Betterment Review

September 14, 2011

The new online brokerage Betterment has been getting positive feedback for the simple approach they offer investors so we decided to take a look at what exactly the firm offers.

What is Betterment?

Betterment is an online investment option that offers an alternative to companies like E*Trade, Charles Schwab, TradeKing, and Scottrade. As you’ve seen in the broker reviews the discount brokerage market is full of options each with their own positives and negatives.  What makes Betterment different than these other brokers is that they focus on keeping costs low and making investing simple.

Betterment Investment Options

Betterment aims to reduce your barriers to investing. Many people are intimidated when it comes to investing and putting their hard-earned money at risk. They see a bunch of acronyms (401k, 403b, Roth IRA, Traditional IRA) and too many options.

In some ways, the hardest part of saving for retirement is deciding where to invest your money and just getting started.  Being confused by the process or your options increases the odds that you will put it off. Betterment is trying to tackle this issue by making saving and investing incredibly simple. The company offers only two investment options in what they call baskets:

  • Treasury Bond Basket
  • Stock ETF Basket

Each basket is made up of a mix of ETFs chosen by the Betterment investment commitee.  The Betterment website explains how they choose which ETF’s to include in the bond basket.  Here’s a snapshot of the current allocation:

Betterment Bond ETFs

The Stock ETF basket holds a grouping of exchange traded funds to that’s designed to give you a growth option to your portfolio while not taking on excessive risks.  The Betterment site also explains how they select the ETFs with a key goal ofdiversification .

Betterment Bond ETFs

You are given the ability to change your overall asset allocation between the Stock and Bond baskets. You could do 10% in Treasuries and 90% in stocks today, change your mind, and switch to 50% Treasuries and 50% stocks.

That’s as complicated as it gets. Decide what percentages you want in risky investments versus conservative investments. Your focus becomes regularly investing funds rather than deciding what mutual funds, ETFs, or individual stocks to choose.

Hiding Complexity

If you haven’t noticed yet, simplicity is one of the key factors of the investing options that Betterment offers.  They do a good job of hiding some of the complexities from you, for example:

  • Re-balancing every quarter, or, when an allocation is more than 5% from the target 
  • Creating a diversified portfolio comprised of over 3,000 different companies inside cost efficient ETFs
  • Dollar based, fractional share investing into ETFs

Things like these combined with automatic deposit and regular contributions over time help investors avoid the roadbumps that keep people from investing in the first place or prevent them from following some of the investing best practices such as diversification and proper asset allocation.

Betterment Investing Fees

Unlike other discount brokerages that charge a per trade cost (ranging from $5 to $20), Betterment has a different take. Instead of charging per trade, they add an expense ratio to your account. The level of the percentage is based on the amount of money you have invested with the firm.

The lowest level accounts (under $25,000) are charged 0.9% of the total invested. If you invested $10,000, you would pay $90 per year. The expense ratio gradually decreases as your balance increases. At the top end of the range — anything over $500,000 — you pay 0.3% per year.

Room for Improvement 

One of the ways I see Betterment being useful is for people who want to save for retirement but haven’t started because they’re uneasy with the whole investment process.  Unfortunately, Betterment doesn’t have the option of opening a retirement account.  Of course you can save for retirement outside of an IRA but then you give up the tax advantages of a retirement account.  I spoke with someone at Betterment regarding retirement accounts and was told they’re a high priority and will be coming soon.

Another pretty standard feature for mutual fund companies and brokerages is the ability to open a joint account.  Betterment doesn’t offer joint accounts right now; it sounds like they will be available at some point but there’s no timeline for when that will be. 

Another nice to have would be the ability to create multiple investment accounts with a different asset allocations for each.  So if you wanted to have two investment funds, each with a different time frame, you could set the investment allocation separately for each of them – Update: I’ve heard from Betterment and a feature that supports this is being released later this month.  You’ll be able to create sub accounts and each will have it’s own allocation.

New Account Bonus

Betterment is offering new customers a $25 bonus for trying it out.  Betterment doesn’t require any account minimums, however, if you sign up for Betterment and deposit at least $250 into your account to try it out, they’ll give you $25 – Click here for the bonus.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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5 Responses to Betterment Review

  • Frustrated @ Betterment

    I want to bring this to the attention of clients of betterment that betterment charges a fee up to $400 if you want to do a direct (in-kind) transfer from betterment to another brokerage. I have been trying to do a direct transfer of Roth IRA from betterment to another brokerage firm and was quoted this amount.

    This fee is also listed in their customer agreement in section 23. Please be aware that your only option could be an indirect roll over if you don’t want to pay $400 in transfer fees.

    Betterment does not openly advertise this fee, which I think they must do when they list any or all fees on their website.

    • Katherine

      Hi F@B,

      Katherine from Betterment here. Thanks for the comment. As I posted in response to you on a few other blogs, you are correct, there is a fee that would be assessed should a 3rd party direct transfer be requested. This is because it would involve a 3rd party to complete the action – it is not a feature provided with your account. Betterment will NOT charge any transaction fees to allow you to complete an indirect transfer of your account, and is our recommended method.

      While we apologize that the new brokerage may charge fees for the trades of moving funds into your account as cash, we do our best to provide an option that does not cost anything extra.



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