Betterment Investment Review – Top Automatic Robo Advisor?

In their own words, Betterment is the largest automated investing service in the country.  They’re in charge of more than $3 billion of client money and since inception they’ve caught the attention of all the major news networks, including the pinnacles of journalism: The New York Times and The Wall Street Journal.  Or if you’re into the more independent gurus of personal finance, there’s Mr. Money Mustache, who openly promotes the services of Betterment on his famous and uber-popular blog.  He surely doesn’t need yet another link to his website, but here it is.

What’s behind all this buzz?  Is Betterment really a way to get rich in the stock market, or at least beat some odds?  Do we finally have an easy, cheap way for the masses to profit from owning stocks, without getting their hat handed to them every time there’s a market correction?

Betterment, The Company

Betterment is based in New York as as their website puts front and center, they manage over $3 billion in assets for their clients.  As a robo advisor, they use proprietary software to manage their client accounts, thereby cutting costs and passing the savings on to their customers.

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The CEO is Jon Stein, a Harvard-educated former Wall Street consultant who went to Columbia Business School.  Other management comes from equally pedigreed backgrounds…Barclays, JPMorgan, Columbia University professor, Goldman Sachs etc.

The Product: How It Works

Betterment encourages investment by lowering their management fees the more you invest.  Take a look:

  1. invest under $10,000 and your fees are 3.5% with auto-deposit or $3 without
  2. invest $10,000 to $100,000 and your fees are 0.25%, no auto-deposit required
  3. invest over $100,000 and your fees are 0.15%, no auto-deposit required.

The annual management fee comes out to roughly $150 for every $100,000 you have invested (which you can compare to Wealthfront).  If the tax-loss harvesting claims are true, they more than make up for this annual management fee.

At the top tier level, you also get a personal consultation, but only if you have at least half a million invested with Betterment.

There are no trade fees, no transaction fees, and no fees for value-added services like rebalancing.  There are no fees for deposits or withdrawals, either.  You can cancel at any time and the minimum investment is $10.

The main benefits of a service like Betterment is that it offers two things for cheap, which normally cost much more.  These are:

  1. Rebalancing:  Dividends are used to rebalance your portfolio which lessens the need to sell shares, which in turn lowers your Capital Gains tax.
  2. Tax-loss harvesting: Gains are balanced by losses so your tax bill doesn’t surprise you at the end of the year.  They claim it adds an additional 0.77% in after-tax returns each year.  ETFs, the only kind of investments Betterment deals with, are generally more tax efficient than mutual funds anyway.

There are 12 classes of assets, and you may choose to have your Betterment investments as either a Traditional or a Roth IRA, trust, or taxable account.

You may set your own financial goals with Betterment, which is something you cannot do with competitor Wealthfront.  For example, when you sign up with Betterment, you can choose from “retirement”, emergency fund,  or capital growth as your goal.  Each goal will determine the specific mix in your personal portfolio.

Your money will be put into Exchange Traded Funds (ETFs), which are low-cost to begin with because they are less complicated to manage than mutual funds.

For referring someone, you get a month of free service.

The Verdict

betterment-roboadvisorsOne big feature that puts Betterment ahead of competitors is that they allow you to purchase fractional shares.

For example, if a share costs $100 and you only have $50 in your account, you can still purchase part of that share.

That means you won’t have idle cash sitting around in your account.  From an investing point of view, idle cash is not something you want to see.

There’s also a relatively new feature: a retirement planning tool (RetireGuide) that gives you actual advice (it’s automated) on how much to save for retirement.  As of this writing, no other robo advisor has this.

As a low-fee retirement option, Betterment is great.  You hardly have to do a thing once you get your account set up, except enjoy watching your pile of money grow on the Betterment app.