Last updated on February 13th, 2018
If you’re here, you are probably looking for Betterment Reviews to see if Betterment is worth the fees that they charge.
I think that Betterment is worth the fees that they charge, but whether you should invest with Betterment is another question that depends on your attitudes towards investing and your particular financial situation. But if you like the idea of investing without having to spend much time thinking about investing, Betterment is a great choice.
If you like thinking about investing a lot, below I’ll describe some of my thoughts on Betterment and why I ultimately moved my money away from it. Full disclosure, I’m just a random guy on the internet with no training in investments, so keep that in mind when you read this and make your own choices.
About three years ago, I learned of this company called Betterment that would invest money for you across a bunch of asset classes and keep it balanced that way for a small fee.
Not really knowing much about investing at all, that seemed like a good idea and so I started plunking some of my income into their service. Decisions being made by computers and math seemed better to me than decisions being made by people. Of course, people were required to program the computers. But my doubts about the conflicted priorities of people with jobs concerned with nothing other than making themselves or other people money can be left for another day.
At any rate, in the ensuing three years, the markets went way up, Betterment started charging more (or less if you have a lot of money invested with them) and offering more services, and my comfort with investing grew.
Despite the fact that I like Betterment and what they do, I decided to move my money out of Betterment.
This was for two main reasons, which will be explained more through the course of my review:
- Too much of my portfolio was outside of Betterment, which limited the efficacy of their various allocation and tax efficiency strategies.
- Betterment is most valuable for relatively new money being invested and less so for money that has appreciated under their watch.
What I liked and didn’t like about Betterment
Betterment is a great investing tool for someone who doesn’t want to think about investing, but wants to be invested.
For a small price (0.25% of assets they manage for you per year), they provide you with a diversified portfolio that is selected depending on your desired risk level. For this review I’m just referring to their normal investment product; not the specialized products like the Goldman Sachs or Blackrock Portfolios and not the plans that come with a personal adviser.
For me, the small fee is akin to the payments one might make to a personal trainer. Sure, you might be able to do everything Betterment does yourself, but it’s a little easier to do when there is someone there to make sure you stay focused on your goal and keep you from getting off track. And, it’s easier when you don’t have to plan everything yourself, but instead all of the planning is done by someone who is thinking about it 24/7. And in the end, Betterment may end up paying for itself.
Betterment Interface / Ease of Use
One of the best things about Betterment is just how easy it is to use.
The most important thing about investing is actually having your money invested. And, the fact that you can just tell Betterment how much you want to invest and your desired risk level and have it be done makes having your money invested easy. Once your account is set up, it really requires no more effort to invest with Betterment than Venmo-ing your friend your half of the boozy brunch bill. But, for better or worse, you don’t get to add an emoji to your deposit and the world isn’t notified of the transaction.
Betterment also comes with options for “AutoDeposit” and “SmartDeposit.”
With AutoDeposit, you can set it up so that Betterment periodically makes deposits to your account from your linked checking account. For example, you could have deposits scheduled for your Betterment account that coincide with your paycheck. I believe that Betterment will not make the deposit if they see that if there isn’t enough money in your linked account for the transaction.
With SmartDeposit, Betterment will periodically check your checking account balance, and make a deposit to your Betterment account from the checking account if your balance is higher than a threshold that you select. I believe they check in with you before making the deposit.
Tax Efficient Investing
Another good thing about Betterment is that they manage your deposits and withdrawals so that your portfolio is balanced in tax efficient ways.
For example, when you deposit money, Betterment automatically figures out what asset classes you don’t have enough of and will put the money towards those asset classes.
In addition when you receive dividends from your investments, Betterment will allocate those dividends to the asset classes that are under-represented in your account.
And, when you withdraw money or change allocation percentages, Betterment automatically figures out exactly which shares to sell so that taxable gains are minimized.
If you have traditional or Roth IRA or 401K accounts with Betterment, they can be even more fine-tuned with your portfolio. That is because they can use those tax-sheltered accounts to keep your asset allocation in balance as often as need-be since sales of shares won’t be taxed there.
Another neat thing about Betterment is the ability to set up different “goals” for your investments. For example, you could set up a goal for saving up for a down payment for a house and another goal for saving up for vacation and another goal for saving for retirement. Betterment will help set up the proper asset allocation for each of the goals depending on your appetite for risk and the time-frame that you have to meet your goal.
