- Most popular by deposits.
- Lowest cost Robo-Advisor.
- No account minimum.
- Not for DIY-ers.
Betterment is a low-cost automated investing service. Their mission is to make investing simple, easy, and accessible to everyone. Customers also gain access to RetireGuide which provides investment guidance before and after retirement.Invest free for up to 1 year
- How Does Betterment Work and How Do You Use It?
- Betterment Screenshots
- Betterment Fees, Features and Competitors
- Historical Returns and Performance
- RetireGuide – Understand When You Can Retire
- Retirement Withdrawals – So You Don’t Fail at Retirement
- Use Smart Saver to Earn on your Extra Cash
- Invest your Change with Smart Deposit
- Amp Betterment Returns with Tax Loss Harvesting (TLH+)
- Gain Access to Betterment’s Financial Advisors
- TL;DR Betterment Review Summary
- Learn Directly from the Betterment Executive Team
- Betterment: Frequently Asked Questions
- Read These Next
Betterment is a highly-automated investing service that takes into account your age, and risk tolerance to build you an optimal portfolio. Their goal is for investing to take only a few minutes a month to maintain.
If you want your savings to make you money and you don’t want to spend a lot of time managing than Betterment is likely a strong fit for you.
Betterment is best suited for people who want stable long-term investments that beat the market average. They’ve built a ton of efficiencies into their platform, and as a result, they are able to whip traditional investment managers on cost. In terms of cost, Betterment is both the most full-featured and cheapest.
Question is, are they as powerful a platform as it seems?
Our goal is to teach you everything you need to know about Betterment investing as well as what goes into building a successful portfolio with them over time. Spoiler alert: Betterment features like Allocation Drift and Tax Optimization matter.
If you want an in-depth analysis of the Betterment app and its features, you’ve come to the right place.
How Does Betterment Work and How Do You Use It?
Traditionally when you wanted to invest successfully, you would do two things. First would be a ton of research picking funds or individual stocks if you’re hardcore. Then you would make sure to diversify enough so that you won’t lose your life savings on a bad day.
You’ll also try to make sure your growth is aggressive enough, so you grow your savings over time. Nobody wants to miss out on the boom or get destroyed by a crash.
At its core, this is the problem Betterment attempts to solve.
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The first question you’re asked is, what goal are you saving for?
Are you trying to buy a home, retire, fill an emergency fund, etc.? Betterment reviews your goals and gives you a rough idea of how much risk they think you should take on based on your age.
Since every decision you make automatically updates this sweet graph you will always know what sort of growth you should expect or what adjustments you’ll need to make to hit your goals.
For example, if you’re trying to fill an emergency fund they’ll suggest you take it slow and recommend a 60/40 stock/bond split.
Betterment reviews all of these elements, and with complete transparency, shows you exactly what your risk level means through what your holdings will be:
This leads me to the secret sauce of Betterment – their use of Modern Portfolio Theory.
Simply put, this is how they diversify and distribute your investment portfolio so that you earn the highest return with the lowest risk possible.
If you’re a finance nerd like me, one of the first things you may notice is that the vast majority of the ETFs Betterment selects for you are from Vanguard. We’re as obsessed with Vanguard as we are with Betterment and most of their choices are on our list of the top Vanguard funds. Badass. Their taste is impeccable.
Now, as you flip your risk slider between 0% and 100% you’ll notice the fund weightings (and the number of funds) change.
I’d say that half the value of the Betterment app is in their execution of Modern Portfolio Theory, the fund choices they’ve made and how pleasurably easy it is to manage your money like this.
Betterment Fees, Features and Competitors
From a bird’s eye view, here is how they stack up against the competition:
Fees & Features
0.25% annual fee
Invest free for up to 1 year
Tax Loss Harvesting:
Assets Under Management:
0.25% annual fee
Invest your first $5,000 free, for life
Tax Loss Harvesting:
Assets Under Management:
$1, $2 or $3 a month.
