One of the newer brokerages receiving a great deal of notice right now is Betterment. Betterment is relatively new; it created quite a stir at Finnovate 2010 by winning “Best of Show”. Since then, financial bloggers and other have been writing about the service, and many have tried it out.
The thing that sets betterment apart from other online brokerages is that it revolves around the idea that it is possible to automate your investment portfolio — even to the point that your asset allocation is regularly changed to meet your changing needs. Betterment is designed to help you assess your investment requirements, and then help you put together a portfolio that reflects your goals, as well as your changing needs.
For the most part, Betterment focuses on asset allocation using stocks and bonds. It’s a classic portfolio management technique that has worked for many, and that provides somewhat consistent returns. The idea behind Betterment is that you can set up the asset allocation for your goals, whether they are short-term, like saving up for a down payment, or long-term, like saving for retirement.
How Betterment Works
Betterment is very simple, and it’s easy to sign up and get started. You sign up quickly, and answer questions about your goals, including questions that indicate your risk tolerance, and your time frame. Betterment helps you come up with an asset allocation that is meant to help you reach your goals. If your portfolio drifts away from your asset allocation, Betterment will make automatic adjustments. These adjustments are made every three months, or when your specified allocation gets off by more than 5%.
As your goals change, and as you approach different milestones in your life, you can change your asset allocation so that it matches your new objectives, and Betterment will take care of that. Betterment uses ETFs to create your portfolio. A number of ETFs, including bonds (like Treasury ETFs) and stocks (like midcap, all-market, and other ETFs), are chosen according to your goals.
The costs of Betterment are relatively low in general. There are three different tiers associated with Betterment:
- Builder: With this plan, you don’t have to have a minimum balance, but you do need to commit to invest $100 each month. At this level you can’t customize your portfolio, or see next day deposits. The cost is 0.35% per year.
- Better: If you have $10,000 to invest, and don’t want to make monthly deposits, you can choose this plan. Like the Builder tier, you can’t customize your portfolio, but you do have the ability for next day deposits. This plan costs 0.25% per year. If you regularly invest $100 a month, and your account grows to $10,000, you will be upgraded to this tier.
- Best: For those who have $100,000 in the Betterment account, it’s possible to add a little more customizability to your portfolio. You don’t have to make monthly deposits, and you have next day deposits. Plus, you can create a custom portfolio for management, rather than just use the Betterment portfolio. This plan is 0.15% per year.
The simple options make Betterment easy to use. You can set up different goals to reach as well. It’s possible to have an IRA for retirement, as well as set up different financial goals. You can arrange your asset allocation, and direct your Betterment portfolios in a way that helps you meet multiple goals. Additionally, you can withdraw your money at anytime without penalty. (Although if you have an IRA, or a Roth IRA, with Betterment, there might be other consequences for withdrawing your money early). However, as Betterment points out on its web site, this system is designed for the committed saver and investor.
If you don’t think that you can handle the $100 a month commitment, you will be automatically placed in the Better plan. However, if you don’t have a $10,000 balance, being in that plan can be costly: $3 a month. Your balance can be spread out over all your goals, however. Really, though, Betterment is designed for those who are ready and able to make a regular commitment to setting aside money for investment. It’s a great way to get started with dollar cost averaging, investing a relatively small amount of money each month.
Limited Options with Betterment
The main drawback to Betterment, though, is the limited options. For the investor looking to invest in a wide a variety of asset classes, Betterment isn’t your best option, since it is mostly limited to stock and bond ETFs. For those who want to add other investments, and who want to direct more of their portfolio options, Betterment doesn’t offer the best choices.
Additionally, it’s important to realize that you won’t have the ability to customize your portfolio as you would like. Only when your account reaches $100,000 you can direct your portfolio beyond the “Betterment portfolio” created on your behalf. The ability to customize is not a regular feature of Betterment, and if you are interested a more “hands-on” approach to your portfolio, this investment brokerage is not for you.
For the most part, Betterment is for the investor interested in getting started, but who doesn’t have a clear idea of where to begin. The questionnaire you fill out when you sign up allows you to learn a little bit more about what investment style might suit you, and how you might begin.
Betterment is also ideal for the investor who isn’t interested in doing a lot of portfolio management. When you sign up with Betterment, the work of investing is essentially taken out of your hands. All you have to do is provide the regular money for investment, and Betterment takes care of the rest, depending on your goals. Betterment provides you with portfolio management, based on principles of asset allocation, for a fairly reasonable fee.
It’s worth a look at Betterment if you are looking to get started on a plan designed to keep you on track as you work toward your investing goals. For those who are interested in just being able to invest money and have the chance of reasonable returns for relatively low fees, Betterment could be the way to go.