Not that long ago, it seemed like the only people who were able to invest were rich old men who worked on Wall Street.
Luckily for us, investing is becoming more and more normal, with it being available to pretty much anyone – which is great news for all of us.
Here at The Savvy Couple, we are all about helping you manage your money and finding your freedom. With this Betterment review, we hope to show you a great tool to do that.
What is Betterment?
Betterment is an online investment platform and is best known for being the leading robo-advisor site. They are based in New York, and it was founded in 2008.
If you’ve ever wished to have a robot do jobs for you like walking the dog or doing the dishes (which I 100% would love especially now after becoming a mom!) – you can see why it would be appealing to have one do your investing for you.
The problem with investing is, as great as it is, it’s confusing. It’s one of those things that you want to do lots of research over and end up procrastinating for years over it, which means wasted money.
The interest rates that come from investing are well worth it, but is it any surprise that so many people don’t want to risk their hard earned cash from a lack of knowledge and confidence?
Not to worry though, as this is where Betterment can come in to help you out.
How Does Betterment Work?
Betterment is a site that will invest your money for you, in the best way that will work for you.
They invest your money depending on your goals – so if you are saving for a house deposit, buying a car, or retirement as examples.
The reason that they ask this, is so that they can assess your risk, and how long you will want to be investing for that specific goal.
You are able to select your portfolio strategies at this stage, and you are able to have multiple portfolio strategies within your Betterment account.
They will look at your goals and divide your investment across 12 asset classes (within the standard portfolio).
The asset classes are as follows:
- U.S. Short-term Treasury Bonds
- U.S. Investment Grade, Short-term Bonds
- U.S. Low Duration Inflation-Protected Bonds
- U.S. Municipal Bonds
- U.S. Total Bond Market
- International Bonds
- Emerging Market Bonds
- U.S. Total Stock Market
- U.S Large-Cap Value Stocks
- U.S. Mid-Cap Value Stocks
- U.S. Small-Cap Value Stocks
- International Developed Stocks
- Emerging Market Stocks
The entire process looks something similar to this:
There are a lot of features that come with Betterment that you can benefit from, such as:
- Security with two-factor authentication. This provides an extra layer of security after your password to protect your account.
- App Passwords. You are able to use third-party applications, but with minimizing risk.
- Personalized guidance. Guidance relating to your specific goals e.g. retirement, buying a home – tools and experts to hand to help you.
- Syncing all of your accounts. You are able to sync your outside accounts (e.g. bank accounts, other investments), and check on your net worth.
- Betterment app. Although Betterment is a robo-advisor, you still have access to a real financial advisor through their app to help you with any questions.
- Tax-Coordinated Portfolio. You can have maximum tax efficiency between your taxable and tax-deferred accounts by auto-allocating your investments with this portfolio.
- Smart Saver account. You could earn 2.23% interest on this low-risk account.
- Two-Way Sweep. This is a feature that automatically moves your money between your checking account and your Smart Saver account. It analyzes the money left in your checking and sees if it can be moved into your savings instead.
- Socially Responsible Investing Portfolio. This is investing with the best interests of everyone in mind – dealing with companies who are working towards things like helping the environment, and staying away from those who don’t.
- Asset allocation for you. The asset allocation that is chosen is chosen with you in mind – it is custom to work in your best interests.
- BlackRock Target Income Portfolio. The strategies within this portfolio are designed specifically to get additional income whilst minimizing capital losses.
- Goldman Sachs Smart Beta Portfolio Strategy. This has been designed by Goldman Sachs Asset Management and is for people who wish to take a greater risk at a given allocation between stocks and bonds.
- Charitable Giving. You are able to donate from your accounts directly to charities, which can help when it comes to taxes, but it is worth checking with your legal advisors before doing this.
- Tax Loss Harvesting. This is where Betterment sells a security which has experienced a loss and then buys another, similar one to replace it. What this does is allow you to harvest a capital loss on your tax return, but still maintain your exposure to that asset class.
- Tax Impact Preview. When you are about to make a transaction, if you use this feature, you will be able to see the tax implications of doing so before you click the button.
On the Digital account (their standard account), there is a $0 minimum balance – the fees are based on your account balance.
They have a really low management fee of 0.25% – meaning if you had a $1,000 account, you would be paying $0.25 per year on your account. If you had a $10,000 the annual fee would be $25, and so on.
Compared to some investment funds like Vanguard’s VTSAX a 0.25% management fee might seem a little higher but it is still far below the industry average. Especially when you realize the incredible benefits that Betterment offers for your investment needs.
You are able to link your bank accounts and other outside investments so that you can see them all in one place and easily track your net worth.
The Premium account has an annual fee of 0.40% and has a minimum balance of $100,000.
If you wish to have a one-off advice call, you can select their Advice Package and from $149, this will connect you with a licensed financial expert who can set you up with an action plan for your financial goal.
