Since its launch in 2010, the Betterment mission has remained the same: “Investing Made Better.” Consistent with modern portfolio theory, Betterment’s goal is to maximize returns and minimize risks. The combination of goal-based tools, affordable management fees, efficiency and a hands-off approach effectively help investors to maximize returns.

Automated wealth management is one of the biggest breakthroughs in the investment world over the past five years. The media has coined the term robo-advisor or robo-adviser to describe these companies, which are now in the dozens. Traditional brokers like Schwab have also launched their own version of automated management. Of the independent launches, Betterment is the clear leader, accumulating more than $5 billion in assets under management.

Getting Started

Getting started with Betterment is almost as easy making a Facebook Inc. account. Beyond your personal information, Betterment uses the answers to three specific questions: age, retirement status, and income to generate a personalized recommendation for you. Based on your responses, you will be prompted to choose between four different goals: safety net, retirement, general investing and major purchase. Each option offers different asset allocations, account types and can be changed after signing up. After signing up, you are then prompted to link a bank account and make a deposit. The whole process can take under five minutes to complete.

Betterment at a Glance

Accounts Supported: Betterment currently offers a robust catalog of accounts which vary depending on your goals. Individual and joint accounts can be used for general investing needs whereas traditional and rollover Roth, and SEP IRAs can be used to build a retirement fund.

What really separates Betterment from its peers and traditional brokers is its relatively new 401k option, Betterment for Business. This is a cost-effective way for small businesses and startups to offer employees a defined contribution plan. (For more on Betterment's 401k plan, see: Betterment's all-ETF Online 401(k) plan.)

It would be ideal for Betterment to also incorporate college savings accounts like a 529 or Coverdell ESA plans. Graduating from college with little or no debt, like retiring comfortably, is an important financial goal. And with tuition costs at an all-time high, several parents are considering starting an educational fund.

Fees: Depending on your account balance, Betterment's management fees can vary from $0.15 to 0.35%, these fees are minuscule compared to the 1% plus charged by traditional brokerages. For accounts under $10,000 with recurring deposits of $100 per month, the rate is 0.35%. If you choose not to automate your savings, the fee is a flat $3 per month. If you invest between $10,000 and $100,000 that fee drops to 0.25%, and if you invest more than $100,000 it becomes 0.15%. Betterment doesn’t charge trading fees or commissions, a significant savings for those using the service.

Portfolio: Betterment uses ETFs that represent up to 12 different assets classes to design a portfolio that best meets your goals and risk tolerance. The company automatically rebalances when cash flow changes, in the form of dividends, contributions or withdrawals, or when a particular asset drifts more than 3% from its target allocation. Fractional investing ensures that not one dollar goes uninvested.

Betterment’s mix of ETF’s covers U.S., international, and emerging markets stocks and bonds, short-term Treasury and inflation-protected bonds.

Betterment Stock Allocation

Sector

Ticker

U.S. Total Stock Market

VTI

U.S. Large-Cap Value

VTV

U.S. Mid-Cap Value

VOE

U.S. Small-Cap Value

VBR

International-Developed Market

VEA

International-Emerging Market

VWO

Betterment Bond Allocation

Sector

Ticker

Short-Term U.S. Treasuries

SHV

Inflation Protected U.S. Bonds

VTIP

U.S. High-Quality Bonds (For IRA and 401(k)accounts)

BND

U.S. Municipal Bonds (taxable accounts)

MUB

U.S. Corporate Bonds

LQD

International Developed Market Bonds

BNDX

Foreign-Emerging Market Bonds

VWOB

(Source: Betterment)

Expense ratios: The average ETF expense ratio is 0.12%, ranging from 0.09% to 0.17%. This is a stark difference from the 1.16% expense ratio at traditional funds.

Tax harvesting: Betterment currently offers tax loss harvesting on taxable accounts. The platform automatically reviews your portfolio on a daily basis to effectively reduce your tax exposure. This is a powerful and sophisticated tool that would be nearly impossible to replicate on your own. Betterment’s software allows you to capitalize on any losses that can be used to offset taxable income. This can be particularly beneficial for investors that have maxed out their tax-advantaged accounts and have extra investable assets.

