Betterment has been on a growth trajectory. A year ago or so Betterment ads started to appear on New York City taxi cabs. A recent visit to their website shows a substantial staff including investment pros in various disciplines including hires from Goldman Sachs and other respected firms.
The gist of Betterment is that you transfer money to Betterment to invest for you. They charge a very low, attractively priced management fee based on the size of the portfolio. Their investment strategy is publicized as being based on Nobel-Prize winning ideas. But this essentially boils down to the same passive index-fund based strategies touted by the other firms in this space. Their specific strategy is likely not very unique to Betterment.
Betterment is a great auto-pilot investment system. Betterment will withdraw funds from your account on a regular interval, invest the money,and rebalance your account as needed to ensure your stay within the appropriate asset allocations. There are no extra trading fees, account management or other hassles.
The only external account information they link to is a checking account. In analyzing your overall portfolio in light of goals, they can also factor in external accounts. However, they do not trade from existing accounts or offer a service to guide your selections for you to self-trade.
I can see this service being a great option for anyone wanting to invest in an age-based risk appropriate portfolio especially for the majority of folks who don’t want to be concerned with the day to day gyrations of stock market. Investors using Betterment will see drops when the market inevitably has setbacks. This is true of any investment strategy managed by any firm. The difference is that results from using a firm that follows passive index-fund strategies are almost always better in the long run compared to not investing at all or investing in select stock funds.
For folks who are more seasoned, or later stage, the service could be a hard sell. For example, I’ve been with Fidelity for a very long time. My employer’s 401K and option plans are linked to Fidelity. So I get a one-stop shop to see my portfolio. Fidelity has great tools that while I don’t use them frequently, I do occasionally go beyond looking at account summaries. To close my accounts, transfer my funds to Betterment seems like a lot of trouble especially for yet another passive index-fund strategy.
Betterment touts ‘Tax Loss Harvesting’ in their investment strategy. This is an option Betterment provides to further enhance performance of the portfolio. Essentially, Betterment will sell a position that experiences a loss and replace it with a near identical fund and then take advantage of the loss to offset taxes or gains.There are times when this should not be done. Betterment provides guidelines on when to use this option. But it is a way to get more micro gains which eventually will add up to a larger portfolio size in the future. This is a significant differentiator. It also shows that the team is doing some ‘active’ management with passive positions and therefore providing added services beyond vanilla asset allocation with occasional rebalancing.
Betterment’s main advantage is their very reasonable management fees in light of what you get: portfolio recommendations, performance dashboards, auto-deposits to your Betterment account from your checking account, and all the trading and rebalancing needed to keep your portfolio in check.
I have to assume that given Betterment’s funding, hiring, and quality staff, that more features are in the works. For now, I have reviewed the offering based on my 30-day trial as of July 2015.
Set-up
First step is to indicate your goals. Depending on the goal, your age, current liquid net worth and other parameters, Betterment will determine the best portfolio allocation per goal type. There are numerous goal types to choose from:
In the above, I selected ‘Education’ to set up a college goal for my toddler.
Next step, is to fill in some basic info on the desired financial target. (It would have been nice if this wizard was more detailed helping to determine a suggested target amount based on type of university and tuition rate for when my daughter goes to college in 2031.)
2
Based on my inputs, Betterment determines the suggested portfolio.
The next step is to fund the goal. Betterment will connect to your banking institution so you can make deposits into Betterment. Both auto-deposits on a set periodic basis or one time transfers are supported.
As shown below, based on your planned contributions, Betterment will indicate you likelihood to reach your goals. If your contributions are too low, Betterment will indicate what you need to do make up the difference.
You will need to fund the goal. In the screen below, you’ll specify the withdrawal amount and date from your checking account.
You can track performance of the goal compared to other Betterment portfolios and also standard benchmark indexes such as S&P 500.
Instead of viewing ‘accounts’, you view your goals to understand how you’re tracking to those goals. So you would go through the same process as above for each goal (retirement, saving for a house, education, etc.)
Performance
The most important question for most investors is performance. Betterment’s performance overview is provided here: https://www.betterment.com/portfolio/
Companies such as Betterment are too young to have any meaningful historical data. Betterment relies on backtesting which essentially models their current portfolio from earlier dates (even before Betterment was founded) and projects how the portfolio would have hypothetically performed.
As with any company substantiating results, information has to be provided in ways to show the value of the service. In Betterment’s case, their results are compared to traditional financial advisors. The main variable is the fees. It’s not discernible how much of the performance is actually driven off of Betterment’s ETF allocation strategy versus simply the added fees you would pay for a traditional advisor. Given the passive nature of index investing, I would have to assume that most of these strategies are very comparable.
Pricing
Pricing is simply a percentage of the portfolio balance that Betterment is managing. The most you invest, the lower the overall percentage. Pricing is summarized below:
Conclusions
Betterment is a great solution for anyone wanting a set-it and forget it strategy to manage investments for a variety of goals. There is a very low flat fee across all your goals.
The main obstacle to get over for any investor with funds invested in other firms such as brokerages, is to transfer the money to Betterment. Unlike other services, they won’t manage your money in other accounts and this could prevent more established investors from going through the trouble of moving to Betterment.
Betterment has all the right certifications, credentials and security mechanisms in place to ensure your money is protected. So this shouldn’t be a major concern.
Also as I have mentioned before, passive index-fund investing is not rocket science not does require frequent trades. A few trades a month at most is all that’s needed. So the task of self-management is not very hard. However, Betterment’s fees are very reasonable. For a 100K portfolio, the annual fee for Betterment is $150 per year. Some of the advisory services I have reviewed earlier charge that much just for recommendations. $150 to get all the trades covered and save the hassle of trading is a great deal. So while the investment strategy may be fairly standard, the low fees are the real selling point. In my opinion, getting the management and trading hassles (even if infrequent) covered for a very low fee, make Betterment a great value.
The Real Money Story 