Betterment Review 2017 – Is It The Best Robo-Advisor?

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As one of the most popular robo-advisors, Betterment has accumulated over $9 billion in client assets from over 330,000 investors. Like other robo-advisors, Betterment relies on a computer model and a team of investment managers to manage client funds. In this Betterment review, we will see not only how Betterment is similar to its rivals but also what sets it apart from most of its competition.

While most robo-advisors launch their services with purely digital advice, Betterment has expanded its product offering to include a wide variety of additional features, including tax-loss harvesting, socially responsible investing, goal-based investing, financial tools and calculators, and thematic investing.

Although Betterment has been an industry leader for years, it strengthened its claim as the best robo-advisor when it added human financial experts to its already strong product offering.

With so many bells and whistles, you might expect Betterment to charge hefty fees, but its pricing is highly competitive, ranging from 0.25% to 0.40% depending on what service level you choose. If you want access to human advice, you will pay more but if you want automated investment management only, the lower fee applies.

Betterment Spotlight

BETTERMENT SPOTLIGHT
betterment

InvestorMint Rating

5 out of 5 stars

  • Promo: Up to 1 Year Free Management
  • Management Fee: 0.25% - 0.40%
  • Account Minimum (Betterment Digital): $0
  • Account Minimum (Betterment Premium): $100,000

via Betterment secure site

Betterment Promo

If you make a deposit within 45 days, you can get up to year of automated investment management free.

Deposit Managed Free
$5,000 to $24,999 1 month
$25,000 to $49,999 2 months
$50,000 to $99,999 3 months
$100,000 to $249,999 6 months
$250,000 to $499,999 9 months
$500,000+ 1 year

You also get a free investment review to help you assess your current investment approach. Four areas are covered, including investment accounts, tax savings, fees, and risk exposure.

Is Betterment Right For You?

Betterment initially offered just a pure robo-advisory service, now called Betterment Digital. More recently, Betterment has added Chartered Financial Professionals via its Betterment Premium offering, which has a higher minimum of $100,000, compared to the $0 minimum for Betterment Digital. 

Fee-conscious, hands-off investors focused on the long-term will find Betterment to be a great fit. Unlike traditional financial advisors, who typically charge north of 1% annually, Betterment fees are just 0.25% for its purely automated offering, Betterment Digital.

Customers who value support will find Betterment to be exemplary. Customer service is embedded in the DNA of Betterment. For example, CEO Jon Stein is known to answer customer phone calls from time to time, thereby setting the example across the  firm that customer satisfaction is a top priority.

Betterment serves stock market beginners, savers and non-self-directed investors exceptionally well. The website is easy to use and chockfull of education, financial tools, and retirement calculators.

It’s easy to transfer funds, set financial goals to target retirement objectives and shorter term targets, such as buying a car, and even analyzing outside portfolios to gauge diversification and fee levels.

For clients wishing to save and invest for retirement, but who are not keen on a self-directed approach, Betterment is the de facto standard other robo-advisors aspire to reach.

Betterment is an excellent investment management solution for:

  • Investors of any wealth level
  • Investors focused on the long-term
  • Hands-off investors
  • Investors who want excellent support
  • Retirement investors

RETIREMENT INVESTORS

Betterment doesn’t just serve growth-oriented investors who are a long way from retirement. It also offers a low-risk alternative to the Betterment portfolio that is designed for retirement investors, called the Blackrock Target Income Portfolio Strategy.

The portfolio is made up 100% of bonds with a range of income targets designed to provide steady income with low risk.

betterment expected income yield blackrock income

Betterment Management Fees

Betterment fees are tiered based on the customer plan selected:

  • 0.25% of assets under management for Betterment Digital, which is a purely automated advisory and tools service.
  • 0.40% of assets under management for Betterment Premium, which provides account monitoring by a team of financial advisors and permits unlimited phone calls and email access.

Betterment Investment Method

Betterment claims annual returns that are 2.9% better than the average investor.

Betterment’s investment philosophy has been influenced by Robert Shiller and Eugene Fama, both Nobel Prize winners.

Betterment offers an automated investing solution designed to counter the risks associated with emotional investing, such as being greedy when markets are buoyant and selling in a panic when markets fall.

Betterment portfolios are designed to generate optimal returns for each level of risk appetite by creating low-fee, diversified portfolios that automatically rebalance with exchange-traded funds from up to 12 asset classes.