Signup and get $5
Tax Loss Harvesting:
Assets Under Management:
Check out our full comparison of Acorns vs Betterment vs Wealthfront.
|Investment Accounts||Individual and Joint Taxable accounts, Roth IRA, Traditional IRA, Rollover IRA, SEP IRA, Trusts, and Non-Profit|
|Mobile App||Yes; Apple iOS and Google Android.|
|Automatic Deposits||Yes; Schedule is flexible.|
|Advice||Automated; Plus and Premium tier users can speak with Betterment's team of CFP® professionals.|
|Customer Service||Email - 24/7; Phone - Monday–Friday: 9:00 AM–8:00 PM ET & Saturday–Sunday: 11:00 AM–6:00 PM ET; Phone Number - (888) 428-9482|
Historical Returns and Performance
Since the bottom of the stock market in February of 2009, the average Betterment portfolio returned 214.7% – and that is after the exchange-traded fund and Betterment fees.
When compared to the average private client investor Betterment outperformed them by 78.7% in that same period.
Betterment’s average annual return over the past 5 years is 0.9% higher than their biggest competitor, Wealthfront. Simply put, Betterment delivers a strong bang for your buck.
RetireGuide – Understand When You Can Retire
If Betterment had a killer feature, this would be it. Most financial tools give a lot of lip service to retirement and how important it is, but few put their money (and talent) where their mouth is.
Betterment set the bar very, very high. They offer the most comprehensive retirement calculation we’ve seen.
Don’t have anything saved yet? No problem, just push back your projected retirement age.
Can’t save enough to hit your spending goal? No problem, you’ll just need to adjust how much you can spend in retirement.
The beauty of answering the above questions and figuring it all out is so that you can understand if what you’ve already been doing is correct. If not you can change course before it’s too late.
To be as precise as possible, Betterment goes all out. Bask in all of RetireGuide’s glory.
Yes, Betterment offers the basics like how much do you make and when do you want to retire but every retirement calculator you’ve ever used does that. That’s the price of entry.
What impressed me is how they account for things like existing assets and cost of living in how much income needed in retirement.
If you lived in Ames, Iowa (50010), Betterment’s calculator says that your cost of living will be 4% less expensive than the national average. However, if you live in Hoboken, NJ, it’s 116% more expensive than the national average.
So, if you do live in Hoboken, you’ll have to save a lot more if you want to continue living there AND retire there. Having Betterment break things like this down is eye-opening, to say the least.
Good calculators give you an answer; great calculators make you think. This is definitely a great calculator.
Retirement Withdrawals – So You Don’t Fail at Retirement
Want to know something important that people talk even less about than when they can retire? How much they can spend in retirement.
Just because you save enough to retire, you still can still blow it. You need to know how much you can withdraw and how often so your nest egg can go the distance.
Betterment’s RetireGuide maps retirement planning out for you.
They run a Monte Carlo Simulation, similar to what they do when you sign up and set your goals. Only this simulation is in reverse since you’ll be drawing down your account balance while trying to make it last through retirement.
You don’t need to guess what you can withdraw in retirement.
As you continue through retirement, Betterment will continually review and re-run this simulation and inform you with an estimated 99% accuracy, how much you can safely withdraw to protect your long-term retirement.
Simply put, Betterment takes all of the guesswork out of retirement.
Use Smart Saver to Earn on your Extra Cash
The average checking balance in the US is $8,100 and it earns 0.08% ($6.48) interest a year. That’s terrible!
Betterment created Smart Saver to solve that, investing your extra cash in ultra low-risk US Treasuries and Bonds. As a result, they are able to earn you significantly more than a typical bank account.
Currently, the Smart Saver rate is approximately 2.19% which would mean $177.39 in interest a year. That’s a big difference.
