Review: My Experience with robo-advisor betterment

I’ve made my career in investing. I opened my first investment account at the age of 16 and spent almost eight years on Wall Street as an equity research analyst and as a Vice President investment analyst at a hedge fund after college, investing large sums of other people’s money. While I now focus on financial education full-time, that experience made two things abundantly clear to me.

First, fees matter.

Second, the simpler it is for people to save and invest, the more likely they will.

Those guidelines are what led me to take a look at Betterment®.

Ironically, most professional investors are limited in how they can invest their own money. So, when I needed to roll my 401(k) into an IRA, I needed to find somewhere to stash my funds that was in line with my two essential guidelines, as well as my company’s compliance policies. After hearing great things about Betterment, I wanted to test it out. While I managed most of my assets myself, I wanted to see what Betterment could do.

Robo-advising is a relatively new phenomenon that is dependent on sophisticated technology and algorithms. It piqued my interest. For a small fee, a robo-advisor could theoretically remove human error and emotion from investing, potentially reducing the chance for costly mistakes that investors often make. I gave it a year trial, and here’s what I found.

What is Betterment?

Betterment is a robo-advisor. That’s a fancy way of saying it uses computers to invest your money for you. The company was founded in 2008 and is the largest independent online financial advisor based on assets under management and the first to exceed $10 billion in invested assets in 2017.

Betterment uses portfolio theory to align your investments with your goals and risk tolerance – which they gather from a quick online questionnaire. They need to know when you think you’ll need the assets from your investment and whether you can stomach the roller coaster ride of the stock market.

Does Betterment make investing less hard?

I consider the most significant value of Betterment, and other robo-advisors like it, the ability to put your investments on autopilot. You can set up auto deposits from your checking account or direct deposit; then Betterment keeps your portfolio balanced, in line with your investment objectives and tracking progress towards your goals. It is genuinely hands-off investing. That said, whether you’re using a robo advisor like Betterment or a real person to help manage your investments, you should always carefully monitor your portfolio.

Betterment has no minimum investment. Which means even if you have $5 to invest, you can get started today. The low threshold to get started is an important feature when time is your most valuable asset as an investor. And because Betterment currently offers affordable, flat management fees (as of July 2018, fees start at 0.25%), you don’t have to worry about costs eating away at your small account.

Betterment’s app gives you direct access to CERTIFIED FINANCIAL PLANNER™ professionals. You need to be on their Premium plan, for a slightly higher fee, to talk to these professionals on the phone. Any customer can send them questions via the app any time. This can be a really helpful feature when a life event or the current market environment has you wondering what to do with your portfolio.

How Betterment works

Betterment has two levels of service – Betterment Digital and Betterment Premium. They offer a few investment account types, including individual and joint accounts; Roth, traditional, SEP, and rollover IRAs; and trusts.

Betterment’s main offering is its Digital Plan with the Betterment Portfolio, their core investment option. The company offers a variety of portfolio options based on your goals and risk tolerance. Your portfolio can include a broad range of investment options.

As changes occur in the market, or as you add money to your account, Betterment will rebalance your portfolio to keep it aligned with your investment objectives. This strategy is designed to hold your risk level steady. One of the things that hurt investors in the Great Recession was a lack of rebalancing. Over time, the potential increased for portfolios to become misaligned with investors’ original objectives and risk tolerance. For many, it meant that they ended up with riskier portfolios than they meant to during the downturn. Robo-advisors like Betterment can help you from being caught unawares. But one caution: while investing in a diversified portfolio and rebalancing it periodically is intended to manage risk, this cannot eliminate the risk of investment loss nor ensure a profit.

If you have taxable investments (investments that aren’t in a tax-deferred account like an IRA), Betterment will work to minimize the amount you owe to Uncle Sam. It does this through “tax-loss harvesting.” When Betterment goes to rebalance your portfolio, or you want to withdraw your investments, it looks to offset sales of assets that have gains with assets that have losses. The net gain is what gets taxed, so reducing that number can lower your tax bill.