Customer support: The company offers phone support from 9:00 a.m. to 8:00 p.m. on weekdays and 11:00 a.m. to 6:00 p.m. on weekends. Email support and live chat options are also available during regular business hours. From my personal experience, this is another aspect where Betterment excels. Its support staff is attentive, knowledgeable and prompt to follow up if they are unable to answer your question.

User accessibility and friendliness: Betterment is available via the website and mobile app. Both are extremely intuitive and straightforward, so users aren’t left scratching their heads. The website also includes a comprehensive FAQ and blog that answers general support questions and various financial literacy questions.

Additional Features: Betterment has many optional features including SmartDeposit and the Retirement Savings Calculator that keeps users mindful of their investment goals.

In March 2016, Betterment launched a new feature called SmartDeposit. Betterment’s SmartDeposit will automatically transfer “excess” money into your Betterment investing account based on settings you choose. At least once a week, SmartDeposit invests any excess cash, up to the amount you set. Before each transfer, Betterment sends an email at least 24 hours in advance giving you the option to skip it—a handy feature, especially if you have more expenses than usual during a particular month. If you know you have a large expense coming, you can disable SmartDeposit, and reset it when you're ready to continue investing.

The money that SmartDeposit transfers from your savings account to your Betterment investment account is invested in up to 12 different asset classes, based on your age and goals, and optimized for your selected asset allocation. Betterment selects low-cost, highly liquid, index-tracking ETFs to ensure clients gain the desired asset exposure at the lowest total cost of ownership. When selecting ETFs, Betterment considers the expense ratio, bid-ask spread, assets under management, number of holdings, exchange rate hedging and capital gains implications. Betterment states: “We use tax-efficient algorithms and automate optimal behavior to maximize your ability to grow your money.”

What About Performance?

Betterment’s portfolios are made up of two parts: equity and bonds. Your portfolio “is designed to keep up with the market and not under-perform, but it is not designed to beat the market,” according to Betterment. “You will never out-perform or beat the market on a risk-adjusted basis in your Betterment portfolio, but you’ll also never under perform or pay for a manager who underperforms either.”

Betterment says its customers can expect 4.30% higher returns than a typical DIY investor. Your returns depend on your asset allocation. Betterment automatically rebalances your portfolio any time the drift – the difference between your portfolio’s target weight and actual weight – reaches 3%. You can view the expected returns for your portfolio by logging into your account and can research how a given blend would have performed historically by using Betterment’s analysis.

Since its inception Betterment, nor any other robo-advisor, has ever experienced any extended period of volatility. Besides back testing, it's unknown how the platform would handle a new financial crisis. The Friday following the Brexit vote, Betterment suspended trading to protect investors from extreme uncertainty. The move undoubtedly saved customers money, but it also sent mixed signals. Failure to adapt to future market declines without having to halt trading is a surefire way to irritate customers.

Fee Differences: Betterment V.S. Robo-advisor

The average charge for an investment advisor is 1.3% of the portfolio's value on an annual basis; however, as mentioned earlier, Betterment's annual fees range from 0.15% to 0.35% depending on how much capital you have invested. If you have less than $100,000 invested, you will pay a 0.35% annual fee. If you have between $10,000 and $99,999 invested, you will pay a 0.25% annual fee. If you have $100,000 or more invested, you will pay a 0.15% annual fee.

If you're not well-educated on the markets, and you don't want to have to worry about your investments for long periods of time, then you might want to consider Betterment. However, be aware that you're putting yourself in a more precarious situation if markets falter. If you keep track of markets, prefer to collaborate on ideas, have specific goals, or are concerned about market conditions, then you should consider a financial advisor.

The Bottom Line

Betterment has shown that it’s a viable option for young investors that lack advanced financial literacy. It’s a perfect starting point to get millennials thinking about their future and also a low-cost investment tool for older investors. Focusing on low fees, simple asset allocation and goal setting features, Betterment truly does make investing simpler.

Note: This story was created with files from Barbara Friedberg and Jean Folger.

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