Betterment further will let you know if you are on track for your goals. It provides projections for what the value of your goal portfolios will reach. And, it gives suggestions of how to meet your goals if your off track. This could be making a one-time deposit towards the goal or setting up periodic deposits.
One of the goals Betterment can set up for you is your “Safety Net” or “Emergency Fund.” Betterment makes the persuasive case that your Emergency Fund should be invested in a portfolio of stocks and bonds rather than stashed in a savings account. They advise putting 1.3-times the amount of your desired emergency fund into a portfolio of 40/60 stocks to bonds (i.e., if you would put $10,000 into a savings account for your emergency fund, you would put $13,000 into your 40/60 portfolio). Betterment reasons that, even if there is a market crash, a 40/60 portfolio would stay large enough that you would have a sufficient emergency fund in reserve. And, you have the upside of potential gains since your portfolio is invested in the market. Note that you don’t have to invest with Betterment to do this.
Betterment invests your portfolio in a globally diversified set of relatively inexpensive ETFs. The ETFs, for the most part, have low expense ratios (usually in the hundredths of percents) that are paid in addition to the 0.25% that you pay to Betterment.
They, like all robo-advisers, tout that their portfolio is built on “Nobel-Prize Winning Research.”
I don’t know very much about investing or what this research entails. But to me, it seems akin to saying that my Garmin GPS watch is built on the research of Albert Einstein, because relativity is required for GPS calculations.
One quarrel I have with Betterment is that many of the portfolio comparisons they offer on their website are what I would call comparisons to very stupid decisions. They compare to using high fee advisers or to simple portfolios that invest in the S&P 500 rather than the better performing Total Stock Market. I have not done an exhaustive review of all of Betterment’s articles so better comparisons might be on the website somewhere.
At any rate, I decided to backtest a Betterment portfolio against some less complicated portfolios that one could construct with Vanguard. To be fair as possible, they all consist of 80% stocks and 20% bonds. One is the portfolio one gets from the Vanguard LifeStrategy Growth Funds. One is a portfolio made up of 80% US total Stock Market and 20% US Total Bond Market. And one is the 80/20 Betterment portfolio as best as I could approximate it from the information they provide.
For the time period 2001 until today, Betterment (represented by Portfolio 3 Below) would have outperformed an 80/20 mix of US securities (Portfolio 2) and the LifeStrategy Growth fund (portfolio 3)
Of course, that is just if you invested money in 2001 and let it sit there. Few people invest this way. So I also looked at what would happen if you made monthly contributions of $1,000 over that time frame.
In that case, Portfolio 2, which is just invested in US stocks and bonds in a ratio of 80% to 20% did the best. And, Betterment barely outperformed the LifeStrategy Growth Fund allocation.
And, that’s without taking into account Betterments fees and the fees of the underlying funds.
It’s hard to compare historic returns over such a short time frame. But for me, asset allocation is not a reason to choose or to not choose Betterment. You could potentially do just as well reading Jim Collins’s stock series and following his suggestions (I realize one of his suggestions is using Betterment) or any other number of simple portfolios that the internet has out there.
Betterment’s Tax-Loss Harvesting
Tax-Loss Harvesting is a tax savings strategy where stocks that have lost value are sold to offset gains from the sale of stocks that have appreciated, and in some cases to offset ordinary income. Betterment’s explanation is here.
The basic idea is that ordinary income is taxed at a much higher rate than capital gains for many people, and so reducing ordinary income at the possible expense of having higher capital gains way down the road is a worthwhile trade-off.
Some people do this on their own periodically. It’s fairly easy to do if you have a simple portfolio.
But Betterment potentially does a better job of it, since they are constantly monitoring your portfolio. And, I imagine the grand majority of people wouldn’t do tax loss harvesting on their own. That is unless personal finance message boards are representative of the general population and not of people more obsessed with personal finance than even me.
Tax loss harvesting has the limitation that one can only offset ordinary income in the amount of $3,000 in any given year. But, you are able to carry over the excess from year to year.
Betterment managed to harvest nearly $10,000 of losses for me. Most of these were during the very volatile 2015 market. Volatile upward trending markets are where Betterment’s tax loss harvesting is at its best. Someone harvesting losses on a less frequent basis then Betterment does, probably would miss many harvesting opportunities. Furthermore, Betterment automatically makes sure that you don’t have to worry about “wash-sales” in conjunction with any tax harvesting that they do.
That being said, tax loss harvesting has its limitations. Once a security has appreciated a fair amount, there will no longer be tax loss harvesting opportunities for that security.
