Review: Betterment.com

Betterment, automatic investing, investment services

For many investing is some exotic activity rich people partake in so they have things to talk about at dinner parties their wives throw. Fair enough.  Regardless, investing is a very complicated activity that manifests itself in relatively simple transactions: buy and sell.  Some enjoy investing—utilizing it as an intellectual hobby or legal gambling, while for others investing is like taking a vitamin: you know it’s good for you but sometimes it is just the last thing on your mind.  Properly investing requires research and evaluation to choose a suitable investment, and then constant monitoring to ensure the health of that investment.  This is time consuming and, for many, more stress inducing than being trapped on a road trip with a flatulent Val Kilmer.  If you wish to invest but either find yourself overwhelmed by the learning curve or just simply don’t have the time than the investment services at Betterment are for you.

What Is Betterment?

Betterment is a relatively new investment service that will invest and manage your money for you.  In essence, Betterment works a lot like a target-date retirement fund from a broker such as T-Rowe Price or Fidelity, in that they will automatically choose your asset allocation based upon your defined risk tolerance.  In exchange, they charge a small fee each month.

Investments are held in ETFs (Exchange Traded Funds), which are publically traded funds available to the public.  You could start, for example, a Scottrade account and invest in the same funds, if you were willing to research them in relation to your risk tolerance, desired asset allocation and overall long term goals.  Betterment does this research for you, ensuring you aren’t too heavily weighted in any one sector or investment type.  Literally, your only requirement is to give them your money and they will take care of everything else.

Investing with Betterment

Betterment splits your account into two different ETF types: Bond Fund ETFs and Stock Market ETFs.  The mix will be determined by you when you set your risk preferences and goals.  By offering ETFs, Betterment facilitates you owning a broad section of the investment market: each ETF holds a multitude of stocks and bonds.  When you purchase a share (and Betterment allows you to purchase fractional shares, which insures that 100% of your money is always invested and working for you), you are buying small stakes in all the stocks within the ETF.  This means that if the ETF owned 100 stocks of 1 share each, and you bought 1 of 100 shares, you would own 1/100 of each of the 100 stocks in the ETF.  This is simplistic, but conceptually is how ETFs work and how Betterment broadly invests your money.  In investing, being diversified is paramount to success, and Betterment facilitates this for you through their ETF options.

How Much Betterment Costs

Betterment’s fees are, considering that they offer active money management, very low.  The fees decrease as your total asset balance grows.

betterment fees

Their site has a slide bar that will show you how much their service will run you based upon the size of your portfolio.  These fees are essentially representative of a reduction in growth of your portfolio, or an addition to any loss.  This is no different than any other fee accessed by any other money management firm.  For example, a T-Rowe Price mutual fund may access a .75% annual fee for the management of the assets within that fund—but they will only be actively managing the assets within that fund, NOT your assets within that fund, or your assets within any other fund.  In other words, pending on the selection of mutual funds you make with a broker you will pay the annual fee for each fund but still be responsible for managing your own investments.  So the service Betterment provides and the low fees need to be considered in that light.

Note that the ETFs Betterment invests you in will also charge fees which you will also need to pay.  This is unavoidable regardless of who invests your money, Betterment or Fat Rick from the local deli.  These are on top of the fees Betterment charges for the management of your assets.  It should be noted that ETFs typically charge far lower fees than mutual funds, so the net combination of fees you would pay via Betterment (Betterment management fees + ETF fees) would still be either comparable to a mid-fee mutual fund, somewhere in the vicinity of .5% or less.  Like I said, this is a low expense profile for active money management.

Goal Setting

Perhaps my favorite aspect of Betterment is their Goal function.  You set a goal (“retire with $1,000,000”) and Betterment will optimize your portfolio around that goal.  If you have a second goal (“save $50,000 for a down payment on a house”) Betterment will create a separate portfolio and optimize that one—separate from any other goals.  This makes it easy to focus on the hardest part of reaching those goals: saving.

Drawbacks

Betterment for many may be an oversimplified method of investing.  Send it and forget it, in a sense. So it is the very convenience and simplicity of Betterment which may be its largest drawback: if it is depended on for 100% of an individual’s investments, it would then rob that individual of a chance to learn how to invest.

The fees charged by Betterment are also incremental to investing in ETFs oneself, or finding comparable mutual funds.  If you consider yourself a savvy investor, there really isn’t much reason to utilize Betterment.

 Verdict

As I find myself becoming busier and busier via my multiple businesses and day job the time I once had to actively participate in the market has become slim.  For this reason, I am currently considering Betterment as an alternative to investing directly myself—for my Roth IRA and prior employer 401Ks.  I will continue to have a modest individual stock portfolio which I will manage myself—the fun money, if you will.  I like the idea that my investments are being managed by competent professionals freeing me up to go out and earn more money.  Sounds like a win-win to me.

So if you find yourself short on time, attention or a willingness to learn how to invest on your own but recognize the value in investing in terms of safeguarding your future and ensuring you don’t end up a toothless haggard living in a heating grate, then Betterment is exactly what you have been looking for.

Want to try Betterment?  Head over to Betterment.com and sign up.

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About Mitchell Pauly

Mitchell Pauly is a humorist, financial professional and entrepreneur. Follow him @Snarkfinance, and be sure to check out his website- Snarkfinance.com. You can learn more about him by visiting his Google+ profile.

Comments

  1. I love Betterment. I wrote a review about them a few months back for Modest Money. That made me want to invest, so I did. Since then, I’ve earned over 9% returns!
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