As technology evolves, new industries emerge and challenge the traditional status quo. Few industries have been more impacted by innovation in technology than the stock brokerage industry.
A perfect example of this disruption is the innovative services offered by Betterment and other robo advisors. Betterment is a new technology-based investment platform that offers many unique advantages to investors. The purpose of this article is to explain exactly what Betterment offers and how it stands out from the crowd.
Betterment offers a custom tailored investment portfolio with no minimum balance to invest. This means investors can start to build financial independence once they transfer at least $10 into their account.
Based on your age and goals, Betterment will build a custom portfolio of low fee index funds. This is a 100% passive portfolio. In exchange for this service, Betterment collects an annual asset management fee of 0.25%.
For accounts valued at over $100,000 Betterment Premium becomes available. This platform gives users access to CFP® professionals for an annual asset management fee of 0.40%. Beyond the investing side of the house, Betterment offers cash management solutions through Betterment Cash Reserve. This is a high yield online savings account that is FDIC insured.
Most recently, they also launched the Betterment Checking account.
|Minimum Balance||$0 ($100,000 For Premium)|
|Fees||0.25% Digital, 0.40% Premium|
|Fund Fees||0.07% To 0.17%|
|Promotion||Free Management For A Set Time (With Our Link Below)|
|Tax Loss Harvesting||Yes|
|Assets||ETFs Only, No Stocks|
|Funds||BlackRock, Vanguard, iShares|
|Account Types||Taxable, Retirement, Trust, SEP, Cash, Checking, Joint|
|Tax Strategy||Tax Loss Harvesting (Daily), Tax Coordinated Portfolio Tool|
|Human Advisor||Premium Only|
|Best For||Passive, Hands Off Long-Term Investors|
Betterment is an online robo advisor geared toward everyday investors who want automation of their investments paired with personalized financial advice. Through the use of streamlined technology, Betterment is able to offer management fees that are extremely competitive.
A robo advisor is a new technology-based financial advisor that provides clients with financial advice and manages accounts with minimal human interaction. This is possible through the use of algorithms and mathematical rules and programs. The result is a lower management fee and a significant cost savings for the investor.
Refined investing strategies such as tax loss harvesting and smart rebalancing are some of the many features offered by Betterment. Most financial advisors charge about 1% per year as a fee. Betterment charges 0.25%, a fraction of the cost.
Betterment has revolutionized the brokerage industry through the use of technology.
That is why investors are flocking to this platform. It is no surprise to us that they have over $16 billion in assets under management. They have significantly lowered the barriers to entry to receiving high quality financial advisement.
In the past, you would need thousands if not tens of thousands of dollars to invest with an in person financial advisor. You would also have to meet in person for a meeting.
Now, you can invest with a robo advisor like Betterment with any amount that you have. It is important to remember that this is a long term investing platform for passive investors. If your interest is in short term trading, individual stock ownership or DIY investing, this isn't the platform for you.
For accounts over $100,000 Betterment also offers ongoing financial guidance through Betterment Premium. Depending on the plan, investors can have unlimited access to professional financial advice from CFP® professionals.
Since Betterment and its professionals are fiduciary advisors, they must act in the best interest of the client at all times. Betterment advisors have no incentive to sell products or funds hoping to make a commission off your purchase.
A fiduciary duty is a legal obligation and is the highest level of customer care in the investment advisor community.
Each Betterment account is tailored to the needs of the individual investor.
When you open an account with Betterment, you will be guided through a questionnaire where they will learn more about your goals and objectives.
Here is the process Betterment follows for each new investor:
Learn about the investor. Using a series of questions, Betterment determines your current financial landscape. By understanding your goals, time horizon, and personality they get an overall picture of where you currently stand and what you are trying to accomplish financially.
Make recommendations. Once they have an understanding of your overall financial picture, they will guide you through a path customized to your specific situation. They will suggest portfolios geared toward your risk tolerance, time horizon and investment objectives.
Invest using cutting edge technology. Using personalized portfolios of stock and bond ETFs, investing is streamlined so you don’t need to worry about the management of your investments. Betterment’s portfolios are focused around minimization of both investment fees and taxes.
Betterment uses exchange traded funds (ETFs) to build the portfolios.
ETFs are investment vehicles similar to mutual funds, but they trade on a major exchange similar to a stock. These investments have grown tremendously in popularity over the last 20 years in the investment community due to the low fees and high liquidity.
ETFs provide diverse positions. For instance, one fund could trade at $50 per share and have hundreds of underlying holdings. This allows investors to be diversified across many different asset classes such as stocks, bonds, real estate, and commodities.
By using ETFs, Betterment can construct cost effective and diversified portfolios with ease.
Their portfolio strategy is to use ETFs to construct portfolios based on the modern portfolio theory and global asset allocation. The modern portfolio theory is a hypothesis that says investors can construct diversified portfolios along an “efficient frontier” that maximize their return for a given level of risk.
Created in the 1950’s, the modern portfolio theory is generally accepted throughout the investing community today. Betterment also uses Nobel Prize winning research by Fama and French as the basis for their investing strategy and asset allocation.
In their research, Eugene Fama and Kenneth French found that equity returns are heavily correlated to the stock market, as well as the value, and size of the company. Betterment uses their own modeling to determine the tilt of their portfolios. This tilt is specifically toward value companies and small cap stocks aiming for higher expected returns.
Most of the ETFs in Betterment’s professionally built portfolios are from the Vanguard fund company.
Vanguard is one of the most well known mutual fund and ETF companies. Known for very low fees and the invention of the index fund, Vanguard has dominated the fund industry with over $5 trillion in assets throughout its funds. Betterment uses Vanguard funds mostly because of their low expense ratios and excellent reputation.