Betterment Tools

Betterment’s stand out tool is its advanced retirement calculator, RetireGuide.

Betterment provides a retirement calculator called RetireGuide, which calculates how much you need for retirement and whether you are on track to hit your financial goals based on a series of questions you answer.

Betterment allows users to connect third-party accounts, including 401ks, analyze fee-savings and recommends portfolio optimizations.

Spending and savings rates are compared to assess whether sufficient funds will be amassed by retirement to meet spending needs.

In our Betterment review, we found it easy to connect to outside accounts so portfolios held elsewhere can be analyzed to identify and improve upon expense ratios and performance returns.

SMART DEPOSIT

Another nice feature we found as we conducted our Betterment review was Smart Deposit. If you wish to activate it, this tool automatically calculates how much excess cash you have in your bank account above a certain threshold and sweeps it into your Betterment accounts.

Socially Responsible Investing

Socially responsible Investing (SRI) is available to all Betterment customers to better align their investment dollars with their personal values.

Increasingly, customers demand robo-advisors invest their dollars in a way that is aligned with their philosophical beliefs.

Some nice features of the Betterment SRI program include:

  • Tax loss harvesting and tax-coordinated portfolios supported
  • No loss of diversification but a 42% increase in social responsibility scores on U.S. large cap assets
  • Global diversification, tax optimization and cost controls maintained while orienting investments towards environmental, social, and governance criteria.

Betterment Tax Strategy

The real goal of investing is to put more money in your pocket, and while focusing on gross stock market returns is good, paying attention to how much you get to keep after taxes is important too.

To optimize for tax efficiency, Betterment employs two primary methods: tax-loss harvesting and tax-coordinated portfolios.

Betterment allocates assets across taxable and tax-advantaged accounts to optimize for tax consequences.

Type Capability
Tax Loss Harvesting YES
(daily on all taxable accounts)
Tax-Coordinated Portfolio Tool YES
(allocates assets across tax-advantaged and taxable accounts)

TAX LOSS HARVESTING

When you have winners in your portfolio that you plan to sell, you can lower your tax bill by selling losers that count against those winners. This practice of counting losers against winners to minimize your tax impact is called tax-loss harvesting.

But if you have sold two positions, is your portfolio still diversified? Maybe not! And that’s why Betterment replaces the sold security with a similar one to ensure that your asset allocation is optimized.

Capital losses can lower your ordinary taxable income by up to $3,000 annually, so it can be a significant savings, especially as time goes by.

Betterment claims that tax-loss harvesting can generate surplus returns of as much as 0.77% annually. That may not seem like a lot, but over time it translates to an extra $44,692 in portfolio gains in a taxable account.

betterment gains chart

TAX COORDINATED PORTFOLIOS

Boosting after-tax returns in your taxable account via tax-loss harvesting is one thing but how do you minimize the impact of taxes across all your accounts, both retirement and taxable?

That’s where tax-coordinated portfolios feature as a key component of your overall investment strategy, and at Betterment it’s also a free service.

The idea in a nutshell is to put tax-inefficient assets into tax-efficient accounts and tax-efficient assets into tax-inefficient accounts.

If that sounds like a brainteaser, here is the simple way of thinking about it. A municipal bond already enjoys tax advantages, so Betterment wouldn’t put it into a retirement account, such as an IRA, that already enjoys tax benefits. Instead, the municipal bonds would be placed into a regular taxable account that is less tax-efficient.

Without asset allocation applied to accounts, a portfolio may look something like this:

But with asset allocation, the overall portfolio would look like this:

Betterment claims tax-coordinated portfolios can boost portfolio value by as much 0.48% per year, which translates to as much as 15% over 30 years.

TAXMIN LOT SELLING

Betterment has developed a series of rules called TaxMin that automatically apply when a security is sold.

Most brokers use an approach called FIFO (first-in, first-out) that compares when securities are bought and sold but Betterment examines not only the timeline of purchases and sales, but also the cost basis too in order to lower the tax impact of stock or ETF sales.

Betterment strives to generate higher returns after taxes by following a strict order in which lots are sold:

  1. Short-term losses
  2. Long-term losses
  3. Long-term gains
  4. Short-term gains

The idea is to exploit all taxable possibilities in one category before moving to the next.

