In this Betterment review, I’ll explain why Betterment is my #1
I’ll also identify what exactly makes Betterment investing superior, and why you should avoid other Betterment products.
This Betterment review is a must-read if you want a comprehensive answer the ultimate question: is Betterment investing worth it for ME??
Betterment is a Robo Advisor
We have to start our Betterment review from its origin. Betterment began in 2008 as a robo advisor. Today, it remains one of the largest robo advisors with the most sophisticated features.
What exactly is a robo advisor, you might ask? Well, all robo advisors, including Betterment, share the following characteristics:
- Robo advisors use the Modern Portfolio Theory to optimize your portfolio by optimizing your allocation based on your risk tolerance.
- Robo stands for the robot; it means a software automatically buys and sells assets to achieve your ideal allocatio.
- The software also auto-rebalances your portfolio as the market changes so that your allocation is always optimized.
As long as you tell the software your risk, you can sit back and forget about it. Having a robo advisor can give you peace of mind knowing it is automatically and continuously working for you behind the scene.
It also costs little for software to serve more customers, as such, using a robo advisor is cheaper than hiring a financial advisor. Some even argue that a robot is smarter than most of the financial advisors.
Is Betterment Safe?
One of the most common questions people ask is whether investing with Betterment is safe. My Betterment review concludes that it is most likely safe if and only if you stick with its
How Betterment Investing is Safe
Let’s face it: investing in the stock market is never entirely safe. Since Betterment invests in the stock market, it is never wholly safe.
But if you are patient enough to wait in years and not months or days, the stock market is still the best place to invest your money.
If you want to invest with Betterment safely, invest for the long term.
Betterment investing is also safe because it the robo advisor only incorporates strategies that have been proven to work.
First, Betterment’s algorithm uses the Modern Portfolio Theory. The theory was invented the 1950s and still works today after being tested through multiple recessions and booms.
Second, Betterment invests in reputable mutual funds from Vanguard and iShares. These mutual funds are as safe as a mutual fund can be.
Third, Betterment’s founders have backgrounds in finance and law. Their prior experience makes them more prudent than other robo advisor founders, mostly software developers or hedge fund guys.
Where Betterment Investing is Not Safe
However, not every offering from Betterment is safe, and you should never dump all of your money with it.
Betterment is a private company funded by venture capital firms. VCs always want growth, and too much of it can be wrong.
Betterment’s explosive growth is slowing down, and in 2017, we see it expanding into dangerous areas to fuel growth. This sort of reckless growth worries me, and I’ll explain
Second, like all companies, there is always a tiny, but non-zero chance of fraud. Nobody expected Bernie Madoff to be a scam or for Enron to commit fraud. But you should never put all your eggs in one basket.
How do you make it safer to invest with Betterment? Invest with only its robo advisor product and do not put more than 50% of your asset there.
A Betterment Review of Fees
Betterment’s robo advisor plan charges a 0.25% annual fee, which is the same as what Wealthfront charges.
The 0.25% annual fee is incredibly low for the services you get. While a few robo advisors charge even lower prices, their services are not as robust, and those limitations will hurt your returns beyond the fee difference.
Not many people know this, but Betterment’s total fees are more than 0.25%. You also pay expense ratios from mutual funds.
The average expense ratio at Betterment is 0.1%, which means total Betterment fees is 0.35%.
Never Pay the Premium Betterment Fees
In 2018, Betterment introduced a Premium Plan. This plan gives you the robo advisor plan plus unlimited access to a certified financial planner (CFP) for an extra 0.15% in fees.
Getting married? Starting a family? Receiving stock options? Betterment’s CFP can help you to adjust your goals, save more on taxes and plan your transition. Sounds pretty sweet, right?
The Premium Plan costs 0.40%, that’s $750 of extra charges a year if you have $500K invested. My advice? Skip Betterment’s Premium Plan. They are NOT worth it. Here is why:
First, you should never hire a CFP without doing some background check to make sure you are getting your money’s worth. With Betterment, you don’t know who you are getting.
Third, most CFPs are not qualified to handle complex assets over $5 million. When you get to this stage, find a top 1%, highly recommended CFP and not some rando from Betterment.
Vanguard also has an advisor plan that gives access to a CFP and allocates your portfolio for only 0.30%. This plan is comparable to Betterment’s 0.40% Premium Plan, and I’d recommendVanguard.
Betterment Review: What is Good and Which Ones to Avoid?
Compared to other robo advisors, Betterment has three superior investing features that will maximize your returns above and beyond what others can deliver.
However, outside of its core product, Betterment’s other investment products are shady, and you should avoid.
Betterment Review: Superior Features
What I love about Betterment is that it only adopts features that have been proven to work over a long period, usually multiple decades. Betterment won’t implement anything without data.
#1. Betterment emphasizes value stocks
Betterment has a slight emphasis on small to medium sized value stocks because evidence shows that small and medium value stocks tend to outperform all other stocks in the long run.
Wealthfront, on the other hand, does not emphasize value stocks.
#2. Betterment is tax-coordinated
If you have money across taxable and nontaxable (IRA, Roth IRA) accounts at Betterment, your portfolio can be tax-coordinated.
Betterment puts your highly taxed assets (e.g., US stocks) in IRA so you can delay paying tax. It places your lower-taxed assets (e.g., bonds) in your taxable account. Finally, Betterment allocates your most risky and potentially highest growing assets (e.g., emerging stocks) in Roth IRA, where you don’t need to pay any tax.
A tax-coordinated portfolio minimizes your taxes while making sure your overall portfolio is optimized.
