Betterment Review [Updated 2012]

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BettermentOne of the online discount brokers that is getting a lot of attention right now is Betterment. This site launched fairly recently, and the concept won the “Best of Show” at FinovateFall 2010. The overriding principle behind Betterment is simplicity.

For those who are interested in a “set it and forget it” approach to investing, Betterment is a solid choice, specializing in using low-cost ETFs to achieve diversity. Betterment will even automatically change your asset allocation.

Here is a rundown of Betterment:

How Betterment Works

Betterment is very straightforward. Betterment is registered with the SEC, and it carries SIPC insurance. Like many other online brokers, it’s fairly easy to sign up online and get started. As you sign up with Betterment, you will enter your basic personal information required by all investment accounts. Then, you answer a few questions that help determine your asset allocation.

All of the investments available are ETFs. You decide how much money you want in stock ETFs, and how much in Treasury ETFs. Your stock ETFs are include those on the Dow, as well as value stocks, midcaps and even a total market ETF. The bond ETFs are iShares Barclays: SHY and TIP.

Once your asset allocation is determined, and you fund your account, you can begin investing. There is no minimum to open, so that makes it easy to get started with what you have. It’s also possible to set up an automatic investment so that you are investing every month with money from your checking account or some other account.

Every three months, Betterment will re-allocate your portfolio. Your holdings will be assessed, and then re-balanced, depending on your previous specifications. Additionally, if your allocations drift more than 5% — even if the three-month mark hasn’t been reached — Betterment will automatically re-allocate. You can change your desired asset allocation as your goals change. Additionally, your investments change as you adjust your goal settings. Betterment takes care of all of it.

Instead of charging per-trade fees, Betterment charges fees based on your yearly account balance. The fee is pro-rated, and ranges from 0.15% to 0.35%. You will be charged the higher fee if you have a low account balance. The starter account with a $0 beginning balance and $100/month minimum deposit costs 0.35% a year. Once you hit an account balance of $10,000, your fee drops to 0.25%. You pay the 0.15% fee if your account balance is $100,000. Plus, once you reach $100,000, you have access to customized portfolio options.

Downside to Betterment: Limited Options

Betterment really is for the investor who is mostly hands off. There aren’t very many investment options. You can’t invest in individual stocks or mutual funds. There aren’t many bond options to choose from. For the hands-on, frequent trader, Betterment probably isn’t the right product.

Additionally, you have to be willing to trust Betterment to re-allocate your holdings appropriately in some cases. Customizing your portfolio, at least at first, isn’t really an option. If you are looking for a full-service online broker offering a variety of options, Betterment is not for you. However, if you want a simple account that allows you to pretty much put things on automatic, Betterment can be an attractive option.

Have you used Betterment? What do you think?

{ 3 comments, please add your thoughts now! }

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3 Responses to “Betterment Review [Updated 2012]”

  1. ChristianPF says:

    Betterment sounds like a great idea for many people, but I’d prefer a bit more control over my portfolio. If only they’d allow more flexibility (such as choosing mutual funds) and then at the same time allow your choice of conservative or aggressive funds.

    Know what I mean? Although I do know people who have done quite well with Betterment. Great review!

  2. Kenny says:

    Thanks for this recommendation. I am just going to do a trial and put in $5K to see how well it does. I have been that investor that just tries out a lot of things, does not stick to anything specific, and am really tired of not being able to do the balancing of the portfolio over the long term.

    I even have a money manager make recommendations and even then I have a hard time following it. Sometimes too much knowledge is also bad for one’s financial health, and this above statement proves it.

    Like the comment above, I have lived the investment world doing it myself, with lots of choices, but not a fixed game plan. And, hence, the game plan differs as market environment changes (bull to sideways to bear to bull to bear etc).

    Results vary as a result, and Betterment was probably created for a busy professional, buried in building and capitalizing on the career.

    Appreciate you bringing it to my attention. I have verified that money managers want anywhere from 0.75% to 2.5% even though they are doing ETFs and most of the time they are filled with flaws also, since most of them will not share past results, and when you force them to do it, their results after fees are no better than the average mutual fund.


  3. Frustrated @ Betterment says:

    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.

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