Here’s how competitive their rate has been over time:
Betterment uses a cash analysis tool that uses your past rate of expenses to help determine how much cash you really need to keep in your checking account. But, simply knowing isn’t enough.
Perhaps the best part of Smart Saver is their introduction of Two-Way Sweep.
This automates the movement of money between your checking and Smart Saver account making sure that your minimum balance is able to cover your expenses while earning the highest interest rate possible on your money.
It’s also not quite fair to compare their interest rate with banks because interest is taxable. Smart Saver is tax-efficient with a large portion of its investments being exempt from state and city taxes. Boom!
Invest your Change with Smart Deposit
While there is support for scheduled monthly investments, one size fits all doesn’t work for everyone. If you’re a contractor or self-employed, this should make you very excited.
With Betterment’s Smart Deposit you can still invest on a consistent basis, but instead of focusing on an arbitrary date you can set a specific amount that triggers an investment.
The most important part is that you can set a max deposit. If you set Smart Deposit to trigger at $5,000 and you get a $3,000 check in the mail, that doesn’t mean you want to send all $3,000 to be invested.
Smart Deposit is very easy to set up from your account and only needs to be configured once.
While Acorns is the first tool to focus on trigger-based investing, their tool is not nearly as sophisticated as Betterments.
It doesn’t withdraw nearly enough for any serious retirement plan. Let’s not kid ourselves, investing the “change” by rounding up every transaction to the nearest dollar will save you much.
As per research conducted by the Federal Reserve the average family makes 58.7 transactions per month across Cash, Credit, Debt and “Other.” If every one of those were for $0.01, you’d only be investing $58 a month.
Amp Betterment Returns with Tax Loss Harvesting (TLH+)
Everybody talks about the monster gains they get when investing but few people talk about the cost of those gains.
When the tax man cometh.
Unless you’re the lucky 0.5% richest investors or 1% poorest, you will pay a 15% long-term capital gains tax rate. That means if you profit $1,000 you need to hand $150 over to the government for the privilege.
Betterment’s Tax Loss Harvesting tips the scales in your favor by harvesting the natural dips in the stock market as losses to weigh against your gains.
These micro-losses add up over time, and when it’s time for you to withdraw your investments it dramatically reduces your tax bill. It’s important to note that you never actually lost any money, it’s more of a clever paperwork process that you’d need a computer to accomplish. Betterment is smart like that.
While there is a lot of complicated logic behind the scenes which pulls this off, the concept is straightforward.
For every fund in your portfolio, Betterment has a similar secondary and tertiary fund that it can flip between. They are for all intents and purposes identical in their contents. They are just managed by different companies and have different names.
For example, VTI (Vanguard’s Total Stock Market exchange-traded fund) will get swapped with SCHB when the timing is right. You can read about it in all of its glorious detail in this Betterment white paper. I highly recommend reading it if you’ve been having trouble sleeping lately. It’s that good. Sorry Betterment!
When your primary fund is at a point where it’s below the value you purchased it at, it is automatically sold and the identical secondary fund is purchased. This process is repeated as often as it makes sense for as long as you keep your money invested.
Betterment outperforms the competition in this process by 0.99% as per that white paper. Go Betterment!
The result is more money in your pocket when it comes time to withdraw your investments. Could you do this on your own? Sure. Would you want to spend your time on this instead of going outside and having fun? Probably not.
In addition to TLH+ for your account, Betterment will also handle Tax-Loss Harvesting across all your Spouse’s linked account types as well. This will help you prevent wash sales and keep more of your overall tax savings.
Also, as a big part of Betterment’s 2017 TLH+ update, they introduced Tax Coordinated Portfolios. From the Betterment website:
Tax-Coordinated Portfolio optimizes and automates a strategy called asset location. It starts by placing your assets that will be taxed highly in your IRAs, which have big tax breaks. Then, it places your lower-taxed assets in your taxable accounts.
Our research shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years.
TLH+ with an IRA in all its glory!