By lowering taxes and fees, they claim to be able to earn you 2.66% more than a typical investor.
Betterments Referral Program
Betterment has a referral program – for every friend that opens an account and funds it, you will get 30 days free, and each friend will get 3 months free.
If you refer 3 friends who set up accounts and fund them, you will get an extra free year!
If you love doing things on the go, Betterment has an app that you can use wherever you are.
The massive benefit of using this app is that you have access to a certified financial planner – all of your questions will be answered by a CFP.
Tax Loss Harvesting
Ok, this is where we are going to try and help you out with the financial lingo, as I appreciate that it can get a little bit confusing if you haven’t looked into this before.
‘Harvesting’ is another term for realizing a loss. Companies like Betterment work hard to make sure that you do not need to pay more to the government than you need to, and they do this through tax loss harvesting.
In fact, their goal at Betterment is to save you more on taxes than any other service would.
If you’re wondering what Tax Loss Harvesting is, it’s where they are selling a security which has experienced a loss, and then buying another, similar one to replace it.
When this happens, it allows you to “harvest” a capital loss on your tax return, but it still maintains your exposure to that asset class – these are both huge plus points.
This isn’t for everyone, however, as you may be in a low enough tax bracket to get capital gains tax free anyway – do your research on this one.
Automated Asset Location
Betterment is the only company who offer automated asset location, which is a strategy that they say could increase your portfolio by 0.48% per year, or 15% over 30 years (estimated).
If you want to set up a Tax-Coordinated Portfolio, you need to log in to your Betterment account, then in the summary, you just need to select ‘Set Up a Tax-Coordinated Portfolio’.
You will still be able to withdraw your money if you use this, but please note that to benefit the most from it, you should keep in mind this is best for long-term investors.
You can change the allocation of your Tax-Coordinated Portfolio whenever you like, under the Advice tab – try and avoid changing it though, as it may set off taxable events.
External accounts can be rolled over or transferred to Betterment in order to benefit from this – it doesn’t affect your external accounts, so if you want to use the automated asset location, it may be best to move them over.
You can use the Tax-Coordinated Portfolio if you have balance in at least 2 of the following accounts:
- Tax-deferred (e.g. 401(k) or IRA)
- Tax-exempt (e.g. Roth 401(k) or Roth IRA)
Betterment isn’t the only robo-advisor out there, and it’s always worth looking at all of the options that are available to you.
There is another big player in the robo-advisor market, called Wealthfront.
Betterment vs Wealthfront
If fees are what you are most concerned about, Betterment and Wealthfront both have the same low 0.25% yearly fee.
With Betterment, there is no minimum amount that you need to open an account, with Wealthfront having a minimum of $500 to open an account with them.
Wealthfront is digital only, whereas Wealthfront does give you the option of messaging financial advisors, should you have any questions.
There are extra features that Wealthfront provides that Betterment doesn’t, such as PassivePlus (includes Tax-Loss Harvesting, Smart Beta and Risk Parity), which is available to those who have more than $100,000 in their account.
Wealthfront is great for college saving based accounts (they offer 529 college savings plan management through the Nevada state plan), whereas Betterment seems to better serve you for your retirement and goal focused saving accounts.
Pros vs. Cons of Betterment
- There is no account minimum.
- Betterment doesn’t own any of the funds that it recommends (unlike competitors such as Fidelity Go), which means there is no bias there.
- It is a fiduciary, which means that they are legally bound to work in the best way for your interests.
- Betterment has socially responsible investing options, where they aim to increase exposure for companies who are working to solve environmental problems, and also to reduce exposure to companies who are doing the opposite.
- There are low management fees (0.25%). Management fees are very important when it comes to choosing where you invest, as you want as low as possible so that you get greater returns.
- Your Betterment portfolio will be globally diversified – which minimizes risk for you, as it is not dependent on one countries economy.
- Betterment is not FDIC registered – which means that your returns are not guaranteed and are subject to risk from the market.
- You won’t have access to a financial advisor either in person.
Betterment Review Summary
So is betterment right for you?
It depends. Do you fall into these categories?
- Hands-off investor
- Users who are intimidated about investing
- Looking for a retirement investment solution
- Users with low balances
- Those who want automatic rebalancing
- Users who like goal-based tools
- Users who like to save money and time
The best thing to do when it comes to investing is to start early and be in it for the long game.
Investments are typically used for things like retirement, so if you want to have a decent retirement or even retire early, this is for you.
The same goes for any savings goals that are more long term and will benefit from the interest rates offered with investing.
Betterment is one of the leading robo-advisors for a reason – they have low fees, offer tax harvesting, smart saver, taxable investment accounts, IRA’s, Roth IRA’s and more!
If you are new to investing and want a hands-off solution Betterment is an outstanding company to use.