Here are some of the Vanguard funds included throughout Betterment’s portfolios:
Betterment also includes a number of bond funds offered by Vanguard. Each Betterment portfolio will consist of a collection of stocks and bonds.
Here's our more comprehensive article outlining how Betterment invests your money.
Betterment also offers custom portfolios constructed by Goldman Sachs.
The Goldman Sachs Smart Beta portfolio aims to provide a diversified portfolio strategy using a balance of actively and passively managed investments. If you're new to investing, you might not be familiar with the terms active and passive investing. For starters, here is a brief summary:
Active portfolio management typically has the goal of beating the market, often associated with hedge funds and mutual funds. This includes buying and holding individual stocks.
Passive management has the goal of generating market returns over the long term. Index investing and buy and hold strategies are types of passive management.
The Smart Beta Portfolio uses both of the above tactics to improve your chances of a high return. Goldman’s smart beta uses a variety of factors to determine investment allocations across the portfolio. Some of these factors include equities consisting of good value, high quality, strong momentum, and low volatility characteristics. Smart beta uses a variety of rules that determine allocations across the portfolio.
Betterment also offers a professionally built portfolio created by BlackRock.
The BlackRock Target Income portfolio is a 100% bond portfolio with the goal of capital preservation.
This may be an ideal portfolio for someone who is looking for an income producing investment strategy vs a growth oriented strategy. This portfolio has no exposure to the stock market, but can fluctuate in value as interest rates change.
Blackrock strategically looks to provide higher yields by investing in both long-term bonds and bonds of higher risk.
The main source of revenue for Betterment is collecting fees for its assets under management. For more information, here's our article on how Betterment makes money.
Betterment collects an annual asset management fee of 0.25% for the Digital plan and 0.40% for the Premium plan. In most cases, this is significantly less than a traditional financial advisor would charge.
Digital is open to anyone, with no minimums.
Premium has a minimum of $100,000 and gives investors access to a team of CFP® pros. Betterment also offers individual advice packages you can book. These are helpful during major life events such as getting married. The cost for these ranges from $299 to $399. You can see these advice packages here.
Betterment Premium offers unlimited access to financial professionals. These professionals will assist you by making recommendations on how much to invest and provide guidance on asset allocation within your portfolio.
This plan also includes detailed advice on investments held outside of Betterment.
If you do not have a Premium plan, you can book a meeting with a planner through the individual advice packages as mentioned above.
One of the best features offered by Betterment is the smart rebalancing of your portfolio. This is available to both premium and digital investors.
Rebalancing of a portfolio should happen when your target weights of assets gets skewed.
For example, let's say have a portfolio of 60% stocks and 40% bonds and the stocks increase in value.
Now, you may be weighted at 70% stocks and 30% bonds.
To tone down risk and return to your target allocation, you should rebalance and sell stocks and buy bonds to return to your 60/40 stock bond allocation. This makes sure your positions are in their right allocation at all times.
Betterment also offers a feature called tax loss harvesting which aims to minimize your taxes on capital gains.
To get a full view of how Betterment handles taxes, see our full article here.
Betterment performs tax loss harvesting by selling securities that have underperformed in your portfolio and realizing a capital loss. You can use this loss to offset capital gains or ordinary income up to $3,000 per year.
Once the loss is realized, they purchase a similar security to replace the one you just sold in your portfolio. This way you avoid any wash sales which occur when you realize a loss on a security and purchase it back within 30 days.
The government identifies wash sales in order to prevent tax loss harvesting. Tax loss harvesting is something that separates these automated platforms like Betterment from the traditional investment options.
You can also use tax loss harvesting across your accounts as well as your spouse's accounts. Spousal tax loss harvesting will allow you to optimize your tax minimization strategies on one tax return.
Betterment uses a method of asset location to construct tax coordinated portfolios.
This is accomplished by putting your highest taxed assets in your IRA first (where you have a tax shelter) and then putting your lower taxed assets in your taxable brokerage account.
According to Betterment, this strategy could boost your return by 0.48% each year.
You can set up a tax coordinated portfolio at any time for no additional fee outside of the asset management fee.
Betterment offers an FDIC insured online savings account known as Betterment Cash Reserve.
This is separate from the robo advisor and you do not need to be invested with Betterment to have a Cash Reserve account. Rates change with the market, but so far they have remained highly competitive.
The minimum to open an online savings account with them is just $10!
The most recent addition to the Betterment suite of products is an online checking account.
For those who do their banking online, this Checking account is a great option. It is designed to integrate directly with the investment product but it can be used alone too.
Betterment is a member of the Securities Investor Protection Corporation (SIPC).
SIPC insures all Betterment accounts up to $500,000 in securities or $250,000 in cash (per account) in the case of a catastrophic financial failure. This is different insurance than FDIC insurance on bank accounts.
Through Betterment Cash Reserve and Checking, you have FDIC insurance.
In a nutshell, Betterment is just as safe as any other brokerage/robo-advisor out there due to the regulations and backing of the SIPC and the FDIC.
Betterment has revolutionized the brokerage industry through the use of technology which is why investors are flocking to this platform. It is no surprise to us that they have over $16 billion in assets under management. Betterment has significantly lowered the barriers to entry to receiving high quality financial advisement.
In the past, you would need thousands if not tens of thousands of dollars to invest with an in-person financial advisor. Now, you can invest with a robo advisor like Betterment with any amount of money. It is important to remember that this is a long-term investing platform for passive investors. If your interest is in short-term trading, individual stock ownership or DIY investing, this isn't the platform for you.
If you are ready to get started with Betterment, check out our full step by step article on how Betterment works next!