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Betterment Review

This article was written by in Investing. 11 comments.


Updated May 2014 to reflect the latest incentive for new customers.

Betterment is a different type of brokerage. Unlike most discount brokerages whose purpose is to get customers to trade — as frequently as possible — Betterment is looking to be your asset manager. Currently, the brokerage is offering an incentive for new customers, but the way they do business is a bit different than most brokerages you may be familiar with. This uniqueness is evident as early as the account sign-up process.

When one applies for an account with a typical discount brokerage, the applications ask about income and net worth as well as investment experience. Betterment asked about the goals and purposes of my investments. Each new account holder is encouraged to designate a main account goal, such as retirement, a major purchase, or a vacation, as well as how many years he expects to take to reach that target or the age at which he’d like to achieve a goal.

The core philosophy for investing with Betterment is the asset allocation. This is the type of simplicity that I’ve seen with 401(k) accounts. These retirement investments often try to take an important concept of investing, asset allocation, and make it simple so that busy employees can simply submit a risk profile and the investment will use this information to determine the ideal mix of stocks and bonds. Betterment takes this concept further, making the process incredibly simple.

Betterment LogoThe fees can be lower than other forms of investing. Although you could have a free account with a discount brokerage and never pay a transaction fee, you may still be subject to fees built into the investments, like expense ratios or front-end load fees. Betterment’s approach is to charge a percentage of your account’s value — or assets under management — as is the more common custom among professional asset managers who generally work with high net worth clients.

This fee depends on how much you invest with Betterment. For small accounts, the fee is 0.35%. As the size of the account grows, the fee decreases in stages to 0.15%. See the chart below for the full information about current fees. These fees are higher, and in some cases significantly higher, than investing in low-cost index mutual funds with Vanguard, for example. With Vanguard investing, you’re mostly on your own. You alone decide your asset allocation, and many investors do not consider asset allocation at all. Betterment can be more expensive, but they are also providing a service that, depending on your needs and interests, may be worth the extra cost. At the same time, it’s less expensive than having a dedicated asset managers while offering many of the same features.

BettermentYou’d have to be a hands-off individual to like the type of service offered by Betterment. You don’t choose your own investments like you would with a typical full-service or discount brokerage. Betterment chooses the investments for you, and their selections are based on a mix of index exchange-traded funds (ETFs). Betterment reinforces the idea that individual investors should not try to beat the market. For the most part, investors fail when they try, and their investments would have fared better had they remained diversified across a broad selection of investments and refrained from changing their risk profile.

In terms of financial security and legitimacy, despite being a new player in the world of finance within an industry where the major companies have been around a century or more, your assets are protected at Betterment just like they are at any major investment firm. Betterment is a Registered Investment Advisor with the Securities and Exchange Commission and is regulated by FINRA and the SEC. Accounts are insured by SIPC up to $500,000 per owner. This doesn’t protect investors from having their investments lose value, but it does protect the value if the brokerage were to fail. If Betterment were to go bankrupt or to go into receivorship, the insurance coverage would allow you to access your account.

Betterment‘s investments include baskets, and each basket represents exposure to a type of assets. To help an investment portfolio match a risk profile, the portfolio could include a combination including a stock market basket and a treasury bond basket. The treasury bond basket is split evenly between two investments, TIP: iShares Barclays TIPS Bond Fund and SHY: iShares Barclays 1-3 Year Treasury Bond Fund. The stock market basket includes these investments as of September 2011:

  • 25% VTI: Vanguard Total Stock Market
  • 25% IVE: iShares S&P 500 Value Index
  • 25% VEA: Vanguard Europe Pacific
  • 10% VWO: Vanguard Emerging Markets
  • 8% IWS: iShares Russell Midcap Value Index
  • 7% IWN: iShares Russell 2000 Value Index

Betterment will rearrange the balance between the different stock index ETFs as it sees fit, but investors control the relationship between stocks and treasury bonds through the risk profile.

Opening my account

Opening my account at Betterment was easy, and I was approved right away. Like any new financial account accepting electronic deposits from other banks, I needed to confirm my ownership of the linked account through the familiar process of verifying test deposits. I’m waiting for my external checking account to receive the test deposits so I can begin investing with Betterment.

