Investing Simple is affiliated with Fundrise and Betterment. This relationship does not influence our opinion of these platforms.
As investors, we have countless options when it comes to the platforms we use to invest our hard earned money. Over the past decade, thousands of different investing and trading platforms have emerged. It can be very overwhelming to the average investor looking to make an informed decision. This is one of the main reasons why we started our blog Investing Simple. We help investors decide which platforms may fit their investment style and personal preferences. In this post, we are going to review and compare two prominent platforms; Fundrise and Betterment.
What Is Fundrise?
Fundrise is a new investing platform that allows everyday investors to invest in private real estate projects traditionally limited to high net worth individuals or accredited investors. Using the Fundrise real estate investing platform, you have the ability to have investment exposure to both commercial and residential real estate.
Here is our full review of the Fundrise investment platform.
How Does Fundrise Work?
Fundrise is a crowdfunded real estate investing platform. Similar to real estate investment trusts or partnerships, all the investors pool their money together to purchase real estate assets. These assets then produce income and/or growth and historically have provided investors with a positive return on their portion of the investment over time.
Real estate is traditionally a high barrier to entry investment, but crowdfunded real estate platforms like Fundrise have allowed average retail investors to get exposure to this asset class. You can get started with Fundrise with as little as $500!
Fundrise takes a new approach to the traditional Real Estate Investment Trust (REIT) structure. Through the use of technology, Fundrise makes it easy to fund your account, check in on projects and choose your portfolio. By leveraging a new regulation, Fundrise gives the average investor access to commercial and residential real estate with as little as $500.
The Fundrise platform offers a variety of benefits such as low account minimums and quarterly redemption periods. However, investors should understand the liquidity and time horizon of an investment in the Fundrise platform. We will discuss this in further detail throughout the article.
Fundrise offers plans to invest in different types of real estate such as income producing rental properties or growth oriented real estate developments. Fundrise offers different investment plans based on your investment objectives. You can keep track of Fundrise real estate projects within your account. Fundrise will also notify you about major developments with their projects.
The main investment objectives of Fundrise are to generate revenue from income producing properties as well as buying and selling real estate in thriving markets. As a Fundrise investor, you can choose whether you want to be in a growth-oriented portfolio or income-oriented portfolio. Income from rental payments and proceeds from flips are passed along to Fundrise investors in the form of dividend payments or distributions. In exchange, Fundrise collects a 1% fee as the investment manager.
It is important to understand that Fundrise is a private real estate investment. The Fundrise eREITs and eFunds can only be bought and sold through this platform. They are not publicly traded on a stock exchange like a publicly traded REIT.
Fundrise Investment Options & Portfolios
Fundrise allows you to choose from four professionally built real estate portfolios based on your risk and investment preferences. Some portfolios are geared towards cash flow and others focused on the growth of the underlying assets. If you invest the minimum of $500, you will be placed in the starter portfolio. The other three advanced plans require a minimum investment of $1,000.
Starter Portfolio: This portfolio is designed for new investors who would like to give Fundrise a shot. The minimum account requirement is only $500 to begin investing. This portfolio consists of 50% growth and 50% income-oriented holdings. If you want to upgrade to an advanced plan down the road, it is completely free!
Supplemental Income: This portfolio is geared toward income-producing real estate. Investors will earn returns primarily through dividends from cash flow producing real estate. Dividends are generated through rental and interest payments in proportion to your share of the fund.
Balanced Investing: This portfolio offers a blend of 50% growth and 50% income-oriented investments. The balanced investing portfolio invests in a blend of eREITs and eFunds offered by Fundrise. The goal for this portfolio is for a balance of income-generating real estate, as well as real estate that is appreciating in value.
Long Term Growth: The goal of this portfolio is to generate returns primarily from asset appreciation. This portfolio aims to purchase high growth potential real estate and generate returns mostly from the sale of the underlying properties. This includes buying property and performing renovations in order to sell the asset for a gain later.
