Betterment at a glance
Pros: Where Betterment stands out
Two service plans, including options to access human advisors
If you’re looking for a robo-advisor to do all your investing or this core function with some extra human guidance along the way, Betterment has you covered. Betterment provides two service plans – a digital package and a premium package – each with its own pricing structure and features:
- Digital plan: This service gets you all the core functionality: portfolio management, automatic rebalancing, tax-loss harvesting and more. Cost: 0.25 percent annually, or $25 for every $10,000 you have invested.
- Premium plan: This service ups the game, and includes all the aspects of the digital plan as well as unlimited access to a team of fiduciary financial advisors who hold a certified financial planner (CFP) designation, and can advise on outside investments, too. Cost: 0.40 percent annually, or $40 for every $10,000 invested.
You can select the plan that better meets your needs, and the fundamental difference between the two is access to human financial advisors tasked with looking out for your best interest as part of their CFP designation. But you’ll need to meet the premium plan’s $100,000 minimum to be able to gain access, a steep threshold for investors just starting out (more below).
Those on the digital plan can get started with no account minimum and may also add on a financial planning package à la carte. You’ll be able to meet with a CFP professional for 45-60 minutes (depending on the package) on a number of topics, including optimizing your Betterment account, planning for retirement, preparing your finances to pay for college, marriage planning or other less common tasks.
The packages run between $299 and $399 and you can book them through the Betterment site.
Betterment has structured its robo-advisor so that you can set up multiple financial goals (a car next year, a house down payment in five years and a retirement in 30 years, for example.) Then you’ll be able to create an investment strategy for each of them using various investment funds.
Betterment offers a wide selection of asset classes, 14 in all, across both stocks and bonds for its core portfolio. They’re used to construct a portfolio based on your risk tolerance and time horizon for your financial goal. Goals that are distant (like retirement) can have more aggressive allocations, while those that are in the near future will have safer allocations.
You’ll also have a few other options when constructing your portfolio. These include:
- A smart beta fund that weights the stocks in the index according to different factors
- Socially responsible funds, including those that focus on climate change or social impact
- An all-cash strategy, which earns what Betterment’s cash management account pays
- An all-bond strategy, which focuses on income and minimizes volatility
In addition to these features, you can adjust the investment weights in your target portfolio, if you don’t want to invest in an area of the world, for example, or have too much of one kind of investment elsewhere and want more diversification.
The robo-advisor monitors your portfolio daily and automatically rebalances it if it moves more than 3 percent away from your target allocation. Betterment generally tries to avoid selling to rebalance and instead uses cash flows (deposits, for instance) to top off the lagging allocation.
Betterment offers fractional fund purchases, not something that every robo-advisor does, allowing you to put your whole deposit to work immediately rather than having it sit around until you can buy a full share. You’ll be able to buy in increments as small as one-millionth of a share.
Since you can buy in smaller increments, fractional shares allow you to keep the allocations in your financial plan on track and can help make tax-loss harvesting more efficient, too.
If you’re looking for a low-cost robo-advisor, Betterment’s digital plan is a solid choice on that front. With an expense ratio of 0.25 percent, the digital plan hits the industry standard, and is still cheaper than a traditional human advisor (who often charges around 1 percent) while offering features (such as tax-loss harvesting) that these advisors would be hard-pressed to provide.
The premium plan charges 0.4 percent of assets, hardly unreasonable for its expanded features.
Wealthier investors on either plan will see fees reduced by 0.1 percent on any money above $2 million with Betterment. So for the digital plan, fees on that excess amount would fall to 0.15 percent, while on the premium plan they would fall to 0.3 percent.
For its investment funds, Betterment chooses ETFs that charge low fees with Vanguard funds making up the primary stock funds for many of its core portfolios. Vanguard is a well-known leader in low-cost funds, and it offers some of the cheapest in the market.
Across the ETFs used in its portfolios, the fees range from 0.06 percent to 0.13 percent, or from $6 to $13 for every $10,000 managed. The average portfolio has a fee around 0.07 percent. These fees go to the fund company, not Betterment, and you’ll pay them regardless of which robo-advisor you select.
Betterment offers a pair of strategies to help you minimize your taxes, and both should prove helpful in keeping more money in your wallet. These strategies are what Betterment calls its tax-coordinated portfolio and tax-loss harvesting+.
The tax-coordinated portfolio feature weighs the best accounts to invest your money in to minimize taxes, so it looks at your accounts as a whole. Highly taxed investments might go into a tax-advantaged retirement account such as an IRA, while those taxed at a lower rate can go into standard taxable accounts. Betterment automatically factors in every deposit and dividend, directing them to where they’re most likely to minimize your taxes.
Betterment’s research says this feature improves after-tax returns by 0.48 percent annually – more than your management fee. It amounts to 15 percent more money over a 30-year period. So a $1 million portfolio could otherwise be worth about $1.15 million, based on these claims.
And Betterment’s tax-loss harvesting feature may also put more coin back into your wallet. Tax-loss harvesting is the process of selling losing investments to get a tax break, and if done smartly, it can save you real money. Betterment automates this process and checks regularly to see whether you could benefit and avoids incurring short-term capital gains, all at no additional cost.
Betterment estimates that its tax-loss harvesting feature boosts after-tax returns about 0.77 percent per year. That may seem modest, but over time it can add up to tens of thousands of extra dollars.
Cash management account
Betterment offers a solid and highly capable cash management account that can handle most needs. Cash management is founded on a fee-free checking account – no monthly fee, no overdraft fee, no monthly minimum. It also offers you a debit card with rewards, reimburses you for ATM fees worldwide and is FDIC-insured up to $250,000 in deposits.
The second part of Betterment’s cash management is what it calls Cash Reserve, a totally separate account that offers an interest rate that’s competitive with the top online banks. You can use this account to “bucket” and track cash for specific savings goals, too. The account is insured up to $1 million with Betterment’s partner banks in the program.
Betterment brings a highly capable robo-advisor to the market, and with a pair of management plans, it should appeal to both beginning investors and those who are a bit more well-heeled. Betterment gets the core functions right – investing, tax minimization, cash management – and it does all this for an eminently reasonable price. So it’s easy to see why clients have flocked to the company and why it’s among the top independent robos, along with Wealthfront.
Those looking for a similar option should have a look at Wealthfront, which offers direct indexing and stock-level tax-loss harvesting. Investors on the hunt for unlimited access to financial advisors should also check out Schwab Intelligent Portfolios.
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