Betterment was founded in 2008 and is the largest online-investment advisor with over $5 billion in assets under management (AUM). In March, 2016 Betterment raised $100 million in a Series E round venture funding led by Kinnevik, a Swedish investment firm. With over $200 million in total funding since inception, it’s clear Betterment is here to stay for the long term.
In the past, retail investors like you and me needed at least $250,000 for a wealth management firm like Merrill Lynch to even take our phone call. Now, we can have our money managed digitally managed by Betterment with as little as $100. In addition to requiring a lot of money, investors used to also have to pay a ridiculous 2% – 3% a year in AUM fees. With Betterment, you can pay as little as 0.15% and a maximum of 0.35%. That’s a huge different that will save years off an investor’s retirement date target, all else being equal.
The investment landscaped has changed from just a decade ago. The risk-free rate of return (10-year bond yield) is now under 2%. If you are paying half to all of that risk-free rate in annual fees, you will have a very difficult time getting ahead. The key for all investors is to leverage technology to minimize costs and consistently save and invest for the long run to allow for compounding.
As an finance professional from 1999 – 2012, and as a personal finance writer of over 1,300 articles on Financial Samurai since 2009, time in the market is much more important than timing the market. Trying to actively manage your money to pick then next Amazon or Tesla Motors is a losing long term proposition. Instead, focus on your expertise, save up as much as possible and asset allocate in a risk-adjusted manner.
What Does Betterment Do Exactly?
Betterment invests in a portfolio of passive index-tracking equity and fixed income exchange-traded funds (ETFs) to help build your retirement nest egg. Too many people are cashed up because they either don’t know what to invest in or feel the cost of investing is just way too high. Betterment is solving both problems. Betterment offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).
Betterment’s core portfolio optimization incorporates insights of Modern Portfolio Theory, the Black-Litterman model, and Behavioral Asset Management. Modern Portfolio Theory (MPT) relies on diversification and asset allocation to attempt maximum portfolio return for an amount of given risk. Black-Litterman enables passive asset allocation by using world market capitalizations to attempt to estimate expected returns.
Below is a snapshot of what your account might look like if you invest with Betterment.
Account Types Available To Open With Betterment
- Traditional IRA
- Roth IRA
- Rollover IRA
- SEP IRA
- Tax-loss harvesting – to help you reduce your taxable income
- Automatic Portfolio Rebalancing – so your asset allocation is always congruent with your risk tolerance –
- Automatic Deposits – Weekly, Every Other Week, Monthly
- Android and iOS Mobile App – you can always check your portfolio on the go
- Customer Service M – F, 6am – 5pm PST
- RetireGuide Calculator – to help you plan for your future retirement money needs.
- Tax-Coordinated Portfolio – to help you reduce your tax liability
Sign Up With Ease
The signup process is easy and takes less than five minutes. During the process, you respond to a series of short questions about your investment needs. Betterment will then construct a model portfolio based on your answers. You can either agree with the model portfolio or adjust the asset allocation according to what you believe is more suitable. Once the choices are selected, all you’ve got to do is link your personal checking account to fund and set up an automatic frequency deposit if desired.
When money is deposited, Betterment will begin to automatically build your portfolio using ETFs. Any dividends earned will be automatically reinvested. Each quarter, any portfolio that is off by more than 5% is rebalanced automatically.
Below is a sample of an aggressive model portfolio with a 90% stock and 10% bond weighting. A typical holder of such a portfolio might be a recent college graduate just starting off or someone who is very comfortable investing in the stock market and can take the volatility.
Tax Loss Harvesting
One of the key benefits of Betterment is their ability to tax loss harvest. Tax loss harvesting involves selling losers to offset the capital gains tax of winners to pay the least amount of taxes possible while focusing on the best possible returns. You and I can’t do this efficiently because it takes time and have our lives to live. But technology can.
The more money you make and the larger your net worth, the more you need to focus on tax minimization. Please be aware for individuals with a Modified Adjusted Gross Income of $200,000 and for married couples with a MAGI of over $250,000, you must pay an additional 3.8% Net Investment Tax.
Give Betterment A Try
Betterment is easy and free to sign up. If you decide to use them to manage your money, the most you’ll pay is just 0.35% on the assets managed, a far cry from the 2% – 3% traditional wealth advisors used to charge. The savings in your money market account earns just 0.2% or less a year on average. Inflation alone is running at around 2% a year and will eat up your buying power over time.
Stocks have historically returned 6% – 8%. Bonds have historically returned 3% – 5%. Your goal is to mobilize your savings to beat inflation by as much as possible in a risk-adjusted manner. This is why it’s important to have a proper mix of stocks and bonds by age. The hope is that one day you’ll have enough saved up and invested that you can either live off your dividends, or slowly draw down your principal so you never have to work again.
There are no investment guarantees, but over the long run, stocks and bonds have shown positive returns. By concurrently investing, saving, and building multiple income streams, your financial future should be much more solid than if you did nothing. Do not rely on the government, your parents, or a rich aunt to save you. Instead, rely on yourself to achieve financial freedom sooner, rather than later.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.