For the micro-manager, Betterment might not be the perfect way to invest. It’s also not the appropriate service for someone who wants to trade their investments frequently or delve into investing in individual companies. Betterment’s services may be right for investors with the opportunity to save for their future outside of retirement accounts who want the simplicity of diversified investments, risk-based asset allocation, and a buy-and-hold-and-rebalance investing philosophy.

A few years, I met the CEO of Betterment, Jon Stein, at an event in New York City. At the time, Betterment was still in its planning stages. I’m glad to see the service has fully matured into something innovative and different than any other brokerage.

Betterment’s fees

See the following chart to understand the annual fees for an account managed by Betterment. The fees are lower than typical asset management fees with a professional money manager, but are they right for you if you compare the fees to your mutual fund account?

Betterment's fee schedule

Investors in the lower tiers can choose a low monthly fee rather than the annual percentage of assets under management. The service is also free for the first 30 days, and previous customers can keep their old pricing plan if they desire.

Betterment IRAs

While previously, Betterment’s investing plans were limited to the form of a standard brokerage account, the service is now offering IRAs. You can now use the government-designated accounts for saving for retirement through Betterment’s service.

New customer incentives.

Betterment is offering Consumerism Commentary readers a benefit for opening a new account. Based on the amount new customers invest, they will receive a number of months free, with the fee waived.

  • Customers making an initial deposit between $5,000 and $24,999 will receive three months free.
  • Customers depositing between $25,000 and $99,999 will receive six months free.
  • Customers depositing $100,000 or more will receive six months free.

For more information, visit Betterment’s welcome page for new customers.

Betterment

Updated May 1, 2014 and originally published September 1, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar hakwuzhere

Ive been looking for something like this as I have been disatisfied with my online savings. I have been very wary of moving my emergency savings into my regular investment account, this looks to be the best of both worlds… will try to report back after a few months.

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avatar Luke Landes ♦127,495 (Platinum)

Using an online savings account fulfills a different need than investing. I wouldn’t put an emergency fund into the stock market, for example, but you may be able to use the treasury bond basket at Betterment for a similar purpose. Let us know what you think!

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avatar hakwuzhere

I do have my regular savings at my bank with about 1 month reserve… Ive just been looking for something for the additional savings. My PNC virtual wallet is like .3% and my HSBC was .8%…

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avatar hakwuzhere

yikes, just looked at my growth account.. its .85% for my balance.. thought it was less… I think its better than HSBC was.. lol.

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avatar Ceecee ♦53 (Newbie)

This is a very intriguing company. Can you update us on this after you have used it for awhile? Thanks for the info.

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avatar qixx ♦1,895 (Half-Dollar)

Flexo and hakwuzhere can you both post updates after 6 months or so?

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avatar wylerassociate ♦162 (Cent)

thanks for the post flexo. Betterment is a company that I’ll need to do some reserach on.

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avatar RPR

Intriguing concept, but not for me. For starters, it is not for a retiree who is looking for dividend and dividend growth income, and there is no option to click on.

This is really for an investing novice with no previous financial experience and who has no interest in gaining such knowledge. It is not for the person who wishes to manage their own money.

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avatar Frustrated @ Betterment

I want to bring this to the attention of clients of betterment that betterment charges a fee up to $400 if you want to do a direct (in-kind) transfer from betterment to another brokerage. I have been trying to do a direct transfer of Roth IRA from betterment to another brokerage firm and was quoted this amount.

This fee is also listed in their customer agreement in section 23. Please be aware that your only option could be an indirect roll over if you don’t want to pay $400 in transfer fees.

Betterment does not openly advertise this fee, which I think they must do when they list any or all fees on their website.

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avatar Katherine

Hi F@B,

Katherine from Betterment here. Thanks for the comment. As I posted in response to you on a few other blogs, you are correct, there is a fee that would be assessed should a 3rd party direct transfer be requested. This is because it would involve a 3rd party to complete the action – it is not a feature provided with your account. Betterment will NOT charge any transaction fees to allow you to complete an indirect transfer of your account, and is our recommended method.

While we apologize that the new brokerage may charge fees for the trades of moving funds into your account as cash, we do our best to provide an option that does not cost anything extra.

Thanks,
Katherine

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avatar RPR

Pretty nebulous information, both on this “review” and Betterment’s website.

Remember, if it sounds too good to be true…………………….

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