Value Index (IVE)
  • 25% Vanguard Europe Pacific (VEA)
  • 10% Vanguard Emerging Markets (VWO)
  • 8% iShares Russell Midcap Value Index (IWS)
  • 7% iShares Russell 2000 Value Index (IWN)

The bond basket contains:

  • 50% iShares Barclays TIPS Bond Fund (TIP)
  • 50% iShares Barclays 1-3 Year Treasury Bond FUN (SHY)

How Much Does it Cost?

There are no minimum balances, no transaction fees, no holding period and no hidden costs.  The fees charged are based on your account balance and are listed in the table below.  In addition to the management fees you will pay 0.2% for the expense ratio fees of the ETFs Betterment offers.

Who Are Betterment's Competitors?

There are several online brokerage firms that offer services similar to what Betterment offers.  They all have a different fee structure, some are higher and some are lower.  As with any investment fees can reduce your return significantly over the long-term so this is something that you want to give careful thought before investing with any brokerage firm.  Larger brokerages like Vanguard and Fidelity will have a broader selection of investments from which to choose from such as annuities, stocks, bonds, CDs, mutual funds, ETFs, and typically offer more services or accounts such as dedicated investment advisor, small business services, IRAs, 401k, and 529s.  Betterment provides advice right within their online platform. You enter your investment goals and the time in which you’d like to achieve them, and Betterment will advise you as to the right asset allocation and monthly contribution necessary to achieve your goals.

Vanguard's Managed Account Program, part of Vanguard Retirement and Savings Plan (RSP), has lower fees than other portfolio management services and offers more investment choices than does Betterment.  A Vanguard RSP Advisor will analyze your current portfolio, help you determine your risk tolerance, set goals, and choose an appropriate asset allocation based on these factors.  Your portfolio will be rebalanced quarterly and you will receive personalized advice and recommendations.

Fidelity Portfolio Advisory Service    With Fidelity's PAS you answer a questionnaire, pick your asset allocation based on your age and risk tolerance, and Fidelity's investment team will manage your portfolio for you based on your recommendations.  Fidelity offers a wider range of investment options than Betterment but also has a higher required minimum balance and higher fees.

Other Competitors ranked according to Kiplinger's The Best of the Online Brokers for 2011:

How Do I Know If Betterment is Right For Me?

If you have less than $1000 to invest and know little to nothing about investing Betterment is an option that may make sense for you.  You can get started for as little as $10 and setup a monthly automatic withdrawal from your checking account.  Once you choose your asset allocation between Betterment's Stock Market Basket of ETFs and Treasury Bond Basket, everything is pretty much on autopilot.  There is a price you will pay for this type of automation so you will need to decide if the higher fees are worth it.

My Thoughts About Betterment

Betterment offers an excellent service for first-time investors with less than $1000 to invest.  You will pay more for a service such as Betterment and if you are comfortable choosing your own investments you can do better elsewhere.  For instance Vanguard offers similar ETFs for 0.18% and that is where I have the majority of my retirement funds.  Vanguard also offers Target Retirement Date Mutual Funds, now $1000 minimum initial investment, that let you choose your asset allocation and expected retirement date.  As you approach your retirement date the asset allocation is automatically rebalanced with a more conservative allocation weighted towards bond funds.  As with Betterment, trades are free with Vanguard as long as you maintain the required balance.

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