Betterment Review: Robo-Adviser with Low Fees and No Minimum Balance Requirement

betterment

Investing is the key to building real wealth. However, the complexities of investing can be difficult to master on your own and hiring an adviser to help you can be pretty costly. Robo-advisers like Betterment are an investment alternative that may be able to solve both problems. Robo-advisers provide an automated process that can make investing accessible and affordable for even the most novice investors.

Betterment requires no minimum investment amount to get started and charges a reasonable fee to manage your account. The service includes trades, allocation recommendations, and more. In this post, we’re going to dig into what Betterment has to offer if you’re interested in signing up with a robo-adviser.

Here’s a breakdown of what we’ll cover:

  • How Betterment works
  • How much Betterment costs
  • The fees and gotchas
  • Pros and cons
  • How Betterment stacks up against competitors

How Betterment Works

Betterment supports multiple investment accounts, including individual and joint accounts, rollover retirement accounts, traditional IRAs, Roth IRAs, SEP IRAs, and trusts. Betterment invests your money in exchange traded funds, or ETFs for short. ETFs are bundled funds that can be made up of stocks, bonds, or commodities and traded like regular stock. Betterment uses a diverse portfolio of handpicked stock and bond ETFs.

Betterment stock ETFs include:

  • U.S. Total Stock Market – VTI
  • U.S. Large-Cap Value Stocks – VTV
  • U.S. Mid-Cap Value Stocks – VOE
  • U.S. Small-Cap Value Stocks – VBR
  • International Developed Stocks – VEA
  • Emerging Market Stocks – VWO

Betterment bond ETFs include:

  • Short-Term Treasuries – SHV
  • Inflation-Protected Bonds – VTIP
  • U.S. High-Quality Bonds (IRA and 401(k) accounts) – BND
  • National Municipal Bonds (Taxable accounts) – MUB
  • U.S. Corporate Bonds – LQD
  • International Developed Bonds – BNDX
  • Emerging Market Bonds – VWOB

To assist you in investing efficiently, Betterment offers goal-based investing, automatic rebalancing, SmartDeposit, and tax harvesting, along with a RetireGuide feature. Let’s explore each one in detail:

Goal-based Investing

The goal-based service lets you choose investment goals and then recommends investment allocations. After receiving recommendations, you can make your own personalized allocation adjustments. Betterment monitors your accounts regularly to make sure you’re on the right path to reaching your goals. If you need assistance along the way, there are support specialists who are available 7 days a week.

Betterment portfolio

Rebalancing

If your allocation shifts, Betterment will automatically rebalance. Using our example above, for retirement the recommended allocation is moderate-risk, 10% bonds and 90% stocks. If the allocation shifts to 20% bonds and 80% stocks, Betterment would rebalance the allocation for free.

SmartDeposit

You can sync your checking account to Betterment and it will monitor your account for excess cash available that you can add to your investment. Betterment then initiates a transfer of funds and sends you an email. You can cancel the transfer if you don’t want it to go through.

Tax Harvesting

Tax harvesting is a feature of the product that can reduce your taxable income. To offset tax on gains and income, tax harvesting sells off and replaces securities that experience a loss. Tax harvesting for Betterment is completely automated and free.

RetireGuide

Lastly, the Betterment RetireGuide is a tool that tells you how on track (or off track) you are in saving for retirement. The RetireGuide can help you determine:

  • When you’ll be able to retire
  • How much money you’ll have to live on each year of retirement
  • How you can invest more efficiently
  • What the consequences are of not increasing your savings rate

Armed with this information, you can update your investment strategy to make sure you’re on the right path to turning your vision for retirement into a reality.

How Much Betterment Costs

Betterment has two costs to consider. First, there’s the fee to manage your account. Then, there’s the actual underlying cost of your ETFs.

Investment Management Fees

Betterment has a four-tier pricing structure. The annual fee spread is:

  • $0 – $10,000 account balance: Flat $3 per month fee if you don’t set up auto-deposit
  • $0 – $10,000 account balance: 0.35% annual fee if you have an auto-deposit of at least $100 per month
  • $10,000 – $100,000 account balance: 0.25% annual fee, no auto-deposit required
  • $100,000+ account balance: 0.15% annual fee, no auto-deposit required

A portion of the annual fee is charged to your Betterment account at the end of each quarter. The management fee is calculated using your average account balance. If you cancel your account, the fee is prorated, which means you only pay for the amount of time you have money in an account.