Fundrise Technology: eREIT & eFUND
An eREIT will produce income for your portfolio in the form of dividends. Dividends are earned from the rent payments from the underlying apartment and commercial leases owned within the eREIT as well as interest payments from underlying real estate debt investments owned by Fundrise.
An eFund is a partnership created by Fundrise to be treated differently for tax reasons and to provide greater investment flexibility. Partnerships have the advantage of avoiding the double taxation of normal C-Corps. eFunds are designed in a similar way to eREITs where there is a pool of real estate investments split into shares and sold to investors. Where eREITs are designed to generate income, eFunds are geared towards growth.
Fundrise Investment Liquidity
Fundrise uses the funds you invest to purchase real estate. For this reason, there is a 60 day waiting period for withdrawing funds. There are also quarterly redemption periods.
This is why it is important to understand what you are investing in when you invest with Fundrise. Investors should aim for a long-term investment of at least 5 years in duration when investing with Fundrise. Real estate is not an investment with high liquidity and it is not for everyone!
It is important that investors understand that liquidity and distributions are never guaranteed.
Fundrise Historical Returns
Past performance does not guarantee future returns. All investing involves risk, including the potential loss of principle.
Fundrise charges a fee of 1% per year. They do not charge any other hidden fees and there is no front load fee with Fundrise. The returns shown above are the returns after Fundrise collects the 1% fee.
Pros of Investing With Fundrise
- The minimum to get started with the Starter Portfolio is $500.
- Small retail investors are able to access private real estate investments.
- Since this is a non traded REIT, it may be less correlated with the overall market.
- Fundrise has a transparent fee of 1% per year.
- This investment allows you to earn compound interest, with the option of automatically reinvesting quarterly dividends using a drip (Dividend Reinvestment Plan).
- Fundrise does not have a minimum net worth or income requirement like most private investment funds do.
- This is a 100% passive real estate investment.
- Fundrise gives you diversified exposure to real estate.
- Fundrise supports retirement accounts.
- Monthly redemption periods eliminate the temptation for panic selling.
Cons of Investing With Fundrise
- Liquidity is never guaranteed. During a downturn, liquidity may not be available as many investors will rush to sell and buyers may be few and far between.
- Distributions (dividends) are never guaranteed.
- Distributions (dividends) are taxed as ordinary income rather than capital gain rates.
- Fundrise has a limited track record of four years and not a long investment history.
Fundrise: The Bottom Line
In most cases, Fundrise is a great platform for passive investors who are looking to gain access to private real estate markets. Fundrise is also a good option for investors who are looking to diversify asset classes and have less correlation to the overall stock market.
Since you can only liquidate your positions quarterly, investors may be less tempted to actively trade in and out of positions. You can also automate your dividend reinvestment plan, allowing compound interest to build up in your account.
In most cases, Fundrise is best for investors with a minimum 5 year time horizon. Real estate is not a highly liquid investment and inexperienced investors need to take this into consideration. While Fundrise does offer a 90-day satisfaction guarantee, you should not invest if you have a short-term investing mentality.
Click here to get started with Fundrise!
What Is Betterment?
Betterment is an online roboadvisor geared towards everyday investors who want automation of their investments paired with personalized financial advice. Through the use of technology, Betterment is able to offer management fees that are extremely competitive compared to the industry average. Refined investing strategies such as tax loss harvesting and smart rebalancing are some of the many features offered by Betterment.
Betterment also offers ongoing financial guidance. Depending on the plan, investors can have unlimited access to professional financial advice from CFP® professionals. Since Betterment and its professionals are fiduciary advisors, they must act in the clients best interest at all times. Betterment advisors have no incentive to sell products or funds hoping to make a commission off your purchase. A fiduciary duty is the legal obligation to act in the clients best interest at all times and is the highest level of customer care in the investment advisor community.
What Is A Robo Advisor?
