Betterment Review – An In-Depth Look at the Leading Robo-Advisor

About Betterment 

Betterment is an online financial advising service that launched in 2010 under CEO Jon Stein. Today, Betterment manages $16 billion in customer assets and has more than 400,000 registered users. The company is continuing to grow by aggressively marketing to a younger generation of investors who are interested in saving for retirement, but don’t want the fees or complexity of a traditional brokerage.

How Betterment Works

Betterment is surprisingly similar to a traditional brokerage for a robo-investment service. The main difference between Betterment and conventional competitors is that Betterment’s investing advice is automated and its fees lower. Alongside Wealthfront, Betterment is one of the leading robo-advisory services.

The service starts off by asking some general questions about your investing goals, from which it determines whether a more or less aggressive investing strategy is right for you. After that, Betterment will suggest a portfolio mix of stocks and bonds – just like setting up a portfolio with a traditional brokerage, you have the option to choose from multiple portfolio mixes (e.g. large-cap, small-cap, and emerging markets stocks) and to customize the balance of these mixes however you would like.

Once your portfolio is setup, the automated nature of Betterment really comes into play. Betterment allows you to set up automated deposits on a weekly, biweekly, or monthly basis, or you can even set up automated two-way transfers between Betterment and your bank account to move money back and forth as your balances go up and down. As the balance of your investment account changes, Betterment will automatically rebalance your holdings to maintain your original portfolio diversification.

Account Requirements

A basic Digital subscription on Betterment does not have any account minimums, although Premium accounts require a $100,000 minimum balance. In addition, Betterment only operates in the US and users must have a US social security number and a US bank account.

Betterment Pricing and Fees

A Digital account with Betterment comes with a flat 0.25% annual fee, with no additional fees for rebalancing, trading, or account transfers. With a Digital account, users get access to all the features of Betterment but do not have the option to receive investing advice over the phone with Betterment’s human advisors.

A Premium account, which requires a $100,000 minimum balance, comes with a flat 0.40% annual fee. Premium members get access to talk to Betterment’s human advisors to discuss investment strategies around life events and for investments outside of Betterment, such as 401(k) plans and real estate.

Keep in mind that since Betterment invests in ETFs, there are exchange fees associated with your portfolio holdings. Typically, these are less than 0.1% since Betterment uses low-cost Vanguard funds. However, some ETFs that Betterment uses can have fees of up to 0.4% – allowing these fees to get expensive rather quickly.

Account holders with more than $2 million in assets under management on Betterment do receive a slight discount – fees drop to 0.15% per year on every dollar over $2 million for Digital subscribers, and to 0.30% per year for Premium subscribers.

Betterment Platform and Tools

Betterment was originally designed as a browser-based web platform, so this is one of the few modern robo-advisors where desktop controls are at least as fully functional as the mobile app. Ultimately, the mobile and desktop apps offer much the same information and don’t differ much from one another in layout.

The summary screen gives you an easily understandable overview of your account so that you can quickly tell whether your portfolio has been gaining or losing money. You can set multiple goals, each under a separately managed portfolio, to save for different life events like buying a home or retirement. Betterment will track whether your deposits and investment returns are on track to reach these goals, although this can make viewing your investments more stressful than with other investment apps if you tend to fall off of investing goals.

For more information on your portfolio, Betterment’s platform offers a closer look at your portfolio holdings, their relative weights and returns, and their fees. You can also dive into the performance of individual ETFs, which can be helpful if you want to manually rebalance your portfolio, although you’ll be better served in this pursuit by moving over to Morningstar or another dedicated financial analysis platform. The majority of hands-off users won’t need to go past the summary page, and Betterment’s lack of customizable analysis tools reflects that this is the platform’s primary audience.

Performance

Betterment has historically performed relatively well, using the average returns with a traditional brokerage-based advisor as the benchmark for comparison. Over the past 15 years, a 90% stock portfolio in Betterment has seen an average return of 7.3%, while a 50% stock portfolio has seen an average return of 5.6%.

However, when you compare this to the S&P 500’s average return of about 9.4% over the same period, Betterment’s performance does not stand out. Ultimately, many investors would do better to invest in an index fund and forego Betterment’s fees and fund exchange fees.

Key Differentiators

The main advantage of Betterment over other robo-advisor services is that Betterment has all of the bells and whistles of a traditional brokerage without the fees. The enrollment process is highly similar, down to choosing your portfolio diversification. However, Betterment uses low-cost ETFs and reduces overhead by offering digital-only accounts with few fees, whereas brokerages typically offer a greater proportion of mutual funds and add in trading fees.

Compared to other robo-advisors, Betterment is more centered around goal-planning and retirement. The platform encourages users to save meaningful amounts of money after every paycheck, in contrast to platforms like Acorns, which work on cents at a time. While goal tracking can be anxiety-inducing for some investors, this is a helpful feature for anyone focused on goals like saving money for a home or retirement. 

Ultimately, many investors would be better served financially by signing up for a traditional low-cost brokerage to invest in one or a few index funds, which have historically performed better than Betterment’s diversified portfolios. However, this comes with added complexity, such as manual rebalancing and trading fees, that Betterment is able to sidestep for its users.

Trustworthiness

Betterment is an enormous management service, with over $19 billion in assets and nearly half a million users, so new customers can feel safe trusting their money to this platform. The absence of transfer fees and the introduction of two-way deposit balancing allows users to precisely control how much money flows into their Betterment accounts, and it’s easy to get money out when it comes time for a big purchase.

Who is Betterment Best For?

Betterment is best for people who are investing with long-term goals in mind, such as buying a home or saving for retirement. The service makes it easy to track progress towards these long-term goals, as well as strongly encourages automated deposits so that you don’t leave money sitting around in your bank account. The $0 minimum account balance and reasonably low account fees make Betterment an accessible choice for virtually everyone, from young people starting their first job to middle-aged investors looking to catch up on retirement savings.

That said, the simplicity that Betterment offers does come with a price. Betterment’s historical returns are lower than those of simple index funds, so investors who don’t mind wading through the math of balancing investment sizes against trading fees, fund fees, and portfolio rebalancing may be better off investing in an index fund through a traditional brokerage.

It should be noted that Betterment is not available for Canadian clients. If you are looking for a Canadian robo-advisor, you may consider Wealthsimple.

Conclusion

Betterment is a capable robo-advising platform with a lot of similarities to traditional brokerages. However, vastly reduced fees and automated tools for deposits and portfolio rebalancing make Betterment an increasingly popular choice among young and older investors alike.

Pros

• No account minimums for Digital account
• Most ETFs offered are low-cost Vanguard ETFs
• Portfolio balances can be fully customized among asset classes
• Automatic rebalancing and two-way deposits
• Goal-setting options for long-term investors

Cons

• Significantly lower historical return than S&P 500
• Betterment annual fee is effectively a double fee on top of ETF exchange fees