Gain Access to Betterment’s Financial Advisors
The newest addition to Betterment is their Plus and Premium plans. These plans provide you with access to CFP professionals. With Plus you get an annual call, and with a Premium Betterment account, you get unlimited calls.
Sometimes you just want to speak with a person and make sure everything is going according to plan – we get it. And with Betterment investing, you can do that.
The real value-add with the financial expert tiers is that you will have people, in addition to computers, looking at your Betterment account for potential tax optimizations.
TL;DR Betterment Review Summary
Betterment is a simple to use automated tool ideal for new and hands-off investors. However, what it accomplishes is by no means simple.
Under the hood, it’s a beast of a service putting traditional brokerages to shame with both its technological prowess and solid returns. As a result, they now have over $3 Billion under management with nearly $2 Billion of that arriving in just the last year.
Betterment is the largest and fastest growing Investing Robo Advisor.
Here’s a pro-con breakdown of the service from a birds-eye-view:
- No Trade or Withdrawal Fees: Should you fear these Betterment fees? Nope, there’s no transaction cost for touching your money. Add and withdraw money for free just like you would a savings account.
- Easy Hands Off Investing: You don’t need to do your research, monitor your investments daily or worry about the tax implications of your actions. They take care of all of it. If you haven’t invested yet or are nervous to get started on your own, this service is for you.
- Cheap Portfolio Management: Most portfolio management services will charge you 1% for an equivalent service and a LifeCycle fund like what Fidelity offers will come it at 0.75% or higher. These are 3x-4x more expensive than Betterment without half the features.
- Plot your Retirement with RetireGuide: This tool takes your entire financial picture into account as well as helping you determine what you’ll need when you retire. It plots the whole thing out for you and helps keep you on track so you can be confident you’ll have what you need when the time comes. It’s deeply integrated into the entire Betterment service.
- DIY Investing is Cheaper: As you’d expect, if you did everything Betterment did on your own you’d save on average 0.25% a year in Betterment fees. There is nothing stopping you from mirroring their allocation and monitoring it on your own. Savvy investors might find this more appealing than a set-it-and-forget-it approach.
Learn Directly from the Betterment Executive Team
We’re nothing if not thorough.
Not only did we reach out to Betterment’s CEO and Director of Behavioral Finance and Investments but we recorded it. These are brilliant men that have a ton of knowledge to impart. Give these episodes a listen during some downtime like your commute – you won’t regret it.
Our interview with the Betterment CEO Jon Stein. He shares quite a lot more than just the basic “Betterment review” and sales pitch. If you’re a fan of the podcast then you know we’re not shy.
Listen to the show every Monday, for free:
Our interview with Dan Egan the Director of Behavioral Finance and Investments at Betterment.
While we do talk about the philosophy behind how they invest, he also schools us on Opportunity Cost and how it relates to Betterment investing. It’s an excellent episode and there is a lot to learn here.
Listen to the show every Monday, for free:
Betterment: Frequently Asked Questions
Is Betterment Safe? What if Betterment goes out of business?
Betterment is SIPC insured so it’s as safe as any investment service.
That means your funds are protected in the unlikely event that Betterment was to shut down. You wouldn’t lose anything.
That said, I’d argue that the tools Betterment provides offer an additional layer of transparency and control that you don’t have with other services. If safe to you means having all the information you need to make smart choices, then Betterment is a safer, smarter option.
How does Betterment Make Money?
Betterment earns money from its 0.25% investing fee. That amounts to $2.50 a year for every $1,000 you invest with them.
Betterment is the most cost-effective Robo-Advisor and the fact that they are also the largest plays a large part in their ability to maintain such low fees.
Who Owns Betterment?
Betterment Holdings, Inc. was established in Delaware on January 29, 2008 and it is privately owned.
How do you Close or Delete a Betterment Account?
They’ve got an article for that.
Is Betterment Legit?
You bet it is!