How Does Betterment Work?

Investing Simple is affiliated with Betterment. This relationship does not influence our opinion of this platform.

Betterment is a new online investing platform that has taken a modern approach to investing. Through the use of cutting edge technology, Betterment has become one of the most well known robo advisors on the market today. In this article we’re going to explain how the Betterment platform works and what they offer.

Read our full review of Betterment here.

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Betterment Logo

What Is Betterment?

Betterment is an online platform that will build a personalized portfolio for you based on your risk tolerance, investment objective and time horizon. Betterment also provides many additional features and tools to investors such as tax minimization strategies, and access to CFP® professionals through the Betterment Premium plan. This passive approach to investing allows investors to focus on other things knowing their money is in a professionally built and managed portfolio tailored to their specific needs.

Betterment aims to offer low fee financial guidance to all investors. They have accomplished this by offering the Betterment Digital plan to investors with a $0 minimum account balance and an asset management fee of just 0.25%!

We have all had that uneasy feeling when investing in the stock market; is my portfolio diversified? Am I taking on the right amount of risk? What would happen to my portfolio if the market were to turn? Is my portfolio aligned with my personal time horizon and risk objective?”

Most informed investors have asked these nerve racking questions. On top of that, the answers to most of these questions change over time. If you are interested in answering these questions yourself and doing an assessment of your portfolio every 6 months, Betterment is not for you. If this does not interest you, continue reading!

Betterment is a passive investing platform. If you are interested in being active with your investments and picking individual stocks, check out M1 Finance.

You can read our full M1 Finance review here.

How Does Betterment work?

Betterment starts off by asking you a series of questions. This will allow Betterment to learn more about your personal investment objective, time horizon, and risk tolerance.

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Betterment Questionnaire

Investors may have shorter time horizons for certain sums of money. The good new is, Betterment has a solution to that! For example, Betterment offers an alternative to a savings account called Smart Saver, currently offering significantly higher interest rates than most banks. Instead of leaving your money in a bank account, Betterment allows you to invest it in a highly liquid, low risk method. You would not want to invest money you need in the short term in a higher risk investment like stocks or long term bonds.

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Betterment Smart Saver

Once Betterment has gathered information about your investment profile, they will offer you a series a portfolios based on your individual objectives. Betterment will be investing your money into ETFs, many of which are Vanguard products. Vanguard is one of the most well known fund companies due to their low fees and long term objective. Betterment focuses on using some of the lowest cost funds available to pass that cost savings along to the individual investor. By investing in funds with low expense ratios, Betterment saves the investor significant amounts of money. This allows you to keep more of your hard earned money invested and earning you a return!

Here is a full list of the ETFs Betterment uses.

Professional Betterment Portfolios

Betterment also offers a professionally built portfolio from Goldman Sachs called the Smart Beta Portfolio. Smart Beta aims to allocate funds based on a split between a passive and active approach. The Smart Beta portfolio allocates the holdings based on a number of different variables. These measures include good value, high quality, strong momentum, and low volatility characteristics. By using this rules based approach, the Smart Beta portfolio aims to beat the market over the long term without tacking on the cost of active money management.

Betterment also offers a professionally a built bond portfolio from Blackrock investment company. The Blackrock Income Portfolio invests 100% of the portfolio in bonds with the goal of generating income for the investor. This portfolio has no exposure to the stock market and may be less risky than an equity portfolio. However, there is still risk in investing in bond portfolios especially in a rising interest rate environment. Rather than generating return based on growth, the Blackrock bond portfolio aims for capital preservation and recurring income from interest payments.

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Blackrock Target Income Portfolio

Once you have selected your Betterment portfolio, you can begin investing. Betterment will make sure your portfolio stays at the right risk and allocation using Smart Rebalancing. This means if you ever need to withdraw money or deposit more money to invest, Betterment will make sure your portfolio is balanced in the targeted allocations for each ETF in your portfolio. This is a step most self managed investors fail to remember, and this results in a portfolio that is too risky or too conservative.

Click here to get started with Betterment!

Betterment Features

Betterment also offers Tax Loss Harvesting included with either plan. Tax loss harvesting will make sure your investments are sold in the most tax efficient way possible. Betterment will help you offset any capital gains by selling a losing ETF that is currently at a loss in your portfolio. Once Betterment has sold this fund off, they will purchase a nearly identical fund to make sure the portfolio stays invested in its target allocations. When you sell a stock or fund for a loss, the wash sale rule does not allow you to repurchase it for 30 days. If it is repurchased within 30 days, it is considered a wash sale and the loss is disallowed by the government (to deter people from generating artificial losses for tax purposes). This is why Betterment purchases a fund similar to the one you sold to incur the loss.

You are allowed to offset any amount of capital gains with capital losses. The current tax law allows you to take up to $3,000 in capital losses to offset ordinary income in a single tax year. Losses over this amount can be carried over and used to offset income in future tax years.

Betterment Premium

If you are investing using the Betterment Premium plan, you have unlimited access to CFP® professionals. These are professional financial planners that will help you make financial decisions and make sure these decisions align with your goals. This is a good resource to have if you have any life changing events or come across financial decisions that you may want a second opinion on. CFP® professionals adhere to a fiduciary standard meaning they are legally obligated to act in the clients best interest at all times. These financial professionals are not earning any kind of commission based on their recommendations to you.

You can read our full review of Betterment Premium here.

Betterment Investment Plans

Betterment offers a wide variety of features and may be one of the most dynamic roboadvisors on the market today. If you are interested in trying out an automated platform, but would like control over your investments while maintaining tax efficiency then Betterment may be a good platform for you.

Click here to get started with Betterment!

Betterment Fees & Features

 Betterment PremiumBetterment Digital
Management Fee0.40% 0.25%
Minimim Balance$100,000$0
Automated RebalancingYesYes
Tax Loss HarvestingYesYes
Unlimited Access CFP ProfessionalsYesNo
Account TypesTaxable, Traditional IRA, Roth IRA, TrustTaxable, Traditional IRA, Roth IRA, Trust
Pricing as of 9/18/2018Balances up to $2,000,000Balances over $2,000,000
Digital0.25%0.15%
Premium0.40%0.30%

 

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