Betterment is the best robo-advisor/digital wealth manager in the new decade. In this Betterment review 2021, we’ll discuss the latest offerings and details about this popular tech-driven money management company.
Betterment was founded in 2008. It’s the largest pure online-investment advisor with over $21 billion in assets under management (AUM). With $275 million in total funding since inception, it’s clear Betterment is here to stay for the long term.
In the past, retail investors like us needed at least $250,000 for a wealth management firm to even take our phone call. Let’s explore in this Betterment review how they have improved investing using technology.
Save On AUM Fees With Betterment
Now, we can easily have our money managed digitally managed by Betterment. There are no minimum balance requirements across the majority of their accounts. Only the Premium plan has a $100,000 minimum.
In addition to requiring a lot of money, investors used to have to pay a ridiculous 2% – 3% a year in AUM fees.
With Betterment, you can pay as little as 0.25%. Premium has a 0.40% annual fee. That’s a huge different compared to 2% – 3%!
In turn, this 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 less than 1%. If you are paying high annual fees, you will have a very difficult time getting ahead.
The key for all investors is to leverage technology. Betterment helps investors minimize costs. In addition, Betterment can help you consistently save and invest for the long run and benefit from compounding.
I was a finance professional from 1999 – 2012. And have written over 2,300 personal finance articles on Financial Samurai since 2009. Trust me when I say time in the market is much more important than timing the market.
Trying to actively manage your money to pick the 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. They offer both taxable and tax-advantaged investment accounts. This includes 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. This is how they attempt to maximum portfolio returns for an amount of given risk.
The Black-Litterman model 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
At the time of writing this Betterment review, these are the available account types.
- Traditional IRA
- Roth IRA
- Rollover IRA
- SEP IRA
Great Features Of Betterment
They offer some excellent features worth highlighting in this Betterment review.
- 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
The one thing to beware of is that the cash savings yields are very low on Betterment. Therefore, I wouldn’t park money in a Betterment account. You should try and invest all the money allocated on Betterment and use an online savings account for a higher interest rate instead.
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. You can also 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. Alternatively, someone who is very comfortable investing and can take the volatility may also like this model.
Tax Loss Harvesting
One of the key benefits of Betterment is their ability to tax loss harvest. Tax loss harvesting involves selling losing positions. This offsets the capital gains tax of winners. The result is you can 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 we 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 you may owe an additional 3.8% Net Investment Tax. Such individuals have a Modified Adjusted Gross Income of $200,000. And such married couples with a MAGI of over $250,000 are typically subject to that additional tax.
Betterment Review: Try It Today
Betterment is easy and free to sign up. Their management fees are very low at 0.25% a year (0.4% for Premium). This is 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. A tech-driven wealth manager like Betterment can really help you save money.
Mobilize Your Savings
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 to never have to work again. You can either live off your dividends, or slowly draw down your principal.
Grow Your Wealth Even More
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.
About the Author: Sam worked in finance for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.
Sam started Financial Samurai in 2009 and has grown it to be one of the largest independently owned personal finance sites in the world. You can sign up for his free private newsletter here.