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 a bonus of $25 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.

The 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 0.9%, and this fee gradually decreases as the value of the account approaches $500,000. With funds invested with Betterment at this level, the fee is 0.3%. 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 is 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.

You’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.

$25 bonus opportunity

Betterment is offering Consumerism Commentary readers a $25 bonus for opening a new account. To receive the bonus, new customers must deposit at least $250 within 60 days of opening the account and not withdraw the deposit for 60 days. For more information, visit Betterment’s welcome page for new customers.

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