Betterment Review 2017

Advisors, Investing

BettermentAs the robo-advisor industry becomes increasingly crowded, Betterment has stepped out as the clear leader among the startup services, with more than 270,000 clients and $10 billion in assets under management.

This year brings big changes: Betterment has revamped its pricing and added access to financial advisors. The company has two plan options: Betterment Digital, its legacy offering, doesn’t have an account minimum and charges 0.25%. Customers can consult financial advisors via in-app messaging. Betterment Premium provides unlimited phone access to financial advisors in exchange for a higher fee and account minimum. All portfolios use exchange-traded funds and automatically rebalance as needed. 



Betterment

Arielle O’Shea
January 31, 2017
5.0


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Quick facts

  • Management fee: 0.25% to 0.40%, depending on plan
  • Account minimum: $0
  • Promotion: Up to 1 year of free management with minimum deposit
Get started on Betterment's secure site
Get started on Betterment's secure site

Betterment is best for:

  • Hands-off investors.
  • Retirement investors.
  • Users with low balances.
  • Those who want automatic rebalancing.
  • Users who like goal-based tools.

Betterment at a glance

CategoryRatingDescription
Overall

Account management fee
  • Betterment Digital: 0.25%
  • Betterment Premium: 0.40%
Investment expense ratiosETF expense ratios range from 0.09% to 0.17%.
PortfolioStandard portfolio uses ETFs from up to 12 asset classes. Socially responsible investing, smart beta and target income portfolios also available.
Account minimum
  • Betterment Digital: $0
  • Betterment Premium: $100,000
Account fees (annual, transfer, closing)None
Accounts supported
  • Individual and joint nonretirement accounts
  • Roth, traditional, SEP and rollover IRAs
  • Trusts
Tax strategyDaily tax-loss harvesting on all taxable accounts. Tax-Coordinated Portfolio tool allocates assets across tax-advantaged and taxable accounts according to tax impact.
Automatic rebalancingFree on all accounts
Customer supportPhone support Monday-Friday 9 a.m.-8 p.m. Eastern, Saturday-Sunday 11 a.m.-6 p.m. Eastern; email support and live chat. All customers can consult a financial advisor via in-app messaging; Betterment Premium customers get access to that team of financial advisors via phone.
PromotionUp to 12 months of free management. Deposits of $10,000 to $24,999 get one month free; $25,000 to $49,999 get two months free; $50,000 to $99,999 get three months free; $100,000 to $249,999; $250,000 to $499,999 get nine months free; and $500,000+ get one year free.

Where Betterment shines

Account minimum: Betterment has been one of the few robo-advisors that require no minimum deposit. However, that now only applies to its Betterment Digital offering. Betterment Premium requires a minimum $100,000 balance in exchange for unlimited phone access to financial advisors.

Investments: Like many robo-advisors, Betterment bases its investment philosophy on modern portfolio theory, which highlights the benefits of diversification. The company uses ETFs that represent up to 12 asset classes, depending on your risk tolerance and goals.

Investors also have the choice of a socially responsible investing (SRI) portfolio, which uses ETFs comprised of companies whose business practices align with certain social causes. These funds may exclude companies with poor records on, say, environmental issues — this exclusion process is called negative screening — and seek out companies with exemplary records in that realm, which is called positive screening.

By doing so, these funds assure people that their investment dollars are supporting companies that share their social values. Not all of the funds meet the definition of SRI, however — some asset classes remain the same as Betterment’s standard portfolio because the company was unable to find a suitable or low-cost alternative. The company plans to add additional SRI funds as they become available.

Betterment automatically rebalances investor portfolios when cash flows in or out — in the form of dividends, contributions or withdrawals — or when the allocation to a particular asset class drifts more than 3% from its target level.

The company’s algorithms check daily for a need to rebalance, and the company buys fractional shares, so there’s no uninvested cash in your portfolio. Betterment Premium accounts are also monitored by financial advisors.

Portfolio - Breakdown

Management fees: The company has two plans, each with a different management fee:

PlanAnnual FeeFeatures
Betterment Digital 0.25%Betterment's legacy offering, with digital advice and tools. Access to in-app messaging with financial advisors, with messages answered within 24 hours.
Betterment Premium0.40%Access to a team of financial advisors for account monitoring, as well as unlimited phone calls and emails.

Betterment Digital’s 0.25% management fee is still inexpensive compared to that of many robo-advisors, though investors who benefited from the service’s original tiered pricing — which charged just 0.15% on balances of $100,000 or more — might not think so. The addition of consultations with financial advisors, via in-app messaging, may help ease that burn. Those advisors respond to messages within 24 hours, according to the service.

