Betterment is one of the pioneers in the robo-advisory world, tracing its roots back to 2010. Its services have evolved over the years from traditional passive exchange-traded fund (ETF) investing to include access to certified financial planners (CFPs), specialized portfolio investments and cash management options.
|Access to human advisors||Yes, at Premium level|
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Betterment offers two tiers of robo-advisory services: Digital and Premium. Pricing varies for the two tiers, coming in at 0.25% annually for Digital and 0.40% for Premium. Access to CFP professionals is available in the Premium tier, but only via Phone or Email.
You can open a broad array of accounts at Betterment, from traditional taxable accounts to IRAs and Trust accounts. In addition to its investing offerings, one of the company’s most recent ventures is the establishment of a banking branch, complete with a no-fee checking account and a high-yield cash account.
Betterment uses a holistic investment approach based on Modern Portfolio Theory, which attempts to achieve the highest return possible for the lowest amount of risk. A so-called optimal asset allocation will lie on this risk-reward line, which is known as the efficient frontier.
Tax-loss harvesting, portfolio optimization, rebalancing and smart beta are some of the available tools designed to enhance Betterment performance.
|Investment options||Selected ETFs
|Tax loss harvesting|
|Socially Responsible Investing|
To determine the appropriate asset allocation for your portfolio, Betterment solicits information about your investing goals and time horizon. These self-inputs are then matched with Betterment portfolios that attempt to best achieve those goals for the lowest amount of risk.
Then, client funds are allocated across a variety of equity and fixed-income ETFs divided into the following subcategories:
Betterment also offers three specialized portfolios:
You can choose from any of these specialized portfolios, or you can use the Flexible Portfolio option to create your own blend based on your investment preferences. These options are all available in addition to the traditional Betterment asset allocation model.
Betterment utilizes a variety of strategies to maximize the tax efficiency in client portfolios, including:
Asset location: This strategy automatically allocates securities based on their tax characteristics. For example, taxable bonds or other investments that throw off the most taxable income are assigned to tax-advantaged accounts, such as IRAs, while tax-free investments like municipal bonds are assigned to taxable accounts.
Tax loss harvesting: Betterment also offers tax-loss harvesting, which sells securities at a loss to offset realized taxable gains in an account. A similar security is purchased to replace the investment harvested for a tax loss.
Investors in Betterment’s most basic Digital tier pay an annual fee of 0.25% of their assets under management. Those opting for the Premium tier, which offers additional services, pay 0.40% annually.
The 0.25% annual fee charged by Betterment for the Digital tier is in line with rates charged by other robo-advisors. When compared with the zero-commission cost at many online brokerages, the Betterment fee might not fit your needs. However, Betterment isn’t designed to appeal to do-it-yourself traders, and on a $10,000 account, an annual fee of 0.25% translates to just $25 in annual fees.
The 0.40% charged at the Premium level is high in comparison to other robo-advisors, but it does provide access to CFP professionals via online Chat or video conference. The rate is also much lower than what’s charged by most full-service investment professionals, though Betterment doesn’t offer in-person servicing. There’s also a $100,000 minimum investment requirement for this tier level, making the minimum annual fee $400 for Premium customers.
In addition to the annual management fees, you’ll also pay costs in the form of expense ratios for the ETFs in your portfolio. Betterment’s ETFs carry underlying expense ratios ranging from 0.03% to 0.50%.
Betterment offers a cash management account consisting of Betterment Checking, a no-fee checking account, and Betterment Cash Reserve, a no-fee, high-yield cash reserve account currently paying a 0.40% APY.
The combined account has no minimum balance requirement or overdraft fees. All ATM fees and foreign transaction fees are reimbursed, no matter where you are in the world. This account is mobile-based, providing features such as PIN changes, card locks and remote check deposits directly through the Betterment app. A contactless Visa debit card is included.
Note that you cannot take withdrawals directly from the Cash Reserve account. Money must first be transferred to the checking portion of the cash management account, at which point you can access your funds via the Visa debit card. There are no limits on the amount or size of transfers to and from your checking account.
