Woman using Bettermint app
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Founded in 2008, Betterment is the largest player among what are known as robo-advisors, automated investing services created to help people who typically don’t have enough assets to afford or need a traditional advisor, or who feel like traditional advisor fees are too high and the service is not great. Other companies that offer robo-advising inclue Charles Schwab and Vanguard, among others.

The company has 270,000 customers and more than $11 billion in assets under management. It offers its clients a globally diversified portfolio of exchange-traded funds, or ETFs. It is goals-based, with portfolios tweaked for things like retirement planning, wealth building and other savings goals.

Although the firm is a pioneer in the space, many others have followed close behind, ranging from micro-investing firms like Acorns to the largest banks, several of which have announced plans to either build or partner with robos to offer similar services. Suffice to say, there are lots of options in the robo-advisor world.

Cost of the service

Betterment’s offering is pretty inexpensive, compared with what you’d pay a traditional financial advisor.

Betterment offers two pricing plans. Its digital plan, which includes its automated portfolio management, tax-efficient investing tools, a personalized financial dashboard and the ability to message with advisors, costs 0.25 percent per year. There is no minimum balance, either. That makes Betterment attractive to someone who is starting small.
For 0.4 percent, the firm offers its premium package, including phone calls with financial advisors, to people with balances more than $100,000.

Embedded in ETF investing is an expense ratio to cover the fund’s operating expenses.

How Betterment works

Bettermint app
Bettermint

Firms like Betterment largely target two groups: those who are new to investing and those who like the ability to do things on their own via technology. Of course, these two groups often overlap — for instance, a millennial who is looking to start investing and wants to do it easily on her iPhone.

Because of these forces, the sign-up process is smooth and straightforward. The mobile app is sleek, with an all-white background and a simple black font. It isn’t cluttered and seems to be built for easy access.

Betterment takes a goals-based approach to investing. In other words, it figures out what you’re saving for and then recommends a portfolio accordingly. If you’re looking to save money for a major purchase, expect to be ushered into a portfolio with moderate risk — about 65 percent stocks and 35 percent bonds. If you’re looking to build wealth over the next 25 years, expect Betterment to suggest more stocks.

Betterment invests your money in exchange-traded funds with 12 different asset classes, and it is optimized for your selected asset allocation. Your mix is rebalanced as needed.

That means that with Betterment, you’re not picking individual stocks to buy and sell; you’re investing in a diversified collection of stocks and other securities that is traded on an exchange. That said, in late March, Betterment announced it would start offering flexible portfolios, which give users more control over how their money is allocated.

You can contribute and withdraw money from your Betterment account at any time without incurring a fee. The firm also doesn’t charge trading fees, but there might be tax consequences from withdrawals, the same way there is when you sell a stock that is worth more than what you paid for it.

Features

Betterment has a few key features worth highlighting.

A handful of portfolio options: Betterment’s portfolio — a mix of stock and bond ETFs — is the default setting, but it also offers three other options.

You can pick a socially responsible investing portfolio, which replaces the U.S. large-cap stock allocations with firms that “foster inclusive workplaces or commit to environmentally sustainable practices.”

There is also an all-bond option from Blackrock that is intended to provide regular income and is designed with retirees in mind.

On the opposite end of the risk spectrum is the Goldman Sachs Smart Beta portfolio, which is supposed to outperform the broad market. Betterment says this portfolio is for “customers who have a tolerance for underperforming a market-cap portfolio but a desire to outperform in the long term.”

Tax loss harvesting: When you sell an investment at a loss, you get a tax benefit. When you sell an investment that has performed well, you have to pay capital gains taxes. Betterment uses its technology to turn losses into opportunities. It sells certain assets at a loss in order to harvest the tax benefit to offset gains. This service is automated and doesn’t cost you any extra.

Tax-coordinated portfolio: Investments are typically held in three types of accounts: those that are taxable, those that are tax-deferred and those that are tax-exempt. Advisors often find ways to help their clients offset their taxes by sticking assets that are not so tax-efficient in accounts with the most favorable tax treatment, and placing tax-efficient investments in accounts with the least favorable tax treatment. Betterment uses technology to bring that benefit to the masses. This is a long-term strategy that Betterment projects could mean 15 percent more after-tax returns available in retirement.

