As far as the field of robo-advisors is concerned, Betterment is one of the pioneers. Betterment is one of the first to use technology to recommend a portfolio and automate the investment process. Over the years since its founding in 2008, the firm has added additional asset classes, launching a savings product in July 2019. A checking account is rolling out in 2020.
Overall rating: 4.2/5
- Minimum investment corpus in the account: $0
- Fees: 0.25% (annual) for digital plan, 0.40% (annual) for the premium plan
There are several ways to use Betterment: you can sync all of your financial accounts to get an overall picture of your assets without investing, you can invest in one of their portfolios. You also have the option to create a Flexible Portfolio which is catered to your specifications. Taxable accounts are designed to maximize after-tax returns using tax-loss harvesting, and portfolios are rebalanced when necessary. Betterment should be considered as a goal-based platform. It also features a plethora of planning tools for users and comes with a lot of useful advice.
Let’s take a look at the pros and cons of Betterment:
- Quick and easy account setup
- Portfolios are fully transparent prior to funding
- You can sync external accounts to individual goals
- Add a new goal at any time and track your progress with ease
- Easily change portfolio risk or switch to a different type of portfolio
- Users of the planning function are constantly nudged to fund a Betterment account
- The standard plan incurs a charge of $199–$299 to talk to a financial planner
- Socially Responsible portfolios are invested in exchange traded funds (ETFs)
- There is no margin lending, secured loans, or borrowing options against your portfolio
Account setup – 5/5
Betterment boasts one of the easiest accounts to set up. While setting their account up, users are required to enter their age, annual income, and a goal. There are none of the standard risk-related questions. Instead, Betterment presents you with an asset allocation suggestion and its associated risk, which you can change by adjusting the percentage of equity versus fixed income held in the portfolio.
You’re also prompted to connect external accounts—such as bank and brokerage holdings—to your Betterment account, both to provide a complete picture of your assets and to make cash transfers into a Betterment investment portfolio easier.
Users can open an individual or joint account, both Roth and traditional IRA accounts, and trust accounts. Customers interested in opening a traditional IRA can now contribute to a traditional IRA for the rest of their lives, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. In addition, the new law extends the age at which participants need to take required minimum distributions (RMDs), from age 70.5 to 72 years.
There are no college savings 529 plans, Uniform Gift to Minors Act (UGMA) accounts, or solo 401(k) accounts.
Betterment comes with five different types of portfolios and clients have the option to switch strategies once the portfolio gets funded. Prior to making the changes, Betterment will also inform customers about prospective tax implications. Each goal can be invested in a different strategy, so funds for longer-term goals like saving for retirement can be allocated to one of the higher-risk portfolios, while shorter-term goals, such as funding a down payment on a house, can be allocated to the lower-risk ones.
Goal Setting: 4.5/5
Betterment has very easy-to-follow steps for setting a goal, and each one can be monitored separately. The asset allocation is displayed in a ring, with equities in shades of green and fixed income in shades of blue. If you’re falling behind on meeting a goal you’ve set, Betterment will encourage you to put more aside. This can be a helpful prompt, particularly for young investors who may not yet feel the urgency to save for some of their longer-term goals.
Account Services: 3.9/5
You’re encouraged to set up automatic deposits, and once an account is linked during the initial account opening process, it’s easy to enable. There is no option to let you borrow against the assets held in your Betterment account. Betterment offers a “Smart Saver” account that is invested in high-yield bond ETFs, which is currently paying over 2% (as of Sept. 23, 2019).
Consolidating external accounts to provide a full picture of your assets is one of the strengths of this platform. Each outside account can have all of, or a portion of, its contents dedicated to one of your goals. This consolidated overview of assets can be quite valuable for investors, even if it comes at the price of being prompted to move more into the platform.
Portfolio Content: 3/5
Betterment offers five portfolio types:
- The standard Betterment portfolio consisting of globally diversified stock and bond ETFs (iShares, Vanguard).
- The socially responsible portfolio that filters its holdings for stocks that are well-governed and score well on environmental and social impact.
- The Goldman Sachs Smart Beta portfolio which is designed to work towards outperforming the market.
- The income-focused all-bond portfolio made up of BlackRock ETFs.