You can stay up-to-date on progress towards your goals, set up automatic deposits, and submit questions to Betterment’s CFP® professionals via their easy-to-use app. They also have a feature that permits you to link other investment accounts to Betterment’s platform to get a complete view of your progress and performance.

Betterment management fees

Betterment employs a very simple and straightforward formula for its management fee, which is relatively affordable. With larger account sizes, you can opt for Betterment Premium and get unlimited phone access to the company’s CERTIFIED FINANCIAL PLANNER™ professionals. The management fee for this plan is higher, but can still be less, annually, than the cost of a private consultation with an independent financial advisor. Just keep in mind that the scope of what these CERTIFIED FINANCIAL PLANNER™ professionals can offer you is limited to your Betterment account unless you choose their Premium Plan, where you can sync outside accounts for a more complete picture. The premium plan involves a higher fee and minimum balance requirements apply.

Betterment competitors

Since Betterment entered the market in 2008, other robo-advisors have appeared on the scene. The company’s biggest competitor is Wealthfront®, which was founded in the same year and manages $10 billion in assets as of March 2018. Other robo-advisors include Wealthsimple®, Ellevest, WiseBanyan®, Personal Capital®, and Stash®. Some traditional investment companies, like Vanguard® and Charles Schwab®, also offer robo-advisor services. And there are micro-investment services like Acorns®.

Why you might want to consider a robo-advisor like Betterment

At the end of 2017, I moved my Betterment IRA back to Vanguard. I enjoy self-managing my investments, and while Betterment offers an excellent service, I prefer putting the would-be fee back in with the rest of my funds.

There are some attractive features to a robo-advisor like Betterment that investors – especially those who don’t have insider knowledge of investing – may want to consider:

Low-cost management: With a low flat fee, Betterment offers professional investment management at a significantly lower cost than a traditional advisor. Fees matter.
Hands-off investing: It is easy to say “buy low, sell high” but the reality is different. Emotion comes into play, and many, many studies show that most people do the opposite. Betterment allows you to set up automatic investments and put the short-term moves of the market out of your mind.
Access to advisors: Many robo-advisors don’t offer access to an investment professional. Sure, a time-tested strategy is built-in. But if you have a question, you’re out of luck. With Betterment, you can submit your questions on the app.

Who might benefit more from other options

Betterment may not be suited for investors that have large taxable investments. These investors might be better aligned with a robo-advisor that offers more complex tax minimization strategies, such as Wealthfront. Alternatively, you may prefer face-to-face advice from an investment advisor, rather than relying on a computer model. Those who are comfortable self-managing their investments and rebalancing frequently may want to consider a traditional fund provider that offers some lower-cost options like Vanguard, Fidelity, or Charles Schwab over a robo-advisor.

Betterment can make investing seem less daunting and helps to match goals well with risk. Whether you’re new to investing and worried you don’t have enough money to get started or an established investor who wants to spend less time dabbling in your investments, you may want to consider a robo-advisor like Betterment.

Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, and more.

Haven Life Insurance Agency offers this as educational information. Haven Life does not offer investment or tax advice and encourages you to seek advice from your own legal counsel, investment advisor, or tax professional.

“Betterment” is a registered trademark of Betterment Holdings, Inc.

“Wealthfront” is a registered trademark of Wealthfront, Inc.

“Wealthsimple” is a registered trademark of Wealthsimple, Inc.

“Ellevest” is a registered trademark of Ellevate Financial, Inc.

“WiseBanyan” is a registered trademark of WiseBanyan, Inc.

“Personal Capital” is a registered trademark of Personal Capital Corporation

“Stash” is a registered trademark of Stash Financial, Inc.

“Vanguard” is a registered trademark of The Vanguard Group, Inc.

“Charles Schwab” is a registered trademark of Charles Schwab & Co., Inc.

“Acorns” is a registered trademark of Acorns Grow, Inc.

Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. All investments carry a degree of risk. While modern portfolio theory is a generally accepted strategy to manage risk through asset allocation across a diverse set of investment options, this strategy cannot ensure a profit or guarantee against loss. Past performance of any investment, portfolio, or strategy is no guarantee of future results.