Betterment Review

Betterment Investing Review

Betterment is a well known robo-advisor based in New York City, offering customers ready-made investment accounts in a process that’s as easy as opening a Facebook page. Betterment is known for its streamlined website, its dirt-cheap ETFs and funds (mostly from Vanguard), and the growing variety of features it uses to make investment effortless for its users. A Digital Betterment account has no minimum balance and costs 0.25% of balance per year.

Betterment is frequently used for retirement and tax-sheltered accounts like IRAs and 401(k)s, but it also shines as a manager for taxable accounts. Betterment’s automated tax-loss harvesting feature gives users savings when it comes time to pay their annual tax bill. Oftentimes these savings more than pay for Betterment’s annual 0.25% fee. A Betterment Premium account ($100,000 minimum balance) at 0.40% annually gives customers personalized advice for investments even outside the Betterment system.

Digital - Highly diversified portfolio of stocks and bonds (in Vanguard ETFs and mutual funds) fully managed indefinitely by Betterment for 0.25% of balance per year.

Premium - Betterment’s standard portfolio with personal investment management counseling from Betterment for the specific needs of the investor. 0.40% of balance per year.

Starting a Digital Betterment Account

Betterment has had success in the marketplace by creating a system where a users can create investment accounts with the ease of starting a Facebook page. The service has been described as “set it and forget it”, because once an account is funded, the customer doesn’t have to do a single thing to manage it again for as long as Betterment is in business.

The Betterment Investing Portfolio

The Betterment portfolio is a standard offering of ETFs and mutual funds, primarily purchases from Vanguard’s bevy of low cost funds. The funds chosen are optimized to cost as little as possible. The user has no choice in what funds are chosen, but can choose the asset allocation for each account according to risk tolerance and growth goals. Selecting a 70/30 stock/bond allocation will cause the portfolio weight of each fund to be different than a 90/10 allocation.

With each change to the customer’s risk tolerance allocation strategy, the user will see a nice, big chart showing how the account funds will be likely to grow in a variety of market circumstances. Betterment’s portfolio is based on Modern Portfolio Theory and has been backtested against historical market conditions. It offers considerable exposure to international stocks in both mature and developing markets. American stocks comprise the bulk of the portfolio.

Betterment Portfolio Performance

Betterment historical returns are uniformly strong. At the time of this writing (12.7.17), the a 70/30 allocation Betterment account has YTD returns of 11.4%, 28.9% returns since January 2016, and 152.7% returns since January 2004 when the service was first initiated. Annualized returns are 7.0%, with the extra performance accounted for by compounding.

Betterment Features

Betterment’s central value proposition is fully automated investments after a signup process of just a few minutes. Additionally, Betterment accounts are created for tax-efficiency and feature standard Tax-Loss Harvesting performed by algorithm whenever possible. This way, users’ losing funds are sold at a loss, which can then be written off at tax time. For most users with taxable accounts, the savings more than pays for the annual 0.25% fee charged by Betterment.

Betterment also has immediately responsive customer service available by phone, by chat on PC, and by chat on the Betterment app. In practice, it doesn’t really matter whether you’re using the desktop or mobile version, Betterment is easy to use and straight-forward to understand. If you have a problem, they fix it quickly.

Potential Complaints About Betterment Investing

People who understand what Betterment is before they use it tend to really like the service. As they say, “It does what it says on the tin”. However, Betterment isn’t for everybody. Most of the “complaints” about Betterment are actually just the observations of people for whom Betterment was not designed. Betterment isn’t for everybody, but for its intended customer it works very well. Still, here are some potential downsides.

1. You Can’t Choose What You Invest In. If you’re buying Betterment, you’re buying the Betterment portfolio. You won’t have any say in what funds are chosen, and beyond a basic control over risk tolerance, you won’t be choosing the fundamental allocation of funds to assets. People who prefer having control would do better with a more traditional broker. But this is what robo-advising is about, right? Not having to make decisions like this.  
   
2. Over-Diversification. Over-diversification is hardly a complaint you’ll hear in the investment world, but it’s one that could be legitimately made against the Betterment portfolio. Your funds will be stretched across thousands of companies, with heavy international exposure. In practice, this means that gains in one sector will be “Cancelled out” by losses in a different sector. Betterment’s portfolio stands strong in times of volatility, but it will never reach the heights of the portfolio that’s 90% VTI.  
   
3. When Management Oversteps. In at least one case in years past, Betterment froze withdrawals during a market correction. They did this to prevent users from “selling at the bottom”, but many users felt their funds were held hostage. This incident has not repeated itself recently, but it’s a black eye that some users still remember.  

Final Thoughts About Betterment Investing

Betterment is by now a trusted name in the world or robo advisors, with more than a decade of proven service. We like Betterment for its simplicity for brand new investors, and the way it protects their money through uber-diversification to provide ease of mind and solid returns.

If you want to make all of your investment decisions yourself, you’ll do better elsewhere. In fact, it’s easy enough to essentially recreate the Betterment portfolio on Vanguard (because almost all of the funds are Vanguard funds anyway), in order to save 0.15% annually, or so. Whether this savings is worth it or not is up to you. You might consider it if you’re looking for a service to hold your tax-sheltered IRA or 401(k).

Where Betterment cannot be beat is in taxable accounts. Their tax-loss harvesting cuts down on your tax bill so effectively that the Betterment service is essentially free. You might even net a profit. Users could manage their own taxable accounts elsewhere, of course, but if you want to never think about your account until you need to cash it out (and so many people do) Betterment is probably the best choice for you.

Start your account, fund it, set up regular automatic bank deposits, and go on with your life. Betterment will take care of the rest.