Betterment Account Review: Brokerage Fees, IRA Investing, Robo Advisor Mutual Fund Offerings
Betterment is one of the largest automated investment services on the market. Companies like Betterment offer to replace traditional human advisors with a hybrid of technology and financial analysts. This, in turn, leads to very low management fees for their customers.
Betterment offers a wide variety of accounts, but this article will focus on their traditional taxable brokerage account. It will begin by covering the basics of how automated investing platforms work to give a basic understanding of the concept. Afterwards, it will review account creation at Betterment, the funds that make up a portfolio, withdrawing money, their fees, and then tie things up with a summary. Is a “traditional” brokerage account at Betterment a good decision? Keep reading to find out.
Automated Investing Basics
In a nutshell, automated investing companies (also known as robo-advisors) take something that humans have done for decades and attempt to automate it. They do this by having human financial advisors pick certain low-cost funds they think will have solid returns. These funds are almost always large index funds or ETFs with low expense ratios; see the “Portfolio Funds” section below for more info. The “basket” of funds changes from company to company but the strategy remains the same.
The automation starts after the selection of funds has been chosen. The companies then tie certain allocations to certain risk levels set by the client. The account is automatically allocated to the appropriate fund ratios after the client determines their acceptable level of risk. This allocation is then rebalanced, reinvested, and managed behind the scenes.
Needless to say, this technology is relatively new (under 10 years) but the performance has been great so far.
Setting up an account with Betterment will take about 10 minutes. They ask the standard personal identification questions that all financial companies ask. Once that’s taken care of Betterment will begin asking a series of questions aimed at finding a persons risk tolerance. The account is setup after that! Simple.
Betterment offers a very diversified portfolio of funds for their customers. They offer options ranging from total market ETFs to emerging market bond funds. This is important because a more diversified portfolio means less inherent risk to the owner. As an example, imagine owning $100 of Lehman Brothers stock or $100 split across the entire financial services industry.
Below is an image of the funds that make up investment portfolios at Betterment. As mentioned before, the “Current Weight” will change depending on the individual’s risk score.
It should be mentioned that customers can’t change individual fund allocations. This is true for all automated investment platforms: micromanaging funds would defeat the purpose of the automation.
Withdrawing money is where Betterment’s account really shines. Customers can withdraw as much as they want, as often as they want, for no fee. That’s right, Betterment’s brokerage account is basically a bank account in disguise. It takes 4-5 days for a transfer from your Betterment account to make it to your traditional bank account. This delay is simply due to the nature of selling investments.
The real reason Betterment’s brokerage account is a real competitor to normal banks is the return. The absolute best savings account only offers an interest rate of around 1.00% per year. With inflation taken into consideration, that account would actually be losing value every year.
Betterment offers a platform that will, on average, have returns of 6%-7%. This is based on the historical stock market average. These returns are 6 or 7 times higher than the interest rates offered by traditional bank accounts.
This is about the time when it should be mentioned that while the average return of a Betterment account is phenomenal, it also has more risk. Betterment accounts can, and will, decrease in value from time to time. Traditional bank accounts, on the other hand, never decrease in value. This means that Betterment can perform one very specific job very well: housing an emergency fund. Emergency funds tend to be held for years before they are used. As seen in the graph below, the longer money is invested the better chance it has to grow.
Betterment’s fees are almost rock bottom if someone is looking for an investment management tool. They charge management fee of 0.25% on account balance. This fee is
added on top of the underlying fund expense ratios.
As mentioned earlier in the article, there are also no additional fees for withdrawing money, changing allocations, adjusting contributions, or adding money at Betterment.
For wealthier investors, Betterment offers upgraded Plus and Premier tiers. Plus requires that investors keep a minimum balance of $100,000, and pay a slightly higher annual fee (0.40%), but provides an annual call with Betterment’s financial experts to help better match customer goals with their investment allocation. This contrasts with Digital customers, who only have access to Betterment’s email and live chat customer support teams. Premier goes one step further by offering unlimited conversations with these financial experts, while requiring a minimum balance of $250,000 and a 0.50% annual fee.
Betterment brokerage accounts are great for holding money that may need to be withdrawn sometime in the future. Using an account at Betterment for this will earn a higher return, on average, than a traditional bank account. Their slick web interface makes the whole transaction as seamless as possible.
Betterment accounts used simply as a taxable investment account leave a little to be desired. For investors looking to make small regular payments, Betterment’s lack of trading fees can more than make up for their small management fee.
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