Betterment is the largest of the pure robo-advisor offerings out there. There are other products that may have more money behind them, like Schwab’s or Fidelity’s, but robo-advising came as an additional offering to existing financial services at those companies. Betterment started as a robo-advisor.
Betterment has registered Assets Under Management (AUM) of $11.9 billion in 392,550 accounts. With an average account size of over $30,200, it offers taxable, IRA/Roth IRA and SEP IRA accounts as well as trusts. While it won’t manage your existing 401(k), employers can use Betterment for Business to provide 401(k) accounts to employees.
Fees and investing
There are three different account plans with Betterment. The basic Digital plan costs 0.25%, with no minimum. The Plus plan requires $100,000, charges 0.4% and grants access to an annual phone consultation and account monitoring by Betterment’s human advisors. Premium plans take $250,000 to open and charge 0.5% annually. In exchange, you get the same service as Plus accounts, but with no limit to the amount of phone calls to Betterment’s financial team.
There are no transaction fees, or other fees associated with your account. All plan types come with a fee cap once your balance tops $2 million.
After inputting your age, employment status, and annual income, you are asked to choose between three goals: Safety Net, Retirement, and General Investing. That will help determine the amount of risk you want to take. There are helpful dropdowns that explain the reasoning behind each particular mix of stocks and bonds, and why those mixes are good for reaching your goal.
You are then prompted for name and contact information, as well as your age, DOB and social security number. Keep in mind that you have to be 18 and a U.S. resident of one of the 50 states or Puerto Rico to open an account (sorry, Guam and US Virgin Islands).
What you get
The portfolios are made up of Exchange Traded Funds (ETFs). ETFs are a broad holding of stocks or bonds, traded on a market. Like most ETFs, the ETFs offered are based on well-known, passive indexes. These ETFs are meant to track with the market so your holdings grow (and shrink) along with the market, instead of trying to “beat” the market like more actively managed funds. Many robo-advisors invest in passive ETFs because of the low expense ratios.The ETFs offered by Betterment cover 12 asset classes, including six classes of bonds and six classes of stocks.
Your portfolio mix is based on your investment, timeline and goal, and the asset allocation can be adjusted based on your preferences. Because of this personalization there isn’t a set number of portfolios you have to choose from, but a large number of possibilities. Tax-loss harvesting and rebalancing are automatic on all portfolios.
While Plus and Premium allow you to speak with the Betterment investment team, the Betterment website also hosts a wealth of content. Information about investing, personal finance, retirement and research, as well as tools and calculators to help you decide where, how and how much to invest. Those resources are available for free without signup.
Betterment had previously dismissed smart beta strategies as “expensive beta”, but its recent decision to team up with Goldman Sachs to offer a Smart Beta Portfolio Strategy appears to represent a change of course.
In the hours after the Brexit vote on June 24th, 2016, Betterment prevented its users from withdrawing funds. Their argument was that they were trying to protect investors from a classic mistake of selling after bad news, trying to “time the market”. However, the other robo-advisors (as well as stock brokers) continued to allow consumers to make withdrawals.
FSRankings believes that Betterment should not have instituted this halt unless they had previously disclosed that they would be doing so. While the halt may have prevented some investors from making a trading mistake, it also may have prevent some users from accessing their money when they needed it for a big ticket item like buying a home or a car. For more information, see this Investopedia article.
Betterment is a giant in the robo-advisor industry. Its product is easy to set up, use and understand. With their tiered plans, human assistance and Betterment for Business 401(k), they are fleshing out their offerings and encroaching on the territory of more traditional financial advisors.
A 0.25% fee and zero minimum is hard to beat when it comes to robo-advisors. Combined with the increased range of services and availability of human assistance, it’s not surprising that Betterment leads the industry in AUM and number of accounts.
Be aware that Betterment, unlike every other robo-advisors, sometimes prevents consumers from withdrawing their funds in times of market turmoil. If you are relying on timely access to your money in a Betterment account, it would be best to plan ahead and withdraw those funds to your checking account a week in advance.
(Find our interview with two VPs at Betterment here)