A robo advisor is a new technology based financial advisor that advises clients and manages accounts with minimal human interaction. This is capable through the use of algorithms and technology. Financial advice is provided based on mathematical rules and programs. This results in a lower management fee and significant cost savings for the investor.
How Does Betterment Work?
Each Betterment account is tailored to the needs of the individual investor. When you open an account with Betterment, you will be guided through a questionnaire where Betterment will learn more about your goals and objectives.
Here is the process for every new investor using Betterment:
1. Learn about the investor. Using a series of questions, Betterment determines your current financial landscape. By understanding your goals, time horizon, and personality Betterment gets an overall picture of where you currently stand and what you are trying to accomplish financially.
2. Make recommendations. Once Betterment has an understanding of your overall financial picture, they will guide you through a path customized to your specific situation. Betterment will suggest portfolios geared towards your risk tolerance, time horizon, and investment objectives.
3. Invest using cutting edge technology. Using personalized portfolios of stock and bond ETFs, investing is streamlined so you don’t need to worry about the management of your investments. Betterment’s portfolios are focused around minimization of both investment fees and taxes.
What Are The Betterment Investments?
Betterment uses exchange-traded funds (ETFs) to build the portfolios. ETFs are investment vehicles similar to mutual funds, but they trade on a major exchange like a stock.
ETFs have grown tremendously in popularity over the last 20 years in the investment community due to the low fees and high liquidity. ETFs provide diverse positions where one fund could be trading at $50 per share yet it can have hundreds of underlying holdings. ETFs allow you to invest in many different asset classes such as stocks, bonds, real estate, and commodities. By using ETFs, Betterment can construct cost-effective and diversified portfolios with ease.
Most of the ETFs in Betterment’s professionally built portfolios are from the Vanguard fund company. Vanguard is one of the most well known mutual fund and ETF companies. Known for very low fees and the invention of the index fund, Vanguard has dominated the fund industry with over $5 trillion in assets throughout its funds. Betterment uses Vanguard funds mostly because of their low expense ratios and excellent reputation.
Here are some of the Vanguard funds included throughout Betterment’s portfolios:
VTI – US Total Stock Market
VTV – US Large Cap Value
VOE – US Mid Cap Value
VBR – US Small Cap Value
VEA – Developed International
VWO – Emerging Market Stocks
Betterment also includes a number of bond funds offered by Vanguard. Each Betterment portfolio will consist of a collection of stocks and bonds.
Betterment Custom Portfolios
Betterment also offers custom portfolios constructed by Goldman Sachs. The Goldman Sachs Smart Beta portfolio aims to provide a diversified portfolio strategy using a balance of actively and passively managed investments. Active portfolio management typically has the goal of beating the market, often associated with hedge funds and mutual funds. Passive management has the goal of generating market returns over the long term. Index investing and buy and hold strategies are associated with passive management.
Goldman’s Smart Beta uses a variety of factors to determine investment allocations across its portfolio. Some of these factors include equities consisting of good value, high quality, strong momentum and low volatility characteristics. Contrary to traditional portfolio allocations that are based on market cap weighted indices, Smart Beta uses a variety of rules based factors that determine allocations across the portfolio. The Smart Beta portfolio using a rules based methodology has a goal of beating the market over the long term.
Betterment also offers a professionally built portfolio created by BlackRock. The BlackRock Target Income portfolio is a 100% bond portfolio with the goal of capital preservation. This may be an ideal portfolio for someone who is looking for an income producing investment strategy versus a growth oriented strategy. This portfolio has no exposure to the stock market but can fluctuate in value as interest rates change. BlackRock strategically looks to provide higher yields by investing in long term bonds as well as higher risk bonds in this portfolio.
What Are The Betterment Fees?