- The Flexible Portfolio constructed from the same individual asset classes as the standard portfolio, but weighted according to the user’s preferences.
Socially responsible portfolios contain ETFs invested in large-cap firms, such as iShares MSCI KLD 400 Social ETF (DSI), and replace emerging market stock exposure with an emerging market environmental, social, and governance (ESG) fund. Outside of large-cap firms and emerging markets, though, very little of a portfolio that is called “socially responsible” is invested in firms that meet socially responsible criteria. You can choose to customize your own Flexible Portfolio, but it’s also invested in ETFs, which are seldom granular enough for those who want their investments focused solely on socially responsible investments.
Portfolio Management: 4.6/5
Accounts are evaluated once a month and rebalanced if they have shifted from their goal allocation. As your target date nears, your portfolio gets more conservative with the goal of locking in gains and avoiding major losses. Having this automated risk reallocation is one of the primary reasons robo-advisors have become so popular. These are standard portfolio management techniques that most investors do not have the time or dedication to actually implement.
Tax harvesting on taxable in house accounts is available for all of Betterment’s clients. The account balance doesn’t matter. This is another key point of differentiation in favor of Betterment. Betterment really shines in this category as competing robo-advisors usually require a minimum account balance of $25,000 to turn tax loss harvesting on. Tax-loss harvesting is an option set at the account level, so if you turn it on, it will be applied to all of your portfolios within your Betterment account.
User Experience: 4.1/5
The native apps are designed to make all of the features available, though in some places there is a lot of scrolling to get to key features. Desktop and mobile capabilities are identical. You can set up all of your goals and investments on your mobile device, though there is quite a bit of data entry when you’re first opening an account. That might be better done on a desktop simply because of the typing involved.
Betterment does not offer a tablet-specific app, but its phone app resizes to use the additional screen space.
Betterment’s website is designed to guide you through the process of setting goals and tracking them. The process is logical and easy to follow to completion. When you access a question in their FAQs, the site maintains a list of the articles you’ve already read. Certain choices—such as clicking on the Support link—spawn a new tab, so you can wind up with a lot of open tabs after a while.
Customer Service: 4.5/5
Online chat is built into mobile apps and the website for customers to access at any time. Customer service is available by email and phone from 9 a.m. to 6 p.m. Eastern time, Monday to Friday, and via email only from 11 a.m. to 6 p.m. Eastern time on Saturday and Sunday. You can get help from financial planners at any time with a premium account, but you’ll pay a fee of $199–$299 to consult a planner if you have a basic account.
Education and Security: 3.6/5
Betterment’s Resource Center includes dozens of informative and well-written articles about retirement planning and how to minimize your tax burden. There are also a few videos to help you figure out how to use the platform. A lot of Betterment’s articles are dedicated towards helping investors understand portfolio compositions and Betterment’s approach towards negative market events such as the COVID-19 epidemic.
Betterment’s security is sufficient. The website is encrypted, and mobile apps offer two-factor authentication. There is no excess Securities Investor Protection Corporation (SIPC) insurance carried by Betterment itself, but trades are cleared through Apex Clearing, which has risk management tools in place. Betterment clients are not placing risky trades and there is no margin lending offered, so it’s unlikely that there would be a need for additional SIPC coverage. Still, if your account has more than $500,000 in it or more than $250,000 in cash, you might consider moving the excess to a firm with additional insurance.
Commission and Fees: 3.5/5
Digital-only customers pay 0.25% per year in management fees, increasing to 0.40% per year for the premium plan. Betterment offers a discounted fee on assets over $2 million, dropping the digital fee to 0.15% per year on the portion of the balance that exceeds $2 million. In the premium plan, you will pay 0.30% on the balance above $2 million. The underlying ETFs incur management fees of 0.07%–0.15% per year.
You can use Betterment’s financial planning and account consolidation tools at no charge, but you will be frequently prodded to move some of your cash into an investing account.
- Monthly cost to manage a $5,000 portfolio: $1.04
- Monthly cost to manage a $25,000 portfolio: $5.21
- Monthly cost to manage a $100,000 portfolio: $20.83
Betterment is a web investment trust based in New York City, New York. Betterment is registered with the Securities and Exchange Commission and is a member of the Financial Industry regulatory agency (FINRA). It is also known as Betterment.com. Betterment functions as a registered investment advisor (RIA) and a broker-dealer.