In the example below, Betterment saves a customer $3,883 by using its proprietary TaxMin algorithm versus traditional brokerage FIFO rules.

COUPLES TAX LOSS HARVESTING

If you already have tax loss harvesting turned on in your own account, you can apply it to your spouse’s account too so that your overall portfolios as a couple are managed holistically as one to optimize for taxes.

Betterment Pros and Cons

Betterment has a demonstrated history of success attracting and retaining clients by offering low fees, superb customer support, access to Chartered Financial Professionals, and easy-to-use retirement tools. Although account minimums are high for more personalized service, the fees charged are highly competitive compared to traditional financial advisors.

Betterment Pros Betterment Cons
Management Fees: Low fees are the hallmark of Betterment. Its pure robo-advisory services, Betterment Digital, charges just 0.25% of assets under management.

Betterment Premium (0.40% charge for assets under management)  connects clients with pre-screened Certified Financial Planners (CFPs) that provide financial advice.

High Account Minimums for Higher Tier Services: $100,000 account minimum for Betterment Premium are high hurdles for most clients who on average have less than $50,0000 invested with Betterment.
Human Financial Experts: Betterment has caught up with Personal Capital by connecting clients to Chartered Financial Professionals, which is an especially valuable feature to higher net worth clients with complex tax situations. Direct Indexing: Direct Indexing allows investors buy single securities held by an index and is beneficial in spotlighting tax-loss harvesting opportunities to minimize tax impact on taxable accounts but Betterment doesn’t offer the direct indexing, unlike some of its rivals.

It does offer a tax-coordinated portfolio that it claims increases after tax returns by an average 0.48% annually for customers who hold Betterment taxable and qualified retirement accounts.

Customer Support: Betterment has fast email response times, and though its lowest tier offering does connect clients to support staff, financial advisors are not available for consultations.
Tools: Betterment’s retirement calculator, RetireGuide, is visually delightful, clearly showing projections, progress relative to goals, shortfalls, and recommendations to get back on track by retirement age and more.

Betterment facilitates easy linkage to outside accounts so non-Betterment portfolios can be analyzed to optimize for performance and improved expense ratios.

Tax Loss Harvesting: Betterment distinguishes itself from traditional financial advisors by systematically finding embedded capital losses and optimizing for the tax impact.

Few traditional financial advisors have both the investment and tax expertise to optimize as efficiently, which creates an underappreciated advantage for Betterment.

Betterment Fees & Minimums

Betterment has competitive fee charges compared to other robo-advisors and substantially lower fees than most traditional personal financial advisors.

Category Fees
Account Management Fees 0.25% for Betterment Digital
0.40% for Betterment Premium
Investment Expense Ratio 0.09% – 0.17%
Account Minimum $0 for Betterment Digital
$100,000 Betterment Premium
Annual, Transfer, Closing Fees None
Personal Finance Tools FREE

Betterment Accounts

Betterment manages the following accounts and advises on accounts that it will not manage, such as 401ks.

Type Capability
Individual Non-retirement YES
Joint Non-retirement YES
Roth IRA YES
Traditional IRA YES
SEP IRA YES
Rollover IRA YES
Trusts YES
401k NO
(but will advise)
529 NO

Betterment FAQ

Betterment uses bank-level security and offers SIPC protection on each account up to the maximum $500,000.

FAQ Answer
Is Betterment SIPC protected? YES
(up to $500,000 per account)
Does Betterment use 256-bit SSL encryption? YES
Is two-factor authentication used when logging on? YES
Is Betterment regulated? YES
(by FINRA & SEC)
Does Betterment receive kickbacks on ETFs used in my portfolios? NO
Will I be charged trading commissions costs? NO
Is there a fee break when I deposit a certain amount? YES
(above $2m no fees are charged)

Betterment Summary

Betterment serves non-self-directed investors of all wealth levels who are fee-conscious and goal-oriented. In addition to its purely automated investment offering, Betterment Digital, Chartered Financial Professionals are available with higher account minimums for investors seeking more accessibility to experts.

Betterment has tools to support analysis of retirement objectives and provides free syncing with non-Betterment accounts to identify lower fee funds and improved allocation opportunities.

Plus, for customers looking for a little extra handholding, a nice feature Betterment provides is the ability to message licensed financial experts via the Betterment mobile app.

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