For this reason, tax loss harvesting is most valuable for new deposits. Older deposits are far less likely to have harvesting opportunities (other than harvesting done on purchases of securities from any dividends received on older deposits).
Many people think tax loss harvesting is the most valuable service of Betterment and where most of the value of their service fee is recouped. Over the years most of your money will have been invested too long for tax loss harvesting to be of any use. If you think tax loss harvesting is the main advantage of Betterment, this raises the question of whether it’s worth paying the fee on all of your money for a service that is only useful for newly invested money. In the end for me, I decided it wasn’t (but it’s only part of the reason I decided to move from Betterment).
In addition, since so much of my portfolio was outside of Betterment, it made “wash sales” a problem that I needed to look out for on my own.
The other issue with Betterment’s tax harvesting is that for some of their asset classes, the ETFs they buy for you after harvesting losses for a given ETF have much higher expense ratios.
For example, the Vanguard small-cap value and mid-cap value ETFs that Betterment normally picks for you have expense ratios of 0.07% each. However, the iShares equivalent ETFs they invest you in have expense ratios of 0.24% and 0.25%. I have done an analysis of how this affects the value of Betterment’s tax loss harvesting, but I haven’t seen an analysis from them on this either.
Betterment’s Tax Coordinated Portfolio
Where I think Betterment really shines is with its “Tax Coordinated Portfolio.”
With its tax coordinated portfolio, Betterment can allocate assets across your taxable, traditional, and Roth accounts to minimize taxes.
For example, they try to put assets that produce lots of dividends and capital gains in your tax-sheltered accounts so that you aren’t taxed on those every year.
In addition, they try to put assets that are predicted to grow the most in your Roth accounts since they will never be taxed.
And, they try to put assets that are predicted to grow the least in your traditional accounts, since they will likely be taxed the most upon withdrawal.
Combined with the fact that Betterment can use your traditional and Roth accounts to constantly keep your portfolio in proper balance without tax consequences, this seems like the best benefit of Betterment to me.
For me personally, half or so of my portfolio is in 401K accounts that are not with Betterment. This meant that Betterment couldn’t optimize everything for me. To take my personal trainer analogy from before further, it’s like if your trainer gave you workouts optimized for someone who works out two days a week, not knowing that you work out five days a week.
Betterment however, generously provides the information for how they would optimize your portfolio on their website. And while I’m not foolish enough to think I will do as good a job of allocation or put as much time into figuring out the correct percentages, I think I can fake my entire portfolio more efficiently than having Betterment manage half of it.
Donating to Charity With Betterment
One very cool thing about investing with Betterment is they make it very to donate shares to certain charities. They figure out what shares to donate that will be most beneficial to you tax-wise. Donating shares has the additional benefit that you get to deduct the appreciated value of the shares without having to pay tax on the gains.
I briefly looked into how to do this with Vanguard last year and it seemed like a pain. Whereas with Betterment it seems fairly straightforward and easy.
One red flag for Betterment was their abrupt change of pricing in the middle of 2017.
My unassisted memory of how this happened was everyone received an e-mail that said “Great news everyone! We’re going to charge you more!”
Betterment used to be structured such that if you had more than $100,000 invested with them, they only charged you 0.15% of assets under management per year. They now are structured that they charge you 0.25% of assets under management up until $2,000,000 (where they then don’t charge you for any money invested over $2,000,000).
I think a fair thing that Betterment could have done is grandfather money already invested under the previous scheme. I’m not sure how it would have worked, but I think it would have been a good gesture.
Instead, Betterment investors are left wondering if pricing changes will be another risk to consider when investing with them.
Transferring Out of Betterment
Transferring out of Betterment is a relatively easy and straightforward process. I documented my transfer process here.
The fact that it’s fairly easy to move your money out of Betterment is a good thing and something that weighs in favor of investing in Betterment in the first place.
Betterment is an easy-to-use platform for investing in an efficient way. It’s most likely a good choice for you and maybe even I’ll regret having moved my money away. But, it’s not for everyone, and you need to consider your own financial situation before deciding where to invest.
All that being said, it’s probably not worth selling securities you own and moving that money into Betterment unless you can do so without tax consequences. Although, Betterment does have a calculator to help decide if it’s worth the tax consequences.
Finally, a lot of the value of Betterment comes from the automated allocation of any deposits you make and the automation of tax loss harvesting. Both of these things become less valuable as your money with Betterment ages. But Betterment has many other good attributes that make it still worth the fees for older money for the most part.