The company is an automatic, goal-based investing service also referred to as a robo-advisor. Betterment invests in a portfolio of passive index-tracking equity and fixed income exchange-traded funds (ETFs) and offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).
As of April 2019, Betterment had $16.4 billion of assets under management.
Betterment was founded in 2008 in New York City by Jon Stein, a Columbia MBA graduate, and Eli Broverman, a lawyer out of NYU School of Law. Stein and his roommate Sean Owen, a Google programmer, started building the primary online platform for Betterment in 2008, employing a Java application and MySQL database on Apache Tomcat servers which featured a front design based on Adobe Flash and Flex. Stein’s girlfriend at the time, Polina Khentov came up with the designs of the initial prototype. Faced with a string of regulations that came with the task of running a financial firm, Stein negotiated with securities lawyer Eli Broverman and brought him over as a co-founder in 2008.
Broverman and Stein were prepared to supply financial advice online as an SEC-registered investment advisor, and also decided to supply broker-dealer services for advice to customers. Betterment added Ryan O’Sullivan, a “serial entrepreneur”, to determine Betterment’s broker-dealer operation.
From 2008 to 2010, the founding team continued to develop the platform for launch. Betterment gained approval from FINRA for membership. A former colleague of Stein, Anthony Schrauth joined as Chief Product Officer in 2009. Kiran Keshav of Columbia University’s Center for Computational Biology replaced Owen in the same year. A year later, O’Sullivan left his role as president.
Betterment, LLC was established as a Delaware corporation on April 7, 2009. Its parent company, Betterment Holdings, Inc. was established on January 29, 2008 in Delaware.
The company launched at TechCrunch Disrupt New York in June 2010, and won the award of “Biggest New York Disruptor.” Within 24 hours, Betterment had attracted nearly 400 early customers, and the company began talks with early investors.
Betterment received Series A round funding from Bessemer Venture Partners in December 2010. By October 2012, Menlo Ventures provided Series B funding alongside Bessemer Venture Partners and Anthemis Group. By 2012, the company established product offerings, such as IRAs, auto-deposit, auto-rebalancing, and goal-based investing advice.
On June 24, 2016, Betterment suspended trading for 150 minutes, after the shocking Brexit vote sent shockwaves of volatility through the financial markets. Subsequently, the firm was accused of not properly communicating the halt in trading with its customers. Following this incident, Betterment faced significant backlash against the protective move on different social media platforms. Massachusetts Secretary of the Commonwealth William F. Galvin raised concerns over Betterment’s actions, remarking that some customers were at a significant disadvantage because of the trading halt.
The unexpected trading suspension also caused concern among financial advisors using Betterment through the Betterment For Advisors platform. Advisors like Eric Roberge grew concerned over the trading suspension because it prevented him from updating client portfolios: “I don’t feel comfortable with somebody else telling me what I can and can’t do” on clients’ behalf, Roberge said. Other advisors expressed concerns about Betterment’s decision regarding communication and questioned why the choice wasn’t communicated to the purchasers and financial advisors, causing lingering questions around Betterment’s policies.
The current business model of Betterment consists of three areas of business: retail investment, a platform for advisors, and a 401(k) for mid-market business. In July 2017, Betterment announced that its assets under management (AUM) had surpassed $10 billion. In March 2019, the corporate removed its minimum account size (formerly $100,000) for portfolio customization.
The company’s personalized financial advice uses principles-based robo-advisor technologies like computer algorithms. Licensed financial advisors provide over-the-phone consultations to customers who opt for additional support. Betterment’s primary retail platform offers individual retirement accounts, trusts, taxable investment accounts, and tax-coordinated asset location services.
In October 2014, Betterment launched a business-to-business offering called Betterment Institutional, subsequently renamed Betterment for Advisors, a digital platform for managing client assets using Betterment’s built-in financial advice. In January 2017, the Financial Planning Association (FPA) and Betterment for Advisors ran a program on digital investment advice for the association’s members.
Betterment for Business works as a turnkey 401(k) platform aimed toward mid-market employers. It uses a similar underlying investment strategy that is less expensive compared to most traditional 401(k) plans.