Betterment has a strong focus on minimizing fees and expenses to investors. Betterment specifically chooses ETFs that have some of the lowest expense ratios. Betterment has no trading fees and no markups on prices. The only fees Betterment charges is a management fee of 0.25% to 0.40% depending on the investment plan. This fee structure is extremely low compared to traditional advisors and stock brokers.
|Betterment Premium||Betterment Digital|
|Tax Loss Harvesting||Yes||Yes|
|Unlimited Access CFP Professionals||Yes||No|
|Account Types||Taxable, Traditional IRA, Roth IRA, Trust||Taxable, Traditional IRA, Roth IRA, Trust|
Betterment has recently made changes to its pricing structure. All account balances greater than $2M will be given a 0.10% marginal discount for the portion of their balance above $2M. Previously accounts with balances over $2 million had their fee cap out at $2 million so any assets above that amount would not be charged a fee. Betterment will continue to honor the $2 million fee cap for all existing Betterment customers, even if their current balance is less than $2 million.
- For Betterment Digital, customers will pay 0.15% for the portion of the balance above $2,000,000.
- For Betterment Premium, customers will pay 0.30% for the portion of the balance above $2,000,000.
|Pricing as of 9/18/2018||Balances up to $2,000,000||Balances over $2,000,000|
What Are The Features Of Betterment?
Financial Planning: Betterment Premium offers unlimited access to financial professionals. These professionals will assist you by making recommendations on how much to invest and provide guidance on asset allocation within your portfolio.
The Premium Plan also includes detailed advice on investments held outside of Betterment. Betterment Digital offers algorithm based financial planning with no human involvement. All Betterment plans offer some level of portfolio guidance.
Smart Rebalancing: Betterment offers smart rebalancing of your portfolio. This is offered to both premium and digital investors. Rebalancing of a portfolio should happen when your target weights of assets gets skewed.
For example, if you have a portfolio of 60% stocks and 40% bonds and the stocks increase in value. Now, you may be weighted at 70% stocks and 30% bonds. To tone down risk and return to your target allocation, you should rebalance and sell stocks and buy bonds to return to your 60/40 stock bond allocation.
Betterment’s version of smart rebalancing makes sure your positions are in their right allocation at all times.
Tax Loss Harvesting: Betterment offers a feature called tax loss harvesting which aims to minimize your taxes on capital gains. Betterment does this by selling securities that have underperformed in your portfolio and realizing a capital loss. This loss can be used to offset capital gains or ordinary income up to $3,000 per year.
Once the loss is realized, Betterment then purchases a similar security to replace the one you just sold in your portfolio. This way you avoid any wash sales which occur when you realize a loss on a security and purchase it back within 30 days. The government identifies wash sales in order to prevent tax loss harvesting. This tax loss harvesting is something that separates these automated platforms like Betterment from the traditional investment options.
Betterment also has the functionality of implementing tax loss harvesting across your accounts as well as your spouse’s accounts. Spousal tax loss harvesting will allow you to optimize your tax minimization strategies on one tax return.
Tax Coordinated Portfolio: Betterment uses a method of asset location to construct tax coordinated portfolios. This is accomplished by putting your highest taxed assets in your IRA first (where you have a tax shelter) then putting your lower taxed assets in your taxable brokerage account. Betterment claims this strategy could boost your return by 0.48% each year. You can set up a tax coordinated portfolio at any time on Betterment for no additional fee outside of the asset management fee.
Smart Saver: As interest rates remain extremely low in the current economic environment, interest rates on savings accounts are virtually non-existent. Betterment offers a solution to this issue by offering an alternative to a savings account.
The Betterment smart saver account yields 2.20% annually. This is significantly higher than most savings accounts. Betterment offers this feature while still providing liquidity. According to Betterment, you will have access to your funds in 4 to 5 business days.
Smart Deposit: Betterment offers a feature called smart deposit that will allow you to set a minimum amount of cash you would like in your bank account. Once your minimum is set, any amount above your minimum will be sent to Betterment and invested.
Say you set your bank account minimum at $5,000. Once your bank account balance is over $5,000 smart deposit will transfer any funds over this threshold to Betterment. Smart deposit in Betterment will allow you to maximize your invested capital while retaining a safety net in your bank account.
