Betterment VS Vanguard: Best Investing Platform 2018

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

Betterment is a new online investing platform designed with the primary aim to save the investor time and money. The modern day retail investor has dozens of options of brokerages, advisors and as of recently roboadvisors to choose from. Vanguard is one of the most well known fund companies and Vanguard also offers advisory services to certain customers. You can invest in Vanguard products through both Vanguard and Betterment. So, which one is better? In this article we’re going to compare the Betterment and Vanguard investing platforms.

Betterment vs vanguard investing simple review.png
Betterment VS Vanguard Review

What Is Betterment?

Betterment is a roboadvisor that was started in 2008. By leveraging technology and custom built algorithms, Betterment invests money in a fee sensitive and tax efficient manner. Betterment is a completely virtual online platform that differs in many ways from other roboadvisors. Betterment offers unlimited access to securities professionals no matter what plan you are in. If you are using Betterment’s Premium Plan, you will have unlimited access to CFP® professionals. These are some of the most educated and experienced advisors in the investing community.

You can read our full Betterment Premium review here.

Betterment invests using mostly passive long term strategies. By asking a series of questions Betterment will get an understanding of your time horizon, risk, and investment objectives. Once they have gathered this information, Betterment will offer you a series of portfolios that fit your investment goals. Betterment’s portfolios are built using low cost ETFs, which provides diversification and saves the investor money in fees over the long term. Most often, Betterment is using ETFs from Vanguard as they have some of the lowest fees and best products in the industry.

Click here to open a Betterment account.

Screen Shot 2018-09-20 at 10.35.53 AM
Betterment Questionnaire

Betterment offers the investor a variety of different features. Two of the most popular are tax loss harvesting and smart rebalancing.

Tax loss harvesting is a feature 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 investing simple review tlh
Betterment Tax Loss Harvesting

Betterment also 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.

Click here to open a Betterment account.

Betterment offers many features above and beyond these two. You can read about them here in our full review of Betterment.

What Is Vanguard?

Vanguard is one of the largest fund companies in the world, with assets under management of approximately $5.1 trillion. They offer a variety of mutual funds and ETFs available on most investment platforms and brokerages. To directly invest in most of Vanguard’s mutual funds you must have a minimum account balance of $3,000.

vanguard fund.PNG
Vanguard VTSMX Fund, $3,000 Minimum Investment

Vanguard Retirement funds and STAR funds have a minimum of $1,000. Vanguard also offers a variety of exchange traded funds which have no minimum investment, and you can buy shares through brokerages and platforms like M1 Finance and Betterment. Vanguard is a mutual fund company, and it is owned by the funds that it offers. In essence, all of the Vanguard investors own shares of the funds and they own Vanguard itself.

If you are interested in buying individual shares of Vanguard funds, check out our review of the M1 Finance investing platform here.

Now, don’t let the word mutual fund scare you! What Vanguard offers is low fee index mutual funds. They offer some of the lowest fee investment products on the market.

Vanguard was started by a famous investor named John Bogle, known as the man who created the first index fund. Bogle created Vanguard to be a company devoted to its people and its underlying shareholders. Vanguard is based on the premise of Bogle’s own thesis of low fee index fund investing over the long term. That is why Vanguard has some of the lowest fees in the fund industry.

Betterment and Vanguard are both highly valued platforms by its users. Now, we are going to compare the features and benefits of each platform..

Betterment VS Vanguard

1. Account/Fund Minimums

Betterment has no account minimum for its digital plan. You can get started with Betterment with just $1. Betterment’s Premium plan has an account minimum of $100,000 offering additional tools such as access to CFP® professionals.

Click here to open a Betterment account.

Vanguard has fund minimums ranging from $1,000 to $100,000 to invest on their platform. The minimums vary based on the specific share and fund type. To invest with Vanguard advisory services you must have an account minimum of $50,000.

