The Bottom Line: Betterment is a clear leader among robo-advisors, with two service options: Betterment Digital has no account minimum and charges 0.25% of assets under management annually. Betterment Premium provides unlimited phone access to certified financial planners for a 0.40% fee and $100,000 account minimum.
Pros & Cons
No account minimum.
Fractional shares limit uninvested cash.
Robust goal-based tools.
No direct indexing.
Betterment, with about $15 billion in assets under management, has stepped out as a clear leader among robo-advisors.
The company offers two service options: Betterment Digital, its legacy offering, has no account minimum and charges 0.25% of assets under management annually. Betterment Premium provides unlimited phone access to certified financial planners for a 0.40% fee and $100,000 account minimum.
Betterment is best for:
Users with low balances.
Those who want automatic rebalancing.
Users who like goal-based tools.
Betterment at a glance
Where Betterment shines
Account minimum: Betterment has been one of the few robo-advisors that doesn't require a minimum deposit. However, that applies only to its Betterment Digital offering. Betterment Premium requires a minimum $100,000 balance in exchange for unlimited phone access to certified financial planners.
Investments: Like many robo-advisors, Betterment bases its investment philosophy on modern portfolio theory, which highlights the benefits of diversification. The company uses exchange-traded funds that represent about 12 asset classes for different levels of risk tolerance and your goals.
Investors can choose a socially responsible portfolio, which uses ETFs comprising 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.
Not all of the funds meet the definition of socially responsible investing, or SRI; some asset classes are the same as Betterment’s standard portfolio because the company was unable to find a suitable or low-cost alternative. The company says it plans to add additional SRI funds as they become available.
Customers who want a bit more control over their investment portfolio can use Betterment’s “flexible portfolios” tool to adjust the percentage of their money invested in any particular ETF, but that option is limited to those who have at least $100,000 in their account.
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 over 2% to 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.
Management fees: The company has two plans, each with a different management fee:
Betterment Digital: 0.25% annual fee. Betterment's legacy offering, with digital advice and tools.
Betterment Premium: 0.40% annual fee. Access to a team of certified financial planners for account monitoring, plus unlimited phone calls and emails.
Betterment Digital's 0.25% management fee is still inexpensive compared with that of many robo-advisors, and if you want to talk to a financial advisor, you can purchase one of the company's financial advice packages (more on those below).
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 Vanguard Personal Advisor Services and Charles Schwab Intelligent Portfolios do. At the Premium tier, you get unlimited phone access to a group of certified financial planners.
For portions of an account balance over $2 million, Betterment Digital costs 0.15% and Premium costs 0.30% (customers who funded their accounts before Sept. 18, 2018, will continue to get free management on their balance over $2 million).
Financial planning packages: Betterment offers advice packages targeted to specific life events. A $199 “getting started” package helps new clients set up their Betterment account and make the most of Betterment tools and features. The other four packages cost $299 and offer advice geared toward college planning, marriage, retirement and general financial health. The amount of time you get with an advisor varies by package, as does the advisor’s expertise (in most cases you get a certified financial planner but two of the packages offer only licensed advisors).
Goal-based saving: Betterment’s sign-up process takes you through a goal-setting exercise, asking for your age and current annual income. Then, it 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.
Smart Saver: If you're earning next to nothing on the cash you have stashed in a savings or checking account, then Betterment has an idea for you: Move your money to its Smart Saver account, which invests in a low-risk bond portfolio. Betterment says the current expected return is about 2.18% after the Betterment Digital fee, and 2.03% after the Betterment Premium fee. Be sure to compare Betterment's current rate with what online savings accounts are offering to make sure you're getting the best rate possible. Also, keep in mind that Smart Saver accounts aren't FDIC insured, and the return isn't guaranteed and may fluctuate.
Two-Way Sweep: You can link your checking account to a Smart Saver account, and Betterment's Two-Way Sweep feature will move any unused money — that is, money that its cash analysis tool sees as excess, based on your regular spending — into your Smart Saver account. It also can move cash back to your bank account when your balance runs low. You can change the target balance for your checking account, and Betterment sends an alert before making a sweep, which gives you the opportunity to cancel if you like.
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 with 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.
Charitable giving options: Betterment also offers a charitable giving tool that gives customers a tax-efficient way to donate appreciated securities to charities directly on the Betterment platform.
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 buys 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 a significant amount of money.
Betterment's Tax-Coordinated Portfolio is a solid attempt to bridge this gap. This is an "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. (You need to have both taxable and tax-advantaged retirement accounts at Betterment for the strategy to work.) Betterment also offers a Tax Impact Preview tool that lets you see the potential tax hit of any portfolio moves before you make them.
Safety net goals: 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 whether 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.
Cutting ties: On occasion, for a variety of reasons, there may come a time when you want to part ways with a company. For Betterment customers, that can be a bit onerous. Transferring everything out of a Betterment account to another company requires a hefty amount of mailed paperwork. As in, snail mail.
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. 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.