Wealthfront does not offer a tax-coordinated portfolio, and frankly, I’m surprised because this seems like a no-brainer.
#3. Betterment auto-adjusts your risk
A Betterment feature that works particularly well for those nearing retirement is auto-adjust, which you can turn on or off as you like.
The auto-adjust feature will automatically adjust your allocation as you approach retirement age, gliding your portfolio slowly and automatically toward fewer stocks and more bonds.
Auto-adjust is another feature not offered at Wealthfront.
Betterment Review: Suspicious Products
In the last two years, Betterment has gotten increasingly more complicated by introducing newer and fancier products.
These new products are often introduced under attractive marketing, making them hard to understand and analyze.
I’ll break down critical products from Betterment since 2017, and tell you why you should avoid them all.
Socially Responsible Investing (SRI): Irrelevant
In July of 2017, Betterment launched a Socially Responsible Investing (SRI) portfolio. Accepting SRI means you will invest responsibly.
Which companies are socially irresponsible? According to Betterment, they are oil companies, big banks, big tobaccos, big pharma, and Walmart.
Millennials love the concept of SRI and Betterment is trying to attract them. But SRI is fishy, and SRI at Betterment is pretty much irrelevant.
First, who is to say that tech is not evil? Why is Walmart worse than Amazon? The concept of SRI makes people feel good, but there is little evidence that it is doing any good.
Second, Betterment’s SRI strategy is only 25%, applicable to large-cap, US stocks. You still invest in socially “irresponsible” bonds, international and small stocks.
Betterment Review Verdict: SRI is not so much a bad thing as it is just a useless thing. It doesn’t do much good and may hurt your returns.
BlackRock Target Income Portfolio is Shady
In 2017, Betterment launched a new income portfolio from BlackRock for people looking to generate cash and preserve capital.
This portfolio is 100% bond and is likely a tool to attract older folks struggling to earn an income without over-exposing to stocks.
The income portfolio is probably an actively managed bond fund that already exists inside BlackRock, but we don’t know. The marketing
Betterment discloses that the income portfolio’s expense ratios range between 0.21% to 0.38%, multiple times higher than that of index funds.
Betterment Review Verdict: Say no to the target income portfolio. Stick with the robo advisor or pick income index fund from Vanguard.
Goldman Sachs Smart Beta Portfolio is Also Shady
In 2017 Betterment introduced a smart beta portfolio. Smart beta sounds enticing, and when you add Goldman Sachs in front, it’s deceiving.
Smart beta funds have existed for a while; they can mean a lot of things. Betterment’s smart beta is an actively managed fund from Goldman Sachs. We don’t know much else: its exact allocation or expected returns.
We know this smart beta fund invests specifically in real estate, even though Betterment wrote an article about how real estate is already part of the overall stock market. And I agree with the old Betterment.
The Goldman Sachs Smart Beta portfolio charges between 0.11% to 0.24% in expense ratio, bringing your total fees to nearly 0.50%.
Betterment Review Verdict: Stay with passive management and use Betterment as your
roboadvisor and not a broker for activefunds.
Smart Saver: Not the Best Out There
Betterment launched a savings and checking account called Smart Saver (Cash Reserve) in 2018. It invests in safe, short-term bonds.
The expected return is around 1.90%, but your average expense ratio will be 0.17% on top of the 0.25% management fee, which brings your total returns from Smart Saver down to 1.45%.
This product is not so bad as it is just not the best. Most 1-year CDs and savings accounts offer more than 2%=. The Treasury’s i-bonds, the safest place to park your money, provides 2.52% today.
Betterment Review Verdict: There are plenty of alternatives to Smart Saver that offer higher interest rates.
Is Betterment Worth It?
Betterment is still the best robo advisor today. It perfected its robo advisor product years ago and continued to be a stellar choice for any patient investor looking to set it and forget it.
Betterment is safe to invest as long as you:
- Only invest in the robo advising side of Betterment.
- Avoid the Premium Plan.
- Reject its array of newer, actively managed portfolios.
- Ignore SRI and Smart Saver.
- Put no more than 50% of your assets with Betterment.
- You never know if
Betterment,or any firm, is a fraud.
- You never know if
Betterment is ideal for a long-term, passive investor. Its auto-adjust feature is great for older folks who need to auto-lower risk.
Betterment is also ideal for someone starting out feels overwhelmed by the array of options from Vanguard.
If you are a sophisticated investor, then Vanguard might be your best bets. But even so, it doesn’t hurt to put some of your assets into Betterment as a barometer on whether you are doing a good enough job managing your money compared to that of a robot.
Betterment Review Conclusion
Even at a low 0.25% management fee, robo advisors may still be too expensive for the intense investor. I put myself in this camp.
But I still have a chunk of my money with Betterment because I want to diversify and make sure I don’t screw up. Betterment is
Betterment is the best robo advisor for most folks looking to set it and forget. But its recent product launches worry me. Betterment is trying to move into the active investing space with no proof of its abilities and little promise on returns.
If there is one thing you take away from this Betterment review, it is to avoid allowing fancy marketing to fool you. Watch out and stick with the original Betterment robo advisor product.
Do you agree with my Betterment review? Are you as worried about Betterment’s new products? Comment below with your Betterment review!
And when you are ready, invest in Betterment today. Use THIS LINK to get your money managed for FREE for 90 days.
Also considering Wealthfront as your robo advisor? Check out Betterment vs. Wealthfront: the Ultimate Review.
Scared for your stock investments and wondering when you should pull out? Read Will the Stock Market Crash? Complete Analysis
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