Betterment Review




My Betterment Review

I’ve had a number of friends rave about Betterment.com, suggesting that I should do a review of the online investment broker here on 20somethingfinance.com for their ease of use and simplicity for beginning and even experienced investors.

I’ve also seen a number of other personal finance bloggers jump on the Betterment fan club pretty early on.

Their claims to fandom have typically revolved around:

  1. Betterment makes investing for common folk easy. Just add your funds, choose your risk level, and voila!
  2. You don’t have to re-balance, they do it for you. This is a good benefit – how many of us strictly re-balance our portfolios?
  3. There are no additional trading fees for re-balancing or adding or subtracting from your balance.
  4. It has a very easy to use interface, much easier than traditional brokers.

So, I decided to do a full Betterment review.

What is Betterment?

betterment reviewBefore I go on, I should first explain what Betterment is. Betterment is an investment broker and registered investment adviser.

Much like other investment firms, Betterment has a $500,000 SIPC insurance guarantee on each individual’s balance (in the event of fraud or their business going under, not on investment returns).

Betterment differentiates itself from other online brokers in the following ways:

  1. They have an easy to use interface where you choose your risk level and they allocate the funds for you.
  2. The have no trading fees and re-allocate (re-balance) your investments for you.
  3. They only invest in low-cost ETF’s.

It’s a pretty good value-prop.




I wasn’t Feeling the Betterment Love

Despite the strong value proposition, prior to some recent updates (which I’ll get to in a bit), I just wasn’t feeling the love. Betterment was not appealing to me for three big reasons:

#1: You couldn’t open an IRA with Betterment as a new investor.

A lot of my savings funds are in retirement accounts and I like to to focus on high dividend investments in my taxable accounts.

Without IRA’s, I didn’t have much reason to start an account with Betterment.

#2: Betterment’s fees were high.

Fees ranged from 0.3% to 0.9% depending on investment level. Not bad if you compare that to expense ratios of mutual fund alternatives.

What my friends and I think a lot of the fans failed to see was that these expenses were on top of the expense ratios of the ETF’s (which are low with an average under 0.2%) that Betterment invests in as part of their portfolios.

Betterment’s fee structure was:

  • Balances under $25,000 = 0.9% annually
  • Balances over $25,000 = 0.7% annually
  • Balances over $100,000 = 0.5% annually
  • Balances over $500,000 = 0.3% annually

Those ETF’s could be traded in and out of for free with a commission-free ETF online broker. For an experienced and disciplined investor, most folks were paying 0.9% extra on top of something you could do for free with a decent amount of effort and determination.

#3: Betterment’s foreign stock allocation was ZERO.

100% of the ETF’s Betterment chose to invest in were domestic stock ETF’s. There was ZERO international exposure. This mean’s you had no choice but to put all of your eggs in the U.S. basket. If you’ve paid any attention to our economy over the last four years, you’d probably be a little concerned about this lack of diversification.

How Betterment has Improved Pricing and Features

Each of the above three complaints were a deal killer for me. But all three paired together? I ripped in to my friends for even suggesting it.

Betterment has since gone on to address each of their biggest downsides:

#1: Betterment now offers IRA’s for new customers.

New Betterment customers can sign up immediately for IRA’s now. I have a few IRA accounts just sitting around with low balances that I don’t actively manage and re-balance that I could easily move over.

#2: Betterment has SIGNIFICANTLY lowered their fees.

Whereas the Betterment fee structure used to be:

  • Balances under $25,000 = 0.9% annually
  • Balances over $25,000 = 0.7% annually
  • Balances over $100,000 = 0.5% annually
  • Balances over $500,000 = 0.3% annually

They have now lowered their fees significantly from 0.15% to 0.35% maximum with three different fee classes:

betterment

So, if I hypothetically invested $15,000 with Betterment in a year:

  • Previously, my annual expense would have been $135.
  • Presently, my annual expense would be $37.50, which is comparable to about 4-5 trades at most online brokers.

For automatic re-balancing and new buys/sells with no trading fees? I can stomach that. This is cheaper than target date mutual funds that do something similar without you having to add funds.

Additionally, Betterment feels that their tax loss harvesting capabilities can potentially save investors thousands per year – more than making up for the cost of the expense ratio.

#3: Betterment’s foreign stock allocation is up to 54%.

I give credit to Betterment for increasing their foreign stock allocation from 0% to 54% (a combination of Vanguard’s VEA and VWO) with a 100% stock allocation portfolio (almost three times the stodgy old financial institution 20% recommendation)! This is in line with Vanguard’s international equity allocation.

Here is the breakdown of Betterment investment allocations.

There are 10 stock ETF’s:

  • VTI: Vanguard Total Stock Market ETF
  • IVE: iShares S&P 500 Value Index ETF
  • VTV: Vanguard U.S. Large Cap Value Index ETF
  • IWS: iShares Russell U.S. Mid Cap Index ETF
  • VOE: Vanguard U.S. Mid Cap Value Index ETF
  • VBR: Vanguard U.S. Small Cap Value Index ETF
  • VEA: Vanguard FTSE Developed Market Index ETF
  • SCHF: Schwab International Equity Index ETF
  • VWO: Vanguard FTSE Emerging Markets Index ETF
  • IEMG: iShares Core MSCI Emerging Markets Index ETF

And 8 bond ETF’s:

  • SHV: iShares Short-Term Treasury Bond Index
  • VTIP: Vanguard Short-Term Inflation Protected Treasury Bond Index
  • BND: Vanguard U.S. Total Bond Market Index (IRA) or MUB: iShares U.S. National AMT-free Muni Bond Index
  • MUB: iShares National AMT-Free Muni Bond Index ETF
  • NYF: iShares New York Muni Bond ETF
  • LQD: iShares Corporate Bond Index
  • BNDX: Vanguard Total International Bond Index
  • VWOB: Vanguard Emerging Markets Government Bond Index

Feedback to Betterment: I think this is actually a pretty darn good breakdown of ETF’s, however, I’d love to see a real-estate option (VNQ has a 0.10% expense ratio) and possibly some high-dividend yield ETF’s to add further diversification. Much like with your stock vs. bonds sliding scale, I’d also love to see a international vs. domestic sliding scale on stocks.

With your bond offerings, I’d like to see some higher yield junk bonds mixed in.

Betterment Review Discussion:

Given these changes, I am going to pull the trigger on giving giving Betterment a try a try with one of my lower value IRA’s. If I’m impressed with the service, I may potentially move more over. Look for more on my experiences in an upcoming post.

  • How would you review Betterment?
  • What is your Betterment wish list?

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