Betterment offers goals-based investment planning when customers sign up. The five types of goals are:
Investors can choose as many of the investment goals as they like. Within each goal category, Betterment suggests investment allocations to help clients reach those goals. Account-holders are free to tweak these allocations at any time to match their personalized views.
Investors in the Betterment Digital tier can access various financial planning packages by paying a fee. Each package includes a Phone call with a CFP and a post-call, personalized action plan drafted by the advisor.
There are currently five packages available. Note that Premium tier users have unlimited access to CFP professionals, so the package prices listed below do not apply.
Betterment was originally created as a largely web-based experience, but it’s come a long way in adding features to its mobile app to make it a more seamless experience. It takes some time to set up an account and get a portfolio designed, especially on the app, but once your account is established, the user experience is intuitive and full of helpful information.
Betterment customer service is somewhat limited. Phone support is only available five days a week, Monday through Friday, from 9 a.m. to 6 p.m. EST. For cash management inquiries, hours are Monday through Friday from 9 a.m. to 8 p.m. EST.
Betterment’s investment portfolios are protected by SIPC insurance for up to $500,000, including up to $250,000 in cash protection. The Betterment Checking and Cash Reserve accounts carry FDIC insurance. Limits are up to $250,000 for the checking account and up to $1 million for the cash reserve account. Note that SIPC and FDIC insurance only cover firm failure, not market losses.
To protect customer data, Betterment utilizes data encryption, fraud protection and two-factor authentication. Once you’ve identified a device as safe to use Betterment, the firm remembers it for two years before requiring additional codes.
Betterment can be a great option for beginner-to-intermediate investors who want professional help with their investments at a low cost. Its optimized ETFs can offer a good value for those without the time, inclination or ability to construct and monitor a long-term investment portfolio. Beyond smart beta and tax optimization, Betterment also offers CFP access, a good online and mobile experience and cash management options.
DIY stock traders should look elsewhere, however, as Betterment doesn’t offer individual stock trading. Numerous brokerages offer commission-free trading of Stocks, ETFs and mutual funds for individual investors.
While Betterment is a leading robo-advisor in the industry, it’s not the only game in town. Wealthfront and Vanguard Personal Advisor Services are two of its most prominent competitors.
|Account minimum||Annual fee||Accounts offered|
|Betterment||$0 or $100,000||0.25% or 0.40%||Individual taxable, joint taxable, IRAs, trusts|
|Wealthfront||$500||0.25%||Individual taxable, joint taxable, IRAs, trusts, 529 accounts|
|Vanguard Personal Advisor Services||$50,000||0.05% to 0.30%||Individual taxable, joint taxable, IRAs, trusts|
Wealthfront charges the same 0.25% annual fee as Betterment does for its Digital tier, but unlike Betterment, Wealthfront requires a $500 minimum. However, Wealthfront offers a broader array of account types, including 529 Plans, which Betterment does not offer. Wealthfront also manages the first $5,000 of an investor’s account at no cost.
Wealthfront doesn’t offer access to financial advisors, so that may be a dealbreaker for some. Still, it does offer a cash management account with similar features to Betterment, including a debit card, but it doesn’t reimburse global ATM fees. Additionally, its current yield is a bit shy of Betterment’s 0.40% APY, at a 0.35% APY.
Vanguard has built its brand on the strength of its mutual fund lineup, but it has branched out into no-fee commission trading and robo-advising as well. Its Personal Advisor Services program carries a hefty $50,000 minimum and charges 0.30% annually, although this can be lowered to as little as 0.05% annually for deposits of at least $25 million.
All Vanguard Personal Advisor Services clients have the benefit of speaking with a Vanguard financial advisor directly to help them plan their portfolios. Although the minimum of $50,000 is high, it’s lower than the $100,000 required at Betterment to access a financial advisor directly.
All information included in this profile is accurate as of 09/17/2020. For more information, please consult Betterment’s website.
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