Vanguard Investor Shares Fund Minimums

  • $1,000 for Vanguard Target Date Retirement funds and STAR® fund
  • $3,000 for most other Vanguard funds

Vanguard Admiral Shares Fund Minimums

  • $10,000 for index funds and tax managed funds
  • $50,000 for most actively managed funds
  • $100,000 for certain sector specific index funds

In summary, an investor looking to get started with Vanguard would have to invest a minimum of $1,000 to enter a Target Date Retirement fund or a $3,000 minimum to enter most of the other funds offered. Betterment has significantly lowered the barriers to entry for investors by offering a $0 minimum account balance to get started.

2. Account Types

Both Betterment and Vanguard offer a variety of investment accounts. Vanguard has the functionality where you can open up 529 college savings accounts as well as additional IRA options if you are self employed. But for most investors, the account types are very similar on both platforms.

Click here to open a Betterment account.

3. Investment Fees

Betterment and Vanguard both have a similar approach to fees. They are both devoted to offering their services with some of the lowest fees in the industry. Betterment has a straightforward fee structure, while Vanguard has a more complex structure with additional transaction and servicing fees. Here is how the fees compare…

Vanguard Investment Fees

Taxable individual, joint, traditional IRAs, Roth IRAs, UGMA accounts, and college savings accounts have a $20 management fee per year if the account has less than $10,000. You can get this fee waived if you sign up for electronic statement delivery. Mutual fund only accounts will have a $20 fee per fund with balances less than $10,000.

Vanguard also has relatively high transaction fees to discourage active trading in and out of their funds. This fee varies between 0.25% and 1.00% of the transaction amount.

Vanguard also offers advisory services if your account balance is at a minimum of $50,000. They charge a 0.30% annual fee per year for this service. You will have access to a team of financial professionals that will help you make financial decisions. Once your account balance is above $500,000 Vanguard will give you access to a devoted CFP® professional who will help you analyze your financial plan.

Betterment Investment Fees

Betterment charges fees based on the two plans it offers. Betterment charges the fee based on the assets under management. This is the only fee charged by Betterment. The Betterment Digital plan has a 0.25% annual management fee. The Betterment Premium plan has a 0.40% annual management fee. Management fees decrease for both plans once your account balance surpasses $2 million. At this point the digital plan charges 0.15% and the premium plan charges 0.30% on assets over $2 million.

Fund Expense Ratios

Both Betterment and Vanguard have expense ratios for each specific fund you are invested in. The good thing is they offer some of the lowest cost funds on the market today. The Vanguard average expense ratio is around 0.12% per year. Betterment’s average fund expense ratio is 0.15% which is far below the industry average of 0.62%.

4. Investment Portfolios

Betterment offers its professionally built portfolios to any investor, regardless of account size. Betterment will ask the investor a series of questions upon opening an account. They will use these questions to develop a investing profile to understand your risk, time horizon, and investment objective.

Betterment will then offer you a series of portfolios that fit your investment profile. This way you are investing in diversified, low cost funds that fit your specific investment objectives.

Betterment builds its portfolios using a variety of ETFs, many of them being from the Vanguard family. The ETFs they use are some of the lowest cost ETFs offered today.

Vanguard will build your portfolio if you have an account minimum of $50,000. Once your account has reached this threshold you will have the option to work with Vanguard advisory services for a 0.30% annual fee. You will work with professional investment advisors to develop a portfolio that meets your investment objective.

If you do not have $50,000 to invest with Vanguard, you will not be able to have professional guidance in building your portfolio. Betterment offers a professionally built portfolio tailored to your specific needs to anyone.

5. Tax Efficient Investing

One of the biggest differences between Betterment and Vanguard is the additional features offered by Betterment. Betterment offers a feature known as tax loss harvesting and this is a big part of the Betterment platform. As mentioned above, tax loss harvesting cuts down on your capital gains and lowers your investment taxes. This feature is available to any Betterment investor. Vanguard only offers this service on a client by client basis if you have $500,000 and are working one on one with an advisor.

