Betterment Review: We’re All Investors Now

Betterment is investing for the masses. If online brokers like E*Trade were a revolution for the do-it-yourself investor, then Betterment is part two of that revolution.  Their goal: get even more people to invest their money (vs parking it in savings accounts) by providing an ultra-simple, passive investing-focused, discount brokerage, wrapped in a Mint.com-like interface.

Betterment is offering a $25 bonus to new users who open up an account with at least $250 and keep their accounts active for at least 60 days*. I just signed up to get the bonus and to check out this innovative investing service.

They claim to have built an online broker site just as easy to use (and as liquid) as your online savings account. From my initial tinkering around with my online account (takes 5 minutes to open), they have achieved that ease of use.

Betterment is a real game-changer. Time will only tell if they can get investors to come on-board (they already have 4,000 apparently), but the concept is a revolutionary one for sure.

About Betterment

Betterment is a broker from a legal perspective just like any other online broker. They are an SEC Registered Investment Advisor, and their broker company, Betterment Securities, is a broker-dealer regulated by FINRA and the SEC.

The money that you have invested with Betterment is protected by SIPC (up to $500K). Like other investment brokers, SIPC doesn’t mean you can’t lose your money if the market tanks. It simply means you can’t lose it to fraud or failure by Betterment (i.e. SIPC isn’t the same as FDIC).

Betterment opened it’s virtual doors in May of 2010. It was founded back in 2007 by Jon Stein, former bank industry consultant turned Chartered Financial Analyst and Columbia Business School graduate. Jon has a “young entrepreneur” beard like yours truly. I like that.

The main dashboard of my Betterment account.

How to Invest with Betterment

This is where Betterment is very different from a traditional brokerage. After you open a Betterment account and connect a bank account, you choose your investing goal and timeline. Then you choose your asset allocation.

At that point, Betterment basically takes over and handles the rest. You are free to move on and let Betterment do their work. They invest your money in a mix of six stock Exchange Traded Funds (ETFs) and/or two treasury bond ETFs.  If you set up an automatic investing transfer (highly recommended) then Betterment will pull the money each month and invest it using the original asset allocation.

They also periodically re-balance your investments so that you maintain the proper asset allocation. To manage all of this for you they charge a fee of 0.3% to 0.9% 0.15% to 0.35%, depending on your account balance. There are no others fees that Betterment charges, and there are also no minimum balance or investing requirements.

Note that if you want a level of service that your minimum balance does not afford, you can pay a monthly fee in lieu of the % fee.

My Thoughts on Betterment

• Betterment is not a savings account - It is an investing account. There is a difference. With Betterment you are investing in the stock market, and your money is at risk. To suggest that this should replace your online savings account with a broker account is to ignore the fundamental purpose of a savings account: security.

Savings accounts provide FDIC insurance, and their return is not reliant on market fluctuations. Savings accounts have a return which can never be negative. You will never lose your money with a savings account at Capital One 360.  Betterment has chosen to market their account as an alternative to a savings account. I wish they would choose not to market themselves this way. But they have indicated that they are specifically targeting the online savings account crowd.

Let’s hope this means that they are targeting people with excess cash in their online savings account (i.e. people who can afford a little risk), but who have yet to embrace the stock market. If that’s the case, then I think they should just come out and say that.

• Betterment is too simple according to some - Active, sophisticated traders will say that it dumbs down investing and does nothing to educate investors. I don’t have an issue with their simplicity, nor do I think that their website is lacking in financial education.

They lay out their philosophy very clearly on the site. They also provide details about each of the ETFs that they use to build your portfolio. I’m a firm believer that you can’t consistently beat the stock market. I certainly don’t give a rip about active trading. It’s like gambling to me.

Simple, passive investing is my friend, and not enough people use it to help grow their investments. Too many people are trying to day trade, or worse, not investing at all. Betterment helps to bring more people on-board to the passive investing style that I’ve come to understand and respect.

However, Betterment is admittedly still missing a couple of piece of the simple investing philosophy: keeping taxes low and offering international exposure. They have made mention of offering IRAs in the future, but at this point they don’t offer that. The beginning investor should be starting with an IRA, not a taxable account in my opinion. Likewise, they have stated that they plan to eventually bring in foreign ETFs, but they currently do not offer any.

Betterment now offers retirement investing through traditional and Roth IRAs, as well as the option to do a 401K or IRA Rollover. They also offer international funds.

• Betterment used to be considered pricey – At their old price point, it was easy to beat Betterment by going to a low cost ETF provider like Vanguard. But now that the fee structure has been lowered, they are very competitive. When you consider that you could go to Vanguard and invest in similar ETFs for less than 0.2%. I personally go to Vanguard and invest in their target-date funds (which also re-balance) and I pay less than about the same that I would pay with Betterment.

What Betterment is counting on though is that the Vanguard account and choice of funds are too complex for some investors. Which it is, I guess. The statistics show that not enough people are investing in their future.

I see that as evidence that the investing services industry has not provided an effective solution for all potential investors. I’ll be the first to tell you to avoid fees in investing, but I’d rather see someone investing, then not because someone hasn’t provided a simple enough solution to investing (even if it costs a bit more).

What I love about Betterment

• It’s very easy to use. Literally anyone can get up and running with these guys in like 5 minutes.
• They limit their fund choices to arguably the best choices for the passive investor: broad index-based ETFs.
• They highly encourage automated investing, the best way to ensure you keep investing.
• They offer retirement investing through IRAs.
• They promote the idea of passive, long-term investing.
• They are transparent about their fees, and they keep fees simple.
• They are highly liquid. You can move your money in and out of the brokerage without fees.

Who Should Use Betterment

If you aren’t investing at all, consider Betterment. If you don’t have an IRA, consider Betterment. If you’re looking for a place to Rollover your 401K or existing IRA, consider Betterment. If you’re already doing passive investing with ETFs, compare your expenses with the fees Betterment has. Give them a try today and take advantage of the $25 bonus.

*It’s my understanding that at the 60 day mark you can withdraw your funds (the $25 and the $250) without fee or penalty.