Betterment Review 2022 – Is This the Best Robo-Advisor for Beginners?

Betterment Review 2022 | Is This the Best Robo-Advisor for Beginners?

What is Betterment?

Launched in 2008, Betterment is the first widely available robo-advisor, and it’s risen to be a popular option for hands-off investors. Betterment is very much a set-it-and-forget-it approach to investing, which is ideal for investors who want to take a fully automated approach.

The way Betterment automates your investments is through its robo-advisor model. You tell Betterment what your financial goals are and timeline — retirement, buying a new house next year, planning a vacation for this summer, etc. — and Betterment recommends a portfolio and savings strategy to help you reach those goals.

Betterment uses Modern Portfolio Theory (MPT) to build its portfolios, which Nobel Prize-winning economist Harry Markowitz created. MPT maximizes your returns while lowering your risk, which is all about investing in a diverse portfolio.

What sets Betterment apart from some robo-advisors is that they offer paid financial planning services with human advisors if you ever want it. Betterment also has cash management services.

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How much does Betterment cost?

Betterment has two tiers of services, Betterment Digital and Betterment Premium. Both charge management fees that are a percentage of assets under management. Here’s how they compare:

• Betterment Digital is 0.25% annually and no account minimum. You’ll have access to Betterment’s online tools and resources, and once you hit $2 million in your account, these fees drop to 0.15%.
• Betterment Premium is 0.40% annually, and there is a $100,000 account minimum. This plan comes with unlimited access to Betterment’s Certified Financial Planners. These advisors are fiduciaries and can offer advice on accounts held both in and outside of Betterment. When your balance hits $2 million, Premium fees drop to 0.30%.

Paying a percentage of assets under management versus a flat subscription fee (how competitors Acorns and Stash charge) is good when you have a low account balance. But once your account starts to grow, you can end up paying hundreds of dollars over the year. 

Don’t let that deter you — Betterment still has very low management fees overall. Remember, you’re paying for a service, including robo-advisor features like automatic rebalancing and tax-loss harvesting. Those help you stay on track for your goals and save money over time, and they can be hard to do on your own.

Betterment features

No minimum deposits

There’s no account minimum to start using Betterment Digital, and because Betterment invests your money in fractional shares of ETFs, there’s no cash drag in your account. 

There is a $100,000 minimum if you want Betterment Premium. That service is for high-net-worth investors who want financial planning advice on their Betterment portfolio and investments held outside of Betterment.

Goal-based savings

Betterment’s sign-up process takes you through a series of questions that helps you set up some financial goals and start saving for them. There are currently five different types of goals you can set: retirement savings, retirement income, safety net, major purchase, and general investing.

Betterment recommends the best type of investment account and asset allocation for each of your goals and timeline. A retirement saving goal, for example, could be to set up a Traditional, Roth, or SEP IRA. Betterment uses your age and how much you’d like to save for retirement to determine the best asset allocation for retirement savings.

Every goal you want to save for is set up as a separate investment account that comes with its own recommended target and asset allocation, and you can adjust and personalize these over time. You’re also in control of how each goal is funded, through one-time deposits or auto-deposits.

Betterment lets you transfer money between goals or your Betterment high-yield savings account.

Betterment’s portfolios

Betterment has several portfolios designed for investors to give you the best performance possible. Again, the asset allocation in your portfolio — the percentage of stocks to bonds — is recommended based on your goals and timeline. 

Betterment’s Core Portfolio is a mix of Vanguard stock and bond ETFs, including the following (the first ticker symbol for each class is the primary ETF, and secondary ETFs enable tax-loss harvesting):

• U.S. Total Stock Market: VTI, SCHB, ITOT
• U.S. Value Stocks - Large Cap: VTV, SCHV, IVE
• U.S. Value Stocks - Mid Cap: VOE, IWS, IJJ
• U.S. Value Stocks - Small Cap: VBR, IWN, SLYV
• International Developed Markets: VEA, SCHF, IEFA
• International Emerging Market Stock: VWO, IEMG, SPEM
• U.S. High Quality Bonds: AGG, BND
• U.S. Municipal Bonds: MUB, TFI
• U.S. Inflation-Protected Bonds: VTIP
• U.S. High-Yield Corporate Bonds: HYLB, JNK, HYG
• U.S. Short-Term Treasury Bonds: SHV
• U.S. Short-Term Investment-Grade Bond: JPST
• International Developed Market Bonds: BNDX
• International Emerging Market Bonds: EMB, VWOB, PCY

The BlackRock Target Income Portfolio is recommended for retirees looking for a stable retirement income, or those looking to protect their retirement savings. It’s a lower-risk portfolio made up of 100% bond ETFs, and there are four risk levels to choose from.

Goldman Sachs Smart Beta Portfolio is another option for retirement inventors who want a low-risk option. It’s also 100% bonds, and gives investors higher returns by avoiding market capitalization weighting in equity asset classes. Smart Beta is a slightly riskier approach for retirement-age investors, but it has the potential for higher returns.