Investors with a balance below $10,000 should set up auto-deposits to avoid the flat $3 fee. Otherwise, you’re going to spend substantially more to have your investment managed by Betterment.

For example, let’s say your account balance averages $900 for the quarter.  Betterment charges one-fourth of the 0.35% annual fee (or 0.0875%) per quarter to calculate your quarterly charge. In this case, the fee would be just $0.78 if you set up an auto deposit of at least $100.

On the other hand, without auto-deposit, you’re looking at $9 per quarter ($3 per month for three months).

ETF Costs

You’ll run into an underlying ETF fee if you invest with Betterment or any other brokerage. The cost of your ETFs will vary depending on which investments you choose. However, the expense ratios of ETFs at Betterment range from 0.09% to 0.17%.

Fees and Gotchas

Other than the adviser fee and ETF costs, Betterment has no other sneaky fees to worry about. The management fee includes deposits, withdrawals, trades, transfers, rebalancing, and advising. There’s no penalty for having a $0 balance. Furthermore, you won’t be charged a management fee at all if you don’t have any money in your account.

Pros and Cons

Now that we’ve gone over the basics, here are the pros and cons of Betterment:

Pro: It’s affordable. Betterment offers an inexpensive alternative to working with a financial adviser. Plus, you don’t need to have a large amount of cash to get started.

Con: The basic plan can get costly. Although there’s no minimum balance with Betterment, watch out for the cost if you have less than $10,000 in your account. You need to have at least $100 per month to spare for your auto-deposit to avoid the $36 annual fee.

Pro: It takes the confusion out of investing. Signing up and starting with Betterment is a simple, online process. You can even test out what investment allocation Betterment will recommend for you before signing up.

Con: Lack of customization. Since Betterment is meant for someone who desires automation, you may find it less useful if you want to have the freedom to customize every aspect of your investment. That said, Betterment isn’t only for a newbie investor. If you’re a seasoned investor who wants to diversify with another account that requires minimal effort, Betterment could be a good choice.

How Betterment Stands Up to the Competition

Wealthfront is another example of a robo-adviser with reasonable fees. If you have an account with $10,000 or less, Wealthfront is free. Any investment over $10,000 has a 0.25% annual fee. You do need to have a minimum of $500 to invest.

Like Betterment, Wealthfront also uses a portfolio of ETFs. The cost of ETFs at Wealthfront averages 0.12%. If you have an account balance over $100,000, there’s a direct indexing premium feature that’s supposed to be even more tax efficient.

WiseBanyan is a robo-adviser with no management, trading, or rebalancing fees. However, there are some fine-print administrative fees. For example, the annual cost of tax harvesting is 0.25% of taxable assets capped at $20 per month. You can find a list of the other administrative fees here.

WiseBanyan has no minimum balance requirement and also uses ETFs. The average ETF expense ratio is 0.12%, and the range is 0.08% to 0.13%.

Who Will Benefit the Most from Betterment

New or experienced investors on the hunt for a low maintenance, low-cost investment opportunity may find Betterment useful. It’s also a good option for someone who has a very small amount of excess cash to start investing with since there’s no account minimum.

However, if you want to have a lot of freedom to make customized adjustments to your investments, you may encounter some roadblocks. Also, keep in mind, there is value in speaking with a financial planner one-on-one at least periodically leading up to retirement. Still, signing up for a site like Betterment is an action you can take right now to start investing if cost and knowledge are barriers.

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Apps That Make Investing Easy: Acorns, Betterment, Robinhood, Stash

The smartphone has revolutionized the way we manage our finances — from paying bills to tracking our credit scores. Thanks to a wave of new investing apps, it’s never been easier for novice investors to get their start in the market. Services like Acorns, Betterment, Robinhood and Stash let users invest small amounts of money to begin to grow wealth.

But how good are these apps at growing your money, and what are the pros and cons?

Read on to find out all you need to know about investment apps. We’ll periodically update this post with new apps and reviews.

