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Just seven years old, robo-advisor technology is already starting to mature with the best robo-advisors now managing more than $100 billion in assets under management (AUM). The pioneer in the field, Betterment, leads all independent digital wealth management platforms with $10 billion AUM.
Founded in 2008, New York City-based Betterment took the lead in disrupting the investment world with its low cost, easy access to investment advice and portfolio management. While its younger peers, such as Wealthfront and Personal Capital, are catching up in terms of AUM and technology, Betterment is still the standard bearer for the relatively new industry.
It was started as a way for smaller, less sophisticated investors to grab a piece of the stock and bond market pie. Betterment continues to attract a growing audience of younger investors who either don’t have the amount of assets required for human financial advisors or simply don’t want to pay the higher fees for live investment advice.
Stocked with portfolios full of low cost exchange-traded funds (ETFs), Betterment is also attractive for investors who believe in the virtues of passive investment management. Betterment’s main goal is to maximize returns while minimizing risks and costs. As its reputation grew, Betterment began to attract investors from across the entire economic and demographic spectrum and, more recently, has been making a big dent in the 401(k) plan market.
|Invest In||Asset class based ETFs|
|Annual Fees||0.25% or 0.40%|
|Promotion||Receive up to 12 months free based on initial deposit|
|Best For||Long-term investments, goal oriented portfolios, 401(k)s & IRAs|
Who Should Use Betterment?
At the core of Betterment’s and, for that matter, the entire robo-advisor industry’s success is the lure of low cost professional investment advice. Although it is dispensed by scientific algorithms through cyberspace, it is still based on decades of academically proven investment principles – the same principles applied by top investment advisors in the flesh.
While it is not designed for bigger investors with more complex needs, it is perfectly suitable for novice investors with much less knowledge in choosing investments. And that is what Betterment does better than most financial advisors – educating investors so they can learn how to control their financial future. Betterment investors learn the essentials of goals-based investment planning and how to match an asset allocation to their risk tolerance and investment objectives.
How Does Betterment Work?
To attract an entirely new demographic, primarily the younger generations, Betterment wanted to make starting an investment program as easy as opening a bank account. In just five minutes you can have your money working for you. After completing a brief questionnaire, you are presented with a recommended asset allocation of stocks and bonds. You can adjust the allocation by sliding a bar. When you have decided on your choices, you simply link to your checking account. You can then move money over manually or set it up for automated deposit.
Once the money is in your investment account, Betterment will automatically allocate it according to your chosen asset allocation. It purchases low cost ETFs from the top ETF managers, such as Vanguard and Blackrock. By using ETFs you achieve instant diversification across various market sectors, which is the key to minimizing risk and increasing portfolio stability. If an ETF pays dividends, they will be automatically reinvested according to your allocation.
Service Tiers and Pricing
Betterment now offers two tiers of service – Betterment Digital and Betterment Premium. The Digital level offers an automated investing app service with no minimum balance requirement and an annual fee of 0.25 percent of the amount invested. Betterment recently added a new service for Digital clients which allows them to access the platform’s team of Certified Financial Planners via messaging through its mobile app. While it is no substitute for face-to-face meetings or phone calls, it can meet the needs of investors who might prefer that form of communication anyway. Questions obviously have to be somewhat basic like, “what kind of IRA should I have?” and the answers are provided within one business day.
The Premium level of service is available for an account minimum of $100,000 and an annual fee of .40 percent of AUM. Premium clients have direct access to the team of Certified Financial Planners by phone at any time.
If you happen to have more than $2 million in your account, Betterment will waive all fees. The average account size of a Betterment client is $32,000.
It is important to note that, in addition to the annual fee, you will also be paying fees for the underlying ETF investments. The good news is that Betterment only invests in the lowest cost ETFs around, with an average 0.10 percent annual expense fee. Betterment does not receive any sort of kickback from the ETF providers. There are no other fees of any kind.
Personalized Retirement Planning Advice
All Betterment clients have access to Betterment’s comprehensive retirement planning tool – RetireGuide. The service will recommend an appropriate asset mix based on your retirement goals and target date. It considers a number of factors in its recommendation, including how much you are able to save, where you expect to live, and how much you expect to save in retirement. RetireGuide then keeps track of your retirement accounts and updates any changes you make to your goals or circumstances.
You will be able to track your progress towards your retirement goal and, if you are off track, RetireGuide will recommend any changes that need to be made to your savings rate or investments to get you back on track. As you approach retirement, RetireGuide will recommend changes in your asset mix to optimize your returns and will recommend a sustainable withdrawal rate from your savings.
Building Tailored Investment Portfolios
With Betterment it’s all about the portfolios – creating them tailored to your objectives, preferences, and risk tolerance. Your answers to a series of questions results in a recommended portfolio of stocks and bonds allocated based on your investment profile. For example, a typical portfolio allocation for a young person looking to achieve growth may consist of 90 percent stocks and 10 percent bonds, but if the primary goal is to build an emergency fund in the short term, the allocation might lean more heavily towards bonds. An older investor nearing retirement might see a portfolio allocation of 50 percent stocks and 50 percent bonds. Once you decide on your portfolio allocation, Betterment will invest your money in ETFs that reflect your desired mix of assets.
Goals Based Investing
You are not limited to one portfolio allocation. Betterment allows you to create different portfolios to address different financial goals. You may have a short-term goal of saving for a down payment on a house and you may have a longer term goal for retirement. You can save separately for each goal, allocating your savings according to your priorities.
Tax Loss Harvesting
It used to be that only high net worth investors would benefit from a service such as tax loss harvesting (TLH) because it required an investment advisor to provide it. Betterment provides it as an automated service to all of its clients. TLH strategies are designed for investors who have capital gains that can be offset by losses. Betterment scrapes the losses in your portfolio to apply them to capital gains that would otherwise increase your taxes. The result is a boost in your after-tax returns without adding risk or costs to your portfolio.
This service creates greater tax efficiency across all of your investments which can also increase your after-tax returns. For example, it will place investments like equity ETFs in your taxable account because they are more tax efficient and it will place bond ETFs in your tax-deferred IRA because they are less efficient. Even though this takes place across all of your investment accounts, Betterment will maintain your overall asset allocation to keep it aligned with your objectives and risk tolerance.
Rebalancing your portfolio is crucial to maintaining your target allocation and preventing additional risk from creeping in. For example, after a stock market surge, your original allocation of 60 percent stocks and 40 percent bonds could change to 70 percent stocks and 30 percent bonds. While that is good news for your portfolio growth, it exposes your portfolio to more risk than you might be willing to take. Rebalancing involves selling securities that have increased in value and buying securities that have decreased in value to keep your portfolio balanced according to your target allocation.
Betterment for Business
With its low-cost advisory services and investments, Betterment is quickly gaining traction in the 401(k) market. Employers can use Betterment to set up, administer, and invest their 401(k) plans, offering free portfolio construction and many of the same features it offers to individuals. Employers value Betterment’s objective approach to recommending investment strategies and its ability to educate their employees on the fundamentals of investing.
The robo-advisor space is beginning to get very crowded, with some of the new players offering some very competitive features and pricing. However, Betterment is far and away the market leader with the funding to innovate to the next level. Regardless of what type of investor you are, Betterment might offer a more efficient way to generate positive returns while trying to minimize risks.
Author: Jeff Gitlen