Betterment also offers a tax coordinated portfolio feature that you can turn on at any time. This will allocate assets across your different account types, putting your highest taxed assets in retirement accounts first then into traditional accounts. This will help reduce taxable gains, saving you more in taxes. You also have the option to turn on tax coordinated portfolios across your accounts as well as your spouses to ensure maximum tax savings.

Click here to open a Betterment account.

6. Portfolio Rebalancing

Vanguard typically has quarterly rebalancing of their portfolios, but it can vary as stated in their advisor agreement. This can be a disadvantage as portfolios may drift away from their target allocations and develop more risk as well as possibly harmful return characteristics.

Betterment on the other hand is always rebalancing in a tax efficient manner. Through the use of technology and algorithms, Betterment can make sure every portfolio is always balanced and maintaining its proper allocation. Tax minimization techniques are used in their rebalancing algorithms to make sure assets are bought and sold in the most tax efficient manner.

7. CFP® Professional Advice

At Vanguard, if you have assets under management between $50,000 and $500,000 you have access to a team of securities professionals. They will aid you in making investment decisions. Once your account balance exceeds $500,000 you will get your own dedicated CFP® financial advisor who will analyze your specific financial situation and make suggestions and recommendations about your financial landscape.

Betterment’s platform gives all of its users access to securities professionals regardless of account size. They will assist you in making investment decisions. Betterment also offers a premium plan which requires a $100,000 minimum account balance and gives you unlimited access to CFP® professionals. This service allows investors to have very low cost investment management while still having the ability to speak with a financial planner about other aspects of their financial life such as retirement planning, estate planning, insurance, and much more. This service can be extremely valuable to an investor who may want a financial advisor to work with to get recommendations and questions answered about their financial life outside of Betterment.

The Verdict

Both Betterment and Vanguard have excellent low fee investing platforms. When compared to actively managed funds and traditional financial advisors, these platforms typically have significantly lower fees.

In most cases, an investor who is concerned with lowering the taxable income from investments would find the tax loss harvesting feature Betterment offers extremely helpful. Betterment will also automatically rebalance your portfolio, while Vanguard only offers this service on a quarterly basis to a limited number of investors.

Keep in mind, in order to get portfolio guidance from Vanguard you need to have a minimum investment of $50,000 and pay an annual asset management fee of 0.30%. Betterment on the other hand does not have any minimum investment to receive portfolio guidance, however this guidance is algorithm based. Betterment charges just 0.25% as an asset management fee for the digital plan.

Click here to open a Betterment account.

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.

betterment investing simple review 1
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.

Screen Shot 2018-09-20 at 10.35.53 AM
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.

investing simple betterment review smart saver
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.

blackrock
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%

 

Betterment Premium Review 2018: Time To Fire Your Financial Advisor?

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

 

betterment investing simple review 1
Betterment Logo

Betterment is a revolutionary investing platform that leverages technology and algorithms to manage money for clients. Betterment has been extremely disruptive to the financial advisory industry, but in the most recent blow they are now offering Betterment Premium users unlimited access to a team of CFP® professionals. Betterment charges an annual management fee of 0.25% for the basic or Digital plan and 0.40% for the Premium plan mentioned above. While Betterment has no minimum account balance requirement, you do need to have a minimum of $100,000 invested with Betterment in order to be eligible for the Betterment Premium plan.

You can read our full review of Betterment here.

If you invest $100,000 with Betterment and opt in to the Premium plan, you would be paying just $400 a year for management of your money and unlimited access to CFP® professionals. For high net worth investors, it gets even better. The annual fee for Betterment Premium is 0.40% per year on the first $2 million. Any funds above $2 million have a 0.30% annual fee. Betterment has ballooned in popularity by offering some seriously inexpensive financial advisement. So, is it time to fire your financial advisor?

