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:
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.
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.
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 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.
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).
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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