In this guide, you’ll find reviews of:

Acorns
Betterment
Robinhood
Stash

Acorns

acorns

How it works: Acorns is an app that is designed to help users invest their spare change by rounding up purchases to the dollar. By linking your checking account and credit cards to the app, it can take everyday purchases like a $4.22 latte and round it up to the nearest dollar, which in this case would be $5. Once you’ve accumulated $5 in round-up savings, the app invests the money for you in a portfolio of your choosing.

Acorns’ main selling point is how simple it is to choose your investments. To get started, Acorns asks for your age, how long you’re looking to invest, your income, your financial goals, and your risk tolerance. From there, the app recommends one of five portfolio blends. Each portfolio comprises six low-cost exchange traded funds (ETFs). Portfolios range from conservative (with a larger allocation of bonds) to aggressive (with a larger allocation of stocks).

Fees: Like any product aimed at convenience, Acorns’ investing platform comes at a price: $1 per month for accounts with $5,000 or less, and an annual fee of 0.25% of the account value for balances over $5,000.

Making withdrawals: Acorns does not charge a fee for withdrawing money, but it will take some time to hit your bank account. Withdrawals take five to seven business days, the company says. That’s because Acorns has to sell the stocks and bonds from your account to cover the withdrawal, which could take up to three business days alone. Then, the company transfers the funds into your account, a transfer that could take one to three days.

Best suited for: Individuals who struggle to set aside savings each month and want to invest for short-term goals.

The pros:

  • No minimum balance is required.
  • No monthly deposit requirement.
  • You can deposit extra funds to your account at any time or set up a recurring deposit.
  • Withdrawals are free and can be made at any time.
  • The app is totally free for students.
  • Users are free to accept or decline portfolio recommendations and can change portfolios at any time.
  • Easy to withdraw funds without any penalty or fees.

The cons:

  • Acorns’ $1 or 0.25% fee may sound nominal. But for an app aimed at investors who are saving only small amounts of cash on the side, those fees can quickly eat into your long-term investment gains. “If you only have $100 and you’re charged $1 a month, you’re paying $12 a year,” says Robert Farrington, founder of TheCollegeInvestor.com, an investing and personal finance site aimed at millennials. “A 12 percent fee is criminal … and once that money is gone, it is not going to compound.”

There are plenty of ETFs and mutual funds out there that charge far lower fees. But Acorns’ main selling point is the ease of selecting a portfolio, which takes away the headache of comparing dozens of different funds on your own.

Betterment

betterment

How it works: Betterment is a service that pretty much takes all the guesswork out of investing. Users input their investment goals, and the app suggests individual portfolios based on an investor’s risk tolerance and goals. Betterment uses software and algorithms to manage money by investing it into a blend of Vanguard exchange traded funds (ETFs), including U.S. and international stocks, short-term Treasuries, inflation-protected Treasury securities, and emerging market stocks and bonds. Betterment’s algorithm manages your investments for you and rebalances them over time, making sure you’re properly invested in the right mix of funds.

Fees: Betterment currently offers a promotion of up to six months for free. After that, fees are relatively low — 0.35% per year on accounts with a minimum monthly auto deposit of $100 and 0.15% for accounts that hold at least $100,000. But beware: If you do not contribute at least $100 to your Betterment account each month, they’ll hit you with a hefty $3 fee.

Making withdrawals: Betterment does not charge any fees or a penalty for making withdrawals, which usually take four to five business days to process. The website notes that a withdrawal might be delayed if a user recently made a deposit, because the deposit needs to fully settle first before another action.

Best suited for: Novice investors who are investing for long-term goals like retirement.

The pros:

  • Betterment currently offers a promotion of up to six months managed for free. After that, fees are relatively low (0.35% a year on accounts with a minimum monthly auto deposit of $100 and 0.15% with a minimum of $100K).
  • The website also offers personalized retirement advice to help educate first-time investors.
  • It is easy to withdraw funds with no penalty or fee.
  • Betterment recently launched RetireGuide, which offers personal retirement savings advice to users.
  • Betterment’s SmartDeposit feature lets users choose a certain amount the app is able to transfer from their bank account into their Betterment account. It’s a savings feature aimed to help people who struggle to set aside extra funds.

The cons:

  • If you can’t contribute at least $100 to your account every month, Betterment will charge you a fee of $3. At that rate, you might be better off saving your cash in a high-yield savings account or a low-cost index fund.
  • Your investments are not FDIC-insured.