Betterment Premium Overview

As a Betterment Premium user, you will be able to take advantage of all of the features offered to Betterment Digital users. On top of that, you will have unlimited access to a team of CFP® professionals. These are financial advisors who have experience and education in the fields of investments, taxes, retirement planning, estate planning, and insurance. Each CFP® professional has a fiduciary duty to legally act in the clients best interest at all times.

betterment premium 1.PNG
Betterment Premium Plan

To explain this simply, these financial professionals are not earning any kind of commission from your investments or their recommendations to you. A fiduciary offers unbiased advice. Not all financial advisors carry this fiduciary duty as it is not always required. Typically, a traditional financial advisor is earning a commission off the financial products they are recommending to you. The question being, are they acting in your best interest or theirs?

Investors using the Betterment Premium plan can also get in depth advice about any investments held outside of Betterment. You may have other investment accounts or retirement accounts with your employer for example. Betterment advisors will guide you through any questions you have on these outside investments. This is a helpful feature for users looking to get holistic advice from professionals that encompasses your entire financial landscape.

betterment premium 2.PNG
Betterment Premium Personalized Advice

Betterment Premium 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%

Click here to get started with Betterment!

What is the difference Between Betterment Premium and a Traditional Financial Advisor?

Most investors thinking about using the Betterment Premium plan will naturally compare the level of service against a traditional investment advisor or financial planner. There are a few key differences and similarities between what Betterment has to offer and the service you receive with most traditional financial advisors. Let’s discuss some of those differences and similarities now.

1. Minimum account balance. The Betterment Premium plan has a minimum account balance of $100,000 to invest. For some investors, this may seem like a large amount of money. The truth is for many financial advisors out there this may not be enough money to do business with them.

There are financial advisors that will only work with clients with assets of $500,000 to $1 million or even tens of millions of dollars. This may seem excessive, but to get “top quality” personalized investment advice and financial planning it will often cost thousands of dollars. Keep in mind, most advisors won’t even begin discussions until they know you have a large chunk of change to invest. For this reason, Betterment’s $100,000 minimum is actually very reasonable compared to traditional minimums for financial advisors.

For example, Vanguard Fund company gives you access to CFP® professionals once your account balance hits $500,000.

Vanguard
Vanguard Logo

We encourage you to compare Betterment Premium with a traditional financial advisor. Compare the asset management fee to what Betterment charges, assuming they will take you on as a client. Keep in mind, unless this financial advisor has a fiduciary responsibility they are likely earning a commission on what they are having you invest in. If you are looking for truly unbiased financial advice, look for a fee only financial advisor.

2. Portfolios and investment strategy. Similar to most traditional investment advisors, Betterment builds and offers model portfolios for its users. This means they prebuild portfolios of stock and bond ETFs, then they match these prebuilt portfolios with a user based on time horizon, risk tolerance, and investment objective. By doing this, they avoid having to create completely new portfolios for each new client they get. They can build templates of portfolios and match them with a client based on the above factors. This is one of the primary reasons why Betterment fees are among the lowest in the industry.

Here is a full list of the investments used by Betterment.

Betterment’s investment style is mostly passive and long term oriented. They do offer options such as the Goldman Sachs Smart Beta portfolio where the goal is to beat the market over the long term. But for the most part, Betterment has a buy and hold thesis for most of the portfolios. This is where a traditional investment advisor may have a completely different approach.

There are many different types of advisors and investment styles out there. If you are looking for active management with the goal of beating the market, there are many traditional investment advisors that offer this type of service.

It is important to remember that an active investing approach, like a mutual fund or hedge fund, will result in higher fees and commission costs. Each time a trade is made, commission is typically paid. It is also significantly more expensive to pay for professional stock pickers. Keep in mind, most of these professional stock pickers fail to beat the market. In a recent report from Standard & Poor’s, they found that roughly 1 in 20 actively managed domestic funds beat index funds.

SIRCH.PNG
Mutual Fund, 3.19% Expense Ratio!

