As the technology evolves, new industries emerge and challenge the traditional status quo. Not many industries have been as impacted by technology as the brokerage industry.
A perfect example of this disruption is the new innovative service being offered by Betterment and other robo advisors. Betterment is a new technology based investment platform that offers many unique advantages to investors that we will be discussing in this review.
Gone are the days of setting up meetings with a financial advisor. Now, you can get automated guidance from a robo advisor or even have unlimited access to a team of financial advisors! By removing most of the human involvement, the process is streamlined and in most cases significantly less expensive.
Betterment offers a custom tailored investment portfolio with no minimum balance to invest. You can start investing with $10 if you want to.
Based on your age and goals, they will build you 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 over $100,000 they offer Betterment Premium, which gives you access to CFP® professionals for an annual asset management fee of 0.40%. Beyond that, they offer cash management solutions through Betterment Cash Reserve. This is a high yield online savings account that is FDIC insured.
Most recently, they launched the Betterment Checking account.
Betterment is an online robo advisor geared towards everyday investors who want automation of their investments paired with personalized financial advice. Through the use of technology, Betterment is able to offer management fees that are extremely competitive.
A robo advisor is a new technology based financial advisor that advises clients and manages accounts with minimal human interaction. This is capable through the use of algorithms and technology. Financial advice is provided based on mathematical rules and programs. This results in 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% which is a fraction of the cost.
Summary
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.
Pros
No minimum balance requirement
Fees are very reasonable starting at 0.25%
Fully automated and dummy proof
Access to financial professionals through Premium
Checking & Savings Accounts available
Cons
No direct indexing
Very little control over your portfolio and assets
Only stocks and bonds
No individual stocks
For accounts over $100,000 they also offer 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 clients best interest 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 the legal obligation to act in the clients best interest at all times and is the highest level of customer care in the investment advisor community.
Click here to invest with Betterment!
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 for every 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 towards 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.
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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 like 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 where one fund could be trading at $50 per share yet it can have hundreds of underlying holdings. They allow you to invest in 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 modern portfolio theory and global asset allocation. Modern portfolio theory is a hypothesis that investors can construct diversified portfolios along an “efficient frontier” that maximize their return for a given level of risk.
Created in the 1950’s, 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, Fama and French found that equity returns are heavily correlated to the market, value, and size of the company. Betterment uses their own modeling to determine the tilt of their portfolios which is specifically towards 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 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.
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.
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. The goal is beating the market over the long term.
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 long term bonds as well as higher risk bonds in this portfolio.
The main source of revenue for Betterment is collecting fees. 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 $199 to $299.
Click here to invest with Betterment!
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 they offer for sale.
One of the best features is 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 offers a feature called tax loss harvesting which aims to minimize your taxes on capital gains.
Here's our full article explaining taxes associated with Betterment.
They accomplish this 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. This 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 spouses 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) 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.
They offer 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.
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.
Overall they are also a popular pick for retirement investing offering a wide variety of account types.
Here is our full review of the Roth IRA Betterment offers.
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.
Click here to invest with Betterment!
If you are ready to get started with Betterment, check out our full step by step article on how Betterment works next!
