Betterment emerged in 2008 as one of the first-ever roboadvisors. This is still a new category of investment platforms that automatically invests for you. These are extremely popular among newer investors who want a hands-off approach to growing their investments.
I opened a Betterment account in 2018 with $10,000 in it to begin researching it. Although most of my investments are at Vanguard, I have been pleasantly surprised by what’s offered!
The tl;dr of this review is this:
- Betterment is a great platform for investing.
- If you’re already investing at Vanguard, M1 Finance, Fidelity. or another platform and are comfortable choosing your own investments, there’s no reason to switch to Betterment.
- If you’d like to get started investing, want to skip learning how to invest, and want a reasonably priced platform, Betterment is a good choice!
Betterment: Minimalist Review
When it comes to investing there’s short-term and long-term. Betterment is one of the best platforms out there – both in features and price – for retirement investing.
Is Betterment worth it? Absolutely. At least if you’re wanting to get started investing. Based on which account you should be investing in, Betterment may not be the right choice for you. For example, if you have a 401(k) from your job that offers an employer match, you’ll likely want to invest in that before putting a dollar in Betterment.
Betterment has one of the best user experiences of any investing application out there. They dummy-proof the experience, making it so that you can invest by just answering a few questions and transferring money (or retirement accounts) to them. It’s good enough for even the most hesitant investors.
What’s negative about Betterment? The big difference is the price. At 0.25% of assets under management, Betterment charges more than managing your own investments – which would be free. 0.25% comes out to $25 per $10,000 invested per year. If you have $1 million invested, you’re paying Betterment $2,500 a year in fees!
At that point, it may be worth it to switch over to M1 Finance, or learn how to manage your investments on your own. I wouldn’t give Betterment a negative review for this point – but it is worth planning for.
Betterment (and also Wealthfront for the matter) offer automatic tax-loss harvesting – a feature they heavily market. This option is completely useless unless you’re investing in an after-tax brokerage account. If you’re investing in a Roth IRA, or rollover an IRA or a 401(k), this feature won’t be used. Even for taxable accounts, the impact of this on your portfolio will likely be tiny. For us, in a $0 capital gains tax bracket, this feature hasn’t been useful.
Should I use Betterment? Here’s a checklist for you. If you can say “yes” to all of these, Betterment could be a good option for you.
- If you’ve already saved up 3-6 months of money in an emergency fund, and maxed out your 401(k) match at your current job.
- If you’re not comfortable investing and would rather let someone else manage your investment decisions.
- If you have a smaller balance so that fees aren’t too large (or if you’re OK with the fees).
My recommendation? Betterment is amazing for beginner-investors who want to get started investing right away.
Opening an account on Betterment is simple. Sign up, decide what type of account you want to use (or what account you’d like to move to Betterment).
Betterment allows for 401k rollovers and IRA rollovers from other investment platforms. This allows you to migrate all of your accounts to one place. Since Betterment will make all of your investment decisions, you’ll want to liquidate all holdings in your current account and then transfer the cash over.
If you’re moving over a brokerage/taxable account things get more difficult. Betterment uses a system called ACATS (Automating asset transfers) to transfer your assets. This allows you to transfer the assets in your account. That’s important since it means that you don’t have to pay taxes for liquidating your portfolio. Betterment will sell any single stocks in your portfolio, then attempt to map ETFs in your account to similar ETFs they recommend. For funds that don’t match up, they try to minimize taxes on the sale
For ETFs and mutual funds that do not align with our strategy, we will only sell assets that are currently at a loss or that you’ve held for at least a year to avoid short-term capital gains taxes, which are generally taxed at a higher rate than long-term capital gains.
The important point here: be careful when transferring a taxable account to Betterment. You may be on the hook for a large tax bill!
How Does Betterment Work? During your account setup, you’ll be asked a number of questions to understand your time horizon for investing and your risk tolerance. Once your money is in Betterment’s hand, they’ll do the rest.
The last step is setting up automatic transfers to your Betterment account for future savings. This is one of the best features of Betterment. New deposits to your account will automatically be invested in whatever ETFs are out of line with your target asset allocation. You don’t need to worry about what to invest in – Betterment will do that for you.
If you’re opening an account rather than transferring one, you can connect your bank account and deposit as much as you want. Betterment has no minimum account deposit needed. You can start with $100 if you want and deposit more over time.
How Big is Better? As of March 2020, Betterment had $22 billion of assets under management. You can think of assets under management as the amount of trust other people have shown in Betterment. At least $22 billion has been trusted to Betterment so far.
Betterment Cash Reserve Account – This is a cash account that your money can be deposited into (either directly from your paycheck, or through a transfer from your bank). This can be an individual account or a joint account. They offer a debit card to access this account that you can use, and it even offers a competitive money market interest rate that far exceeds savings rates (currently 0.40%, but fluctuates).
Automatic Tax-Loss Harvesting – Tax-loss harvesting is the process of selling investments at a loss. This allows you to sell other investments at a gain to offset the taxes on those. One purpose of this strategy is that Betterment can keep your portfolio in line with a specific asset allocation by buying and selling assets for you. They have a lengthy article about how this process works. Since Betterment’s tax-loss harvesting is automatic, they’ll do it for you. You can do the same thing in manual investment accounts.
Apps & Website
Betterment offers a website, an IOS App and an Android Application for you to use. The website is beautiful, and extremely easy to use.
Since Betterment is making all of your investment decisions for you, you won’t need to use the website or app very often. They favor a set-it-and-forget approach to investing where you setup your account, fund it and then let compound interest do its thing.
In other words, you can’t make individual trades with Betterment. Not through the website and not through an app. If you want to day trade a portion of your portfolio, you’ll want to move that portion to a different brokerage.
Almost everything available from the website is also available from the mobile apps. The one except is Betterment’s tax forms which are only available from the website.
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