For investors with $100,000 or more, Flexible Portfolios allows investors to adjust individual asset class weights. Betterment’s Portfolio Analysis tool makes recommendations, and you can still access tax strategies (more on that further down in my Betterment review). 

Betterment also has three socially responsible investing portfolios that align with environmental, social, and governance (ESG) standards set by MSCI. Here’s a list of Betterment’s SRI portfolios:

• Broad Impact Portfolio: Focuses on ETFs that consider all three ESG pillars: environmental, social, and governance. 
• Climate Impact: Heavier focus on environmentally conscious funds that support alternative energy, pollution prevention and control, sustainable water, and more.
• Social Impact: Includes stock ETFs that focus on diversity and inclusion.

Retirement planning

Betterment’s retirement planning tool lets you link up non-Betterment accounts, like your work 401k, to get a complete picture of your savings. This gives you a comprehensive view of what retirement will look like, and even considers your desired retirement spending levels. You’ll see if you’re saving enough and whether or not you’re saving in the right ways.

Financial planning packages

Betterment gives you the option to speak with a certified financial planner in one of five different financial planning packages. They start at $299 for a 45 minute “getting started” call with a Betterment certified financial advisor that helps you set up your accounts and get full use of Betterment’s services.

The other packages are $399 for a 60-minute call and focus on retirement planning, marriage planning, college planning, and a financial check-up. 

Checking and savings

Betterment Checking is an online checking account with $0 fees (no minimum balance fees, maintenance fees, ATM fees, or overdraft fees). It comes with a Visa debit card, that earns cash back at thousands of retailers nationwide. 

Cash Reserve is a Betterment high-yield savings account. It’s a no-fee account that pays 0.10% APY. Cash Reserve lets you set individual savings goals in the account, and you can keep track of your progress towards each of them in the app.

Two-Way Sweep

Two-Way Sweep is a feature that analyzes what’s in your linked checking account (even if you’re not using Betterment’s checking account) and finds an excess, and sweeps it into a Betterment Cash Reserve account. It works the other way, too — sweeping money from savings to checking if your checking balance is running low.

You can set a target balance and alerts for the Two-Way Sweep, and you can turn it off. The idea is to get extra cash in savings and earning some interest.

Tax strategies

All Betterment accounts qualify for tax-loss harvesting to help you lower your tax bill, but you do have to enable it when you set up your account. Betterment also lets you donate shares to charities, and if you do that with appreciating assets, you can avoid some capital gains taxes. Betterment will even help you figure out which assets are best to donate.

How does Betterment make money?

Betterment makes most of its money from robo-advisor management fees. These fees are 0.25% for Betterment Digital and 0.40% for Betterment Premium.

Betterment has over $22 million assets under management, so those management fees add up.

This robo-advisor also makes money from financial advice packages, and those run $299-$399 for each call. And Betterment makes a little money from anytime a customer swipes their Betterment Visa debit card. 

How brokerages make money turned into a hot topic after investors learned about potential conflicts of interest with how Robinhood makes money. The biggest issue is over payment for order flow (PFOF) — when a brokerage earns income from routing orders through a high-frequency trading firm. It’s a legit practice if a brokerage discloses it.

Here’s what Betterment says about PFOF: “Apex does not pay Betterment Securities or any of its affiliates for order flow payments and rebates received by Apex on Betterment Securities’s orders.” Apex is the clearing firm Betterment and many other brokerages use.

Betterment vs. other robo advisors

Acorns vs. Betterment

• Acorns funds your investment account with round-ups, multipliers, and Found Money — this is more of the spare change or micro-investing model.
• Betterment gives you a wider range of investments.
• Both brokerages offer the same types of investment accounts, plus checking and savings.
• Because of the fee structures, Acorns is more expensive for low balances, while Betterment is slightly higher for larger balances.
• Betterment gives you the option to get advice from real advisors. Acorns doesn’t.

Learn more in Betterment vs. Acorns | Which Robo-Advisor is Best in 2022?

Betterment vs. Wealthfront

• Wealthfront has a few more account options, including 529 college savings plans.
• Betterment doesn’t have account minimums, but Wealthfront has a $500 minimum.
• Wealthfront offers REITs, and Betterment doesn’t.
• Both robo-advisors offer tax-loss harvesting.
• Unless you choose Betterment Premium, both have the same 0.25% fee.

Learn more at Betterment vs. Wealthfront: Which Robo-Advisor Is Best?

Betterment pros & cons

Betterment Review 2022 — the final word

Betterment is a low-cost approach that’s good for investors who want some help figuring out how and where to invest their money. A lot of investors like Betterment because it helps you set goals, and then tells you exactly what you need to do to get there. That’s big. 

Now, Betterment can’t make you reach those goals — you’ve still got to fund your account, and that can mean doing things like making more money with a side hustle. But Betterment gives you the tools to make your goals a reality.