Retire Guide: This is a retirement planning tool offered by Betterment. You will input your current savings, projected budget, and retirement date to get a picture of where you stand in reaching your retirement goal.
Retire Guide will show you how to save, what accounts to utilize, and recommend any changes you need to make to reach your goal. This allows you to have an understanding of your projected financial position and budget when you retire.
Fractional Investing: Betterment also offers a unique feature called fractional investing. Fractional investing allows an investor to buy fractional shares of an ETF. For example, if you want to buy VTI which is trading at $150 per share and you only have $100 you could buy .67% of a share using Betterment’s fractional share investing. The advantage of using fractional shares allows an investor to be fully invested at all times. Fractional shares also provide for greater diversification as you will have more precise allocations across your portfolio at all times.
What Are The Pros Of Betterment?
- Passive investing. Betterment is a set it and forget it investing platform. You do not need to worry about account maintenance. Betterment takes care of everything.
- Automation. The entire investment process can be automated. You can automate contributions to your account that will automatically rebalance your portfolio upon contribution. Your investments are on autopilot!
- See the big picture. Betterment allows you to link up all of your investment accounts and get an idea of what all of your investments are doing in one place.
- Fiduciary responsibility. Betterment advisors are held under the fiduciary duty standard. This is the highest standard in the investment advisor community. This means the advisor is legally required to act in the client’s best interest at all times. Remember, this in person advisement is only offered through Betterment Premium.
- Low fees. Betterment focuses on minimizing fees for investors. They do this by selecting low-cost ETFs that have low expense ratios and leveraging technology.
- No minimum. You can open a Betterment Digital account with any amount of money. Betterment Premium requires a balance of $100,000 or more.
What Are The Cons Of Betterment?
- No direct indexing. Some other investment accounts offer direct indexing or stock level tax loss harvesting. This is typically reserved for accounts with $500,000 invested or more. This allows direct ownership of individual stocks, not funds, which allows for more tax loss harvesting opportunities. Betterment does not offer this feature.
- Too passive for some. If you are interested in being active in your selection of stocks or ETFs, Betterment is not for you. Betterment is for passive investors.
- Limited to stocks and bonds. Your asset allocation is limited to stocks and bonds. You cannot invest in other assets like real estate or commodities through Betterment. It is important to note however that Betterment has stated that these assets added no value to portfolios that they tested.
Betterment: The Bottom Line
Betterment has revolutionized the brokerage industry through the use of technology. This has significantly lowered the barriers to entry to receiving high quality financial advice. Traditionally, you would need thousands if not tens of thousands of dollars to invest with an in-person financial advisor.
Now, you can get started with a robo advisor like Betterment with any amount that you have. Betterment is a long term investing platform for passive investors. If you are interested in short term trading, individual stock ownership or DIY investing Betterment is not for you.
Click here to get started with Betterment!
Fundrise vs Betterment
Fundrise and Betterment are both very different investing platforms. The Fundrise platform gives you the ability to invest in commercial and residential real estate. With a minimum balance of $500 to open an account, Fundrise gives the average investor an opportunity to invest in assets typically limited to high net worth individuals. By using technology and offering a user-friendly experience, Fundrise remains very transparent about any project developments or updates to their portfolios.
Betterment, on the other hand, offers a robo advised investing experience with the goal of creating a broad portfolio of stocks and bonds. The Betterment platform offers some of the most valuable investment features available today. Smart rebalancing, smart deposit, smart saver and advice from securities professionals are just some of the features that create tremendous value for investors.
When comparing the two platforms it is important to understand what your goal is as an investor. If you would like to own growth or income-producing real estate on a dynamic user-friendly platform, then Fundrise may be a good option for you. Fundrise gives you the ability to invest in real estate projects without having to outlay a huge amount of capital. If you are an investor with the goal of building a broad portfolio of stocks or bonds, then Betterment may be a great option for you. Betterment is one of the most dynamic robo advisors available today.