Lots of content: Investing is intimidating for the average person, and it seems like that drives Betterment’s content strategy. The company’s site is brimming with articles, white papers and podcasts that range from the basics, advanced investing advice and topical features about things like managing your investment exposures to guns.

Access to advisors: Betterment has built into its website and interface the ability to text with licensed financial experts who can answer your questions about things like investing, taxes and retirement. The service is unlimited and is offered standard with the digital package. The premium package gives you access to a person via phone, too.

Automated contributions: With Betterment, you can choose a few ways to fund your account. You can contribute manually, set up regular contributions or access Betterment’s SmartDeposit function, which identifies idle cash sitting in your checking account and moves it to your investment account. You can set parameters, such as the maximum amount you want to keep in your checking, and you can opt out, too.

The drawbacks

The primary drawback of Betterment versus other digital investing platforms is the amount of personalization available. Its goals-based approach and investment in ETFs makes it attractive for investors who want to be hands off, but if you want to pick and choose the companies you’re investing in, Betterment might frustrate you. Its new flexible portfolio might alleviate some of that angst by giving you some more control.

The other drawback is not specific to Betterment, but rather the digital investing space at large. It is great that average people now have access to easy-to-use investment tools, but it is important to remember that investing really ought to follow financial health fundamentals. It is imperative that you establish a solid emergency fund held in an FDIC-insured savings account and pay off high-interest debt before considering investing in the market. Additionally, you ought to participate in your company’s 401(k) program, if one is offered, before investing your post-tax dollars.

Your investment choices

Betterment’s portfolio — a mix of stock and bond ETFs — is the default setting, but it also offers three other options: a socially responsible investing portfolio, which replaces the U.S. large-cap stock allocations with firms that “foster inclusive workplaces or commit to environmentally sustainable practices”; an all-bond option from Blackrock that is intended to provide regular income and is designed with retirees in mind; and the Goldman Sachs Smart Beta portfolio, which is supposed to outperform the broad market.

Betterment excels if you want to be hands-off, which is one of the major appeals of a robo-advisor. However, several other firms, especially those with a values-based approach like Motif, allow for a bit more control of where your money is being invested by letting you pick a certain number of companies you want (or don’t want) in your portfolio.

Alternatives

The digital investing space has heated up significantly in the past several years, with large banks and traditional brokerage firms looking to introduce their own digital advisors. Many are doing this in anticipation of the great wealth transfer expected to happen between older generations and younger generations. The legacy players want to establish connections with those people now so that they stick around when they inherit their parents’ or grandparents’ wealth.

Betterment vs. Wealthfront: Betterment’s closest competitor is Wealthfront. For investors with less than $10,000, the decision will likely come down to price versus access to help. Wealthfront doesn’t charge a fee for the first $10,000 and then charges 0.25 percent for balances more than that, but it doesn’t offer messaging with an advisor. Wealthfront also has a minimum account balance of $500, whereas Betterment has no minimum account balance.

Betterment vs. Acorns: Perhaps because both have been rather successful in building notable brands, Betterment and micro-investing app Acorns are often compared, too. Acorns builds its users’ accounts via round-ups. If you buy coffee for $2.72, it rounds the purchase up to $3 and puts the 28 cents in an investment account for you. It moves money to the account typically in increments of $5, and you can also set up recurring investments. Acorns charges $1 a month on accounts with less than $5,000, and 0.25 percent on accounts with more than that amount. In that regard, Betterment might be cheaper in the early stages of your account. Say you set aside $1,000 in your first year. At Betterment, that would equal $2.50 in fees, versus $12 at Acorns. Also, Acorns’ interface is intended to be much simpler, so there are only five portfolio options for various risk tolerances.

Bottom line

Betterment has emerged as the largest robo-advisor in the space. Its low fees and ability to interact with advisors make it a good option for inexperienced investors. More advanced investors or those with greater assets might also really appreciate Betterment’s hands-off approach, however they should consider shopping around, too, since there are so many more options for them.