Betterment does not try to beat the market. Betterment follows a passive investing approach where you are owning the market instead. Betterment will invest your money in low fee index funds, many of which are from Vanguard. Based on the information they collect from you, they create a portfolio of different ETFs that best suit your needs. Based on the report mentioned above, this strategy beats about 95% of the professionally managed funds.

3. Investment fees. Betterment has very low fees compared to the industry average. As mentioned above, Betterment Digital has an annual asset management fee of 0.25%. Betterment Premium has an annual asset management fee of 0.40% and this fee drops down to 0.30% after $2 million invested. Let’s see how these fees compare to traditional investment options.

The industry average for most investment advisors is 1%. All investment advisors can charge different fees and offer different types of service for the fees they charge. There are a wide variety of services offered by investment advisors. Based on the industry average, Betterment charges less than half as an annual asset management fee.

InvestmentBetterment Premium FeeIndustry Average FeeSavings
$100,000$400$1,000+$600
$250,000$1,000$2,500+$1,500
$500,000$2,000$5,000+$3,000
$1,000,000$4,000$10,000+$6,000

4. Investment account types. Betterment offers a variety of different account types. For more advanced investors, you may want specific or additional account types outside of what is offered by Betterment. You may need to work with an investment advisor to invest using other types of funds for example the SEP IRA, Simple IRA, or college savings plans. Here are the different account types offered by Betterment:

  • Taxable and Joint Accounts
  • Traditional IRA
  • Roth IRA
  • Trust Accounts
  • Inherited IRA

5. Financial planning versus investment advisement. One key aspect to consider when comparing a traditional advisor to the Betterment Premium service is the type of service offered by the advisor. The term financial advisor has many different meanings and encompasses a wide variety of services. A financial advisor may be a CFP® professional who does much more than provide investment advice. They may do your taxes or help you plan for your estate or help you analyze your insurance needs as well. There are also financial advisors who strictly manage your investments and will not advise you on any other financial decisions.

investing simple betterment review 2
Betterment Licensed Financial Experts

The Betterment Premium plan gives you unlimited access to CFP® professionals who will help you make decisions involving your financial landscape. Pair this with investment management and Betterment has a very powerful and competitive service. This may be a higher level of service than a traditional investment advisor who strictly manages your investments may offer.

It is important to know the services offered when you are looking at working with a financial advisor. Do they offer tax preparation or planning? Will they help you plan for your retirement? This is where the key difference between investment management and wealth management comes into play. Wealth management involves holistic financial planning taking every variable of your financial landscape into account rather than just your investment portfolio.

The Case For Betterment Premium

In most cases, Betterment will work best for cost sensitive investors. Betterment Premium is offered for a 0.40% annual asset management fee, compared to the industry average of 1%. This allows you to keep more of your money invested. While these fees do not sound like a lot, the compounded fee is often staggering. Over time the savings on fees could add up over many years. Their service also comes with the advantage of saving on taxes due to Betterment’s tax loss harvesting feature.

Betterment is designed for investors looking for a moderate level of advice from CFP® professionals, but not a very detailed and personalized financial plan. This service is designed for people who have questions here and there regarding their finances.

The Case For A Traditional Financial Advisor

In most cases, a traditional financial advisor will work best for someone looking for more comprehensive services and a customized financial plan. Traditional financial advisors may also offer a variety of investment strategies such as active portfolio management or alternative investments. Betterment offers passive portfolio management using a long term investment approach.

Click here to get started with Betterment!

 

A Beginner’s Guide To Betterment Robo Advisor

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

 

betterment-investing-simple-review-1.png
Betterment Logo

What Is Betterment?

Betterment is an online robo advisor that creates customized investment portfolios, provides financial advice, and helps reduce fees and taxes by using cutting edge technology. Betterment operates entirely online and is available to US investors 18 or older. Betterment has revolutionized the financial advisory industry by offering low fee financial guidance with no minimum account balance.

Here is our full review of Betterment.

How Does Betterment Work?

Betterment builds your portfolio of stocks and bonds by using Exchange Traded Funds (ETFs). These portfolios are built and assigned to investors based on your risk tolerance, time horizon and personal preferences.