Robinhood

robinhood

How it works: Robinhood is a brokerage service that offers zero-commission stock and exchange traded fund (ETF) trading. Once you sign up for the service and link it to a bank account from which to pull funds, you are ready to trade stocks. Just type in the name of a particular stock and either put it on your “watch list” or buy shares. On the company’s homepage you can find out how much each share of stock is selling for and read current news about the stock. Once the trade has been placed, you can either buy more shares or sell what you have.

Fees: There is no minimum investment to get started, and Robinhood charges no trading fees.

Making withdrawals: Uninvested funds must remain in your Robinhood account for five trading days before they can be withdrawn. The company states that the holding period is established for “anti-money laundering and risk management purposes.” You must also wait for your funds to settle after a sale before withdrawing. From the date the trade is made, it will take another three days.

Best suited for: Individuals who know a bit about stock trading and want a commission-free way to try their hand in the market.

The pros:

  • There is no minimum investment to get started and no fees.
  • Users can set up automatic transfers.
  • Proceeds when you sell stocks and ETFs are available immediately to reinvest.

The cons:

  • This app is not for suited for novice investors. Unlike Acorns or Betterment, there is no ready-made portfolio designed for your needs. Robinhood is a hands-on service, aimed at people who have a grasp on buying and selling stocks. Robinhood also provides minimal information to investors to reassure them during times of market volatility. “It’s self-directed and you need to know what you’re doing,” Farrington said.
  • Robinhood currently only allows users to trade stocks and ETFs. You’d have to look elsewhere if you want to trade options, OTC securities, warrants, or mutual funds.
  • The service does not allow users to transfer existing brokerage assets into the app. However, the company says this will be changing soon.

Stash

stash-2stash invest

How it works: Stash lets you pick from 30 different flavors of exchange traded funds (ETFs). To make the app more approachable, the ETFs come with friendly names like “Clean & Green” and “American Innovators.” Clean & Green, for example, is the iShares Global Clean Energy ETF, a fund broadly invested in renewable energy companies. The American Innovators fund is the Vanguard Information Technology ETF, which has holdings in over 300 tech companies like Apple, Microsoft, and Facebook. The Slow & Steady portfolio is the PowerShares S&P 500 Low Volatility ETF, a fund invested in low-volatility stocks. Depending on your risk tolerance and investing goals, Stash suggests which funds best fit your needs.

Fees: Stash is similar to Acorns in terms of fees. It charges $1 per month for balances under $5,000 and 0.25% annually for balances of $5,000 or more. (Stash offers a promotion of the first three months for free.) Fees are taken from your bank account, however, and do not come out of your investment portfolio. You only need $5 to get started.

Making withdrawals: Withdrawing funds is fee- and penalty-free, but they are capped at $10,000 per day. Withdrawals take one to three business days to process before funds become available in your bank account. The company notes that the process might take a few more days if you need to sell investments first.

Best suited for: Novice investors who want to get into the market but are intimidated by all the jargon and don’t have much money to play with. It also works for investors who don’t want to pick stocks piecemeal and like the flexibility of investing in fractional shares.

The pros:

  • Fees are relatively low assuming you put enough money in the account each month to offset a high percentage fee.
  • Along with ETFs, users can invest in some individual stocks, but only if they are listed as investment options.
  • You only need $5 to get started, and Stash offers a promotion of the first three months for free.
  • Stash allows you to invest in fractional (or partial) shares in companies.
  • Its “Auto Stash” feature allows you to schedule automatic deposits into your account.

The cons:

  • The $1 monthly fee can bite into investment gains. And once your account hits $5,000, Stash begins charging 0.25% annually.
  • You can only view your account on a smartphone, as there is no desktop platform.
  • Stash is effectively letting investors choose funds that are widely available for anyone to invest in outside of the app — without the additional 0.25% fee.

Farrington noted that it is important to review your investment portfolio on an annual basis to ensure that fees aren’t too high and that it has the investment choices you want. “These apps are designed to be a kickstarter to help you get started, but they might not be able to get you to the next level,” he said.

Regardless, Farrington believes that investing apps are an overall positive. “In general, the easier companies make it for people to invest, the better it is as a whole,” he said.

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