Likewise, the fee for Betterment Premium seems reasonable for access to human advice through a fiduciary advisor like Betterment. The company isn’t able to supplement its management fee by using its own funds, the way broker-owned robo-advisors such as Fidelity Go, Vanguard Personal Advisor Services and Charles Schwab Intelligent Portfolios do. The advice offered by the Premium tier doesn’t go beyond what is offered via the basic in-app messaging, but the advisors are available by phone.

Both services waive fees on the portion of an account balance that is over $2 million, which is unlikely to help many, given that the average user’s account balance is just $32,000.

Goal-based saving: Betterment’s sign-up process takes you through a goal-setting exercise, first asking for your age and current annual income. It then suggests a series of goals based on your answers, estimating a safety net of three to six months of expenses, a retirement savings target and a general investing goal. Each goal comes with a recommended target and asset allocation, which you can adjust. You can also add other, personalized goals that will dictate the account types used and the way your money is invested. And you can set up auto-deposits into each goal.

Summary - Various Goals

Smart Deposit: This optional feature harvests unneeded cash out of your checking account so it goes to work for you. You set a maximum amount you need in your checking account — enough to cover a couple of months of expenses plus a buffer, for example — and Smart Deposit will monitor your account weekly and pull out any excess. You can set the maximum amount you want Betterment to take out at one time, and you can opt to skip any Smart Deposit before it happens. This is in addition to any automatic deposits you’ve set up.

RetireGuide: Betterment’s RetireGuide lets you link your non-Betterment accounts, including 401(k)s, giving a full picture of all your savings and investment accounts. With this information, the tool can offer comprehensive retirement planning advice. RetireGuide compares current savings levels to your desired spending levels in retirement, answering questions about whether you’re saving enough money, when you’ll be able to retire, and if you’re using the correct savings vehicles and investments. It updates and syncs to outside accounts daily and allows for Social Security data uploads.

Where Betterment falls short

No direct indexing: Like many other robo-advisors, Betterment offers tax-loss harvesting on taxable accounts. The platform automatically reviews your investments daily to reduce tax exposure. But it doesn’t have a direct-indexing tool like Wealthfront, which provides this service on taxable accounts with balances of $100,000 or more. Direct indexing lets investors buy the single securities held by an index, rather than the ETF tracking that index. That can help single out tax-loss harvesting opportunities and save investors with taxable accounts significant money.

Betterment did make a solid attempt to bridge this gap by launching Tax-Coordinated Portfolio in 2016. This is an asset allocation — or rather, asset location — strategy that automatically puts tax-efficient investments into taxable accounts and investments that have a heavy tax burden into tax-advantaged accounts that will shelter them. The company says Tax-Coordinated Portfolio can increase annual after-tax returns by an average of 0.48%, though the strategy works only for clients who have both taxable and tax-advantaged retirement accounts at Betterment.

Safety net goals: As mentioned above, one of Betterment’s suggested goals is a safety net — read: emergency fund — which it advises investing 40% in stocks and 60% in bonds. Conventional advice says short-term savings such as an emergency fund probably shouldn’t be invested at all, particularly if your goal is underfunded, because you may need access to the account quickly and it’s not money you want to risk losing.

Betterment says its tests show that this allocation is a reasonable alternative to cash, but you’ll need to decide if you’re comfortable investing your emergency fund. Many people would sleep better at night with at least some of this money in a standard savings account. Also, the company concedes that taking money out of your safety net account could have capital gains tax implications — including short-term capital gains, which are taxed at higher rates. Withdrawals from a savings account aren’t taxed.

How Betterment stacks up

The comparison between Betterment and Wealthfront comes down to whether you want and are willing to pay more for human advice: Wealthfront’s 0.25% management fee matches the cost for Betterment Digital, but Wealthfront actually gets slightly less expensive when you consider that the service manages $10,000 of your balance for free. Wealthfront also offers superior tax optimization, saving investors with taxable accounts additional money.

But investors who want or need access to financial advisors can find it for a reasonable cost with Betterment.

Is Betterment right for you?

Betterment is the largest independent robo-advisor, and the speed at which it has been able to attract clients and assets is impressive. Its goal-oriented tools and features should appeal to retirement investors, and the human advice offering is inexpensive compared with other independent hybrid advisors, such as Personal Capital. Investors with taxable accounts are likely better off at Wealthfront.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

Updated July 26, 2017.