Betterment offers a number of additional features and tools. After researching multiple investment platforms, we believe Betterment has some of the best features among options available to investors.

Here are some of the additional features they offer:

Tax Loss Harvesting: Betterment will aim to reduce your taxes by offsetting capital gains in your account by selling any positions that are at a loss in your portfolio. Once they have generated this artificial loss, Betterment will then buy a similar security to the one you have sold in order to get a similar position in your portfolio and avoid a wash sale.

Smart Saver: Betterment offers a portfolio built to replace your savings account. Smart saver is a portfolio currently yielding 1.83% annually according to Betterment. Keep in mind, the average bank account in the US pays about 0.05% in interest annually!

Tax Coordinated Portfolio: As a Betterment investor, you have the option to utilize a feature called the tax coordinated portfolio. This will allocate your assets across your accounts in order to minimize taxes. Your highly taxed assets will go into your IRA first then the next portion of assets into your regular brokerage account. You can also implement this strategy combining your accounts as well as your spouses, creating even more opportunity for tax savings.

Retire Guide: Betterment offers a retirement planner within their platform. By inputting your savings, budget, and time frame Betterment’s retire guide will analyze if you are on track to meet your goal. The planner will then make any suggestions or recommendations for how you may need to change your plan to meet your goal.

Fractional Investing: Betterment allows you to buy fractional shares of the assets in your portfolios. For example, say there is an ETF that is trading at $150 per share. If you only have $50 in your account, Betterment will allow you to buy 1/3 of a share of that ETF. This feature allows better portfolio diversification and reduces idle cash.

Financial Planning: Betterment offers a team of financial planners and security professionals available to work with it’s investors. Security professionals are available to any investor regardless of the plan they are in. In Betterment’s premium package, investors have unlimited access to CFP® professionals. These are financial planners that have a legal fiduciary standard to act in the client’s best interest at all times. These financial professionals are not making any kind of commission from your investments.

Professionally Built Portfolios: Betterment offers a series of portfolios constructed by it’s own security professionals as well as outside firms such as Blackrock and Goldman Sachs. Blackrock offers an income producing portfolio consisting of different types of bonds. Goldman Sachs offers a smart beta portfolio within Betterment that aims to outperform the stock market over the long term.

How To Get Started With Betterment

1. Start by opening an account here. 

sign up.PNG
Betterment Sign Up Process

2. Betterment will learn more about you.

By asking a series of questions, Betterment will determine where you currently stand in terms of your finances. Betterment will also learn what your goals are as well as the objective of your investment.

Screen Shot 2018-09-20 at 10.35.53 AM
Betterment Questionnaire

3. Betterment will build your custom portfolio. 

Based on your risk tolerance and time horizon, Betterment will build a portfolio tailored to your specific needs. One of the key features of Betterment is the emphasis on low fees. Betterment primarily uses ETFs offered by Vanguard, known for having some of the lowest expense ratios in the industry. Betterment also offers professionally built portfolios constructed by Goldman Sachs and Blackrock.

investing simple betterment review 1.PNG
Betterment Custom Portfolio

4. Betterment goes to work for you. 

Once your account is set up and funded you can sit back and allow Betterment to manage your account for you. Betterment will take care of investment management and rebalancing your portfolio to make sure you are making the most of your money as well as managing your risk. Betterment is a 100% passive investing strategy. You can even automate your contributions to your Betterment account!

What Are The Betterment Fees?

Betterment charges its fees based on the amount of assets under management. Betterment will assess their fee quarterly based on your account balance. Their digital platform begins at 0.25% annual fee and their premium package starts at 0.40%. These are minimal fees compared to traditional investment advising fees. Here is a breakdown of Betterment’s fee structure.

 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

Is Betterment For You?

