Betterment was founded in 2008 and is the largest online-investment advisor with over $21 billion in assets under management (AUM). With $275 million in total funding since inception, 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 no account minimum for most accounts.
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 0.25%. Premium accounts have a 0.4% AUM fee. That’s a huge savings compared to 2% – 3%.
As an finance professional from 1999 – 2012, and as a personal finance writer of over 2,000 articles on Financial Samurai since 2009, my belief is time in the market is much more important than timing the market.
Save aggressively and invest regularly. If you do, you are well on your way to financial independence.
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 just sit on cash and don’t put their money to work. This happens when people don’t know what to invest in, get lazy, or feel the cost of investing is just way too high. Betterment is a solution to all of these problems.
In addition, Betterment offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).
Portfolio Optimization With Betterment
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.
Below is a snapshot of what your account might look like if you invest with Betterment.
Betterment Account Types
Here’s a list of some of the different account types available with Betterment.
- Traditional IRA
- Roth IRA
- Rollover IRA
- SEP IRA
Key Betterment Features
- 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
- Custom Asset Allocation — Based upon your risk profile and account type (taxable vs. tax-deferred), the asset allocation is customized.
- SmartDeposit — You can automatically make deposits if your bank balance goes over a specified amount.
- Tax-Coordinated Portfolio — Asset-allocate your investments to maximize the tax efficiency between your tax-deferred and taxable accounts held at Betterment.
- Two-Factor Authentication — Secure your account via SMS text or an authenticator app on your smartphone.
- App Passwords — This allows personal financial services such as Mint, Personal Capital or TurboTax to a read-only view of your financial information without giving away your master password.
- Socially Responsible Investing Portfolio — Investing not only can help you make money but can also make a difference. Betterment offers Social Responsible Investing (SRI) ETFs to achieve your goals and make the world a better place.
- BlackRock Target Income Portfolio (New) — This portfolio is for those in retirement or investors wanting a low-risk portfolio. The portfolio is 100% bonds to give investors income with low risk.
Even More Betterment Features
- Goldman Sachs Smart Beta Portfolio (New) — Competing with Schwab, Betterment now also implements Smart Beta with this portfolio in the hopes of improving returns over using traditional indexing.
- Talk to Financial Expert via Betterment’s App (New) — Got a financial question? Just like texting a friend, you can send a message to a financial expert within the Betterment app. This unlimited feature is available to all Betterment customers.
- Charitable Giving (New) — Betterment allows customers to donate shares directly from their accounts to charities. This can save investors at tax time because they will avoid capital gains taxes on donated shares.
- Flexible Portfolios (New) — Available for investors with $100,000 or more in investible assets at Betterment, these portfolios allow you to customize your portfolio by adjusting your individual asset class weights. You’ll receive feedback from the Portfolio Analysis tool on your selections.
- Financial Advice Packages (New) — Betterment now offers individual advice packages that answer its customers’ most pressing financial questions. Packages are tailored to specific life events and include personalized action plans, educational content and one-on-one help from a certified financial planner or licensed financial expert.
- Smart Saver with Cash Analysis and Two-Way Sweep (New) — Earn returns projected to be 20% higher than your typical savings account. Smart Saver uses a portfolio comprised mostly of U.S. government bonds for these low-risk earnings. Plus, the Cash Analysis and Two-Way Sweep functionalities will identify extra cash in your checking account and sweep it into your Smart Saver account.
Betterment gives you access to a lot of automated options. And because the process is streamlined, it requires little day-to-day involvement. Think of their investing options like “set it and forget it.”
How To Sign Up For Betterment
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.
If you don’t completely agree with the model portfolio generated, no sweat. You can simply adjust the asset allocation to your preferences. After that, simply link up your personal checking account. Select how much you want to fund and you’re on your way. You can even set up recurring deposits to save you time in the future and keep your investing diligent.
Once your money hits, Betterment automatically builds your portfolio using ETFs. Earned dividends are automatically reinvested. What’s also great is that every 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. Your own portfolio can be customized to your risk preferences.
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 too much time. Fortunately, Betterment’s 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.
Financial Advice Packages
Betterment has rolled out a collection of personalized advice packages to answer its customers’ most pressing financial questions.
The company reports that questions about financial planning often arise around major life events. Betterment wanted to create a way to provide advice that addresses these challenges in a sensitive and sensible manner and for a low, fixed cost.
The package themes are:
- Getting Started Cost: $149
- Financial Checkup Cost: $199
- College Planning Cost: $199
- Marriage Planning Cost: $299
- Retirement Planning Cost: $399
Each package includes a one-on-one call with a licensed financial expert, an action plan specifically tailored for your needs and situation, and exclusive educational content to help keep you informed.
Detailed Cost Overview
Here’s a breakdown of Betterment’s pricing structure. There are two main choices: standard at 0.25% and premium at 0.40%.
For individuals who want more hand-holding from a human life form than just digital zeros and ones, Betterment now offers the Premium tier.
This service is optional once you reach the $100,000 investment threshold. The primary advantage of the Premium plan is assistance with investments outside Betterment — retirement accounts, stocks, or other life events.
The other benefit of the Premium tier is unlimited access to Betterment’s CFP professionals. With the Premium plan, you’ll be happy to know Betterment can assist with your 401(k) plan and give advice on asset allocation.
Betterment Is The Leader
Betterment is easy and free to sign up. If you decide to use them to manage your money, you’ll only have to pay 0.25% on the assets managed, a far cry from the 2% – 3% traditional wealth advisors used to charge. One of your top goals as a long-term investor is to minimize fees and invest in a risk-appropriate manner.
Stocks have historically returned 7% – 8% per annum. Bonds have historically returned 4% – 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. Betterment is the premier digital wealth advisor today. Sign up for free and explore what they has to offer.
Diversify Beyond Stocks And Bonds
In addition to investing in stocks, consider diversifying into real estate crowdfunding. Benefit from the performance of various types of real estate without any of the maintenance, hassle, or needing a lot of capital.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields. They also have potentially higher growth due to job growth and demographic trends.
Personally, I’ve invested $810,000 in real estate crowdfunding since 2016 to diversify my investments. It’s nice to earn income 100% passively as I spend more time taking care of my children.