Update: This comprehensive review now includes the latest on the revolutionary personal investing service, Betterment.
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 six free months to new users who open up an account with at least $100,000 and keep their accounts withdrawal free for 90 days*.
They claim to have built an online broker site just as easy to use (and as liquid) as your online savings account.
Betterment is a real game-changer. With over 175,000 customers and more than $5 billion under its management, Betterment is making its revolutionary concept accessible to investors.
Here are the details:
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 its 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.
More Betterment Review Information
Fees – Back in the day, Betterment used to charge 0.3% to 0.9%, depending on your account balance. Now they are charging from 0.15% to 0.35% (this is on top of investment expenses). They categorize their fees based on the type of user you are: “Builder,” “Better,” and “Best.” Here’s the visual:
At a flat 0.15%, Betterment is competing more directly with the likes of Vanguard funds. This new pricing essentially cuts the old model in half, and then some. Kudos to Betterment for making their service more affordable.
Investors above the $100,000 minimum balance mark also qualify for next-day transfers and a custom portfolio for that flat 0.15% fee. If your balance is too low to receive the services you want, you can choose to pay a monthly fee in lieu of the percentage fee in order to access those services.
A couple of other things to point out:
- Existing customers can stay put in their old pricing plan if they want to.
- New investors can qualify for up to six months free just for signing up with a new account, depending upon your initial deposit level. An account opened with a $5,000 deposit earns you three months free, $25,000 earns you four months free, and $100,000 earns you six months free.*
*Accounts must remain withdrawal free for 90 days.
IRAs – Betterment customers can invest in an IRA (both Traditional and Roth), and the company even supports SEP IRAs and SEP 401(k)s. This means you can also rollover your 401K or existing IRA to an IRA with Betterment
In my book, the ability to invest in an IRA through Betterment is huge. As you guys know, I don’t see much use for taxable investing, so it’s definitely something I want to see in my online broker.
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 stock Exchange Traded Funds (ETFs) and/or 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.
The complete list of Betterment funds:
VTI: Vanguard Total Stock Market
IVE: iShares S&P 500 Value Index
VEA: Vanguard Europe Pacific (EAFE)
VWO: Vanguard Emerging Markets
IWS: iShares Russell Midcap Value Index
IWN: iShares Russell 2000 Value Index
TIP: iShares Barclays TIPS Bond Fund
SHY: iShares Barclays 1-3 Year Treasury Bond Fund
My Thoughts on Betterment’s Offer
- Betterment is too simple according to some – Active, sophisticated traders will say that Betterment 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.
- 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. I personally go to Vanguard and invest in their target-date funds (which also re-balance – but which force you into one of a few five year increment plans) and I pay less than 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 it’s better to have people invest with a simple solution to investing (even if it costs a bit more) rather than avoid investing because the complexity makes them nervous.
What’s to Love About Betterment
- They are built for the 21st century – slick interface with little complexity in their setup.
- 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 roll over 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.