If you are relatively comfortable with technology, sensitive to high fees and understand the variety of features offered by Betterment, this may be an ideal platform for you. Betterment aims its service at long term and passive investors that are not looking to make frequent trades in and out of the market. Investors who would like to build their own portfolios may be more interested in a customizable platform such as M1 Finance. M1 Finance gives you the power to create your own diversified portfolio.

Check out our M1 Finance review here.

Betterment offers a unique service that does not compare to many other platforms out there. If you are looking for a service that will assist you in building a portfolio and provide a moderate amount of financial guidance, Betterment may be an ideal platform for you.

Click here to get started with Betterment!

Betterment Review 2018: Best Robo Advisor?

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

As the internet grows and evolves, new industries emerge and challenge the traditional status quo. Not many industries have been as impacted by technology as the brokerage industry. A perfect example of this disruption is the new innovative service being offered by Betterment and other robo advisors. Betterment is a new investment platform that offers many unique advantages to investors that we will be discussing in this review.

What is Betterment?

Betterment is an online robo advisor 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. Refined investing strategies such as tax loss harvesting and smart rebalancing are some of the many features offered by Betterment.

investing simple betterment review.png
Betterment Home Page

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 a 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 management of your investments. Betterment’s portfolios are focused around minimization of both investment fees and taxes.

Screen Shot 2018-09-20 at 10.35.53 AM.png
Betterment Questionnaire

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.

Here is a full list of the ETFs Betterment uses. 

Betterment’s portfolio strategy is to use ETFs to construct portfolios based on modern portfolio theory and global asset allocation. Modern portfolio theory is a hypothesis that investors can construct diversified portfolios along an “efficient frontier” that maximize their return for a given level of risk. Created in the 1950’s, modern portfolio theory is generally accepted throughout the investing community today. Betterment also uses Nobel Prize winning research by Fama and French as the basis for their investing strategy and asset allocation. In their research, Fama and French found that equity returns are heavily correlated to the market, value, and size of the company. Betterment uses their own modeling to determine the tilt of their portfolios which is specifically towards value companies and small cap stocks aiming for higher expected returns.

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.

Vanguard
Vanguard Logo

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 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 it’s 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.

goldman.PNG
Gooldman Sachs Smart Beta Portfolio

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 vs 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.

blackrock.PNG
BlackRock Target Income 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 mark ups 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 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

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.

Here’s a visual breakdown of Betterment’s new pricing structure:

Pricing as of 9/18/2018Balances up to $2,000,000Balances over $2,000,000
Digital0.25%0.15%
Premium0.40%0.30%

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.

investing simple betterment review 2.PNG
Betterment Financial Professionals

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 spouses accounts. Spousal tax loss harvesting will allow you to optimize your tax minimization strategies on one tax return.

betterment investing simple review tlh.PNG
Betterment Tax Loss Harvesting

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 1.83% 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.

investing simple betterment review smart saver.PNG
Betterment Smart Saver

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.

The Retire Guide is completely free! Click here to try it out.

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.

Is Betterment safe?

Betterment is a member of the Securities Investor Protection Corporation (SIPC). SIPC insures all Betterment accounts up to $500,000 in securities or $250,000 in cash (per account) in the case of a catastrophic financial failure. This is different insurance compared to FDIC insurance on bank accounts. Traditional banks will take the majority of your bank account balance and lend out your money in order to make a profit. This is much more risky than holding securities. In the case of Betterment, all your assets are held in the account at all times. Betterment is not lending out your account balance. For SIPC insurance to be triggered your securities must have to go unaccounted for during a broker dealer going out of business. Betterment does not hold custody of your assets along with broker dealer assets, which limits the chance that your assets go unaccounted for in the case they go out of business.

What are the Pros of Betterment?

  1. 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.
  2. 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!
  3. 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.
  4. 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.
  5. 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.
  6. 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?

  1. 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.
  2. 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.
  3. 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.

The Verdict

Betterment has revolutionized the brokerage industry through the use of technology. This has significantly lowered the barriers to entry to receiving high quality financial advisement. 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!