Algorithms seem to be in control of everything these days, from the ads we see on Facebook, the shows we watch on Netflix, to what we find when we search on Google.
But what if there were an algorithm that could help you invest smarter? Something that could maximize returns and minimize risk, while possessing smart features such as automatic rebalancing and tax-loss harvesting?
Especially for new investors, wouldn’t it make sense to give this a try?
That’s the idea behind the newest crop of automated investment platforms called robo-advisors – and Betterment is one of them.
Formed in 2008 by Jon Stein, Betterment was one of the first online investing and financial advising platforms available. With currently $16.4 billion in assets under management, it’s also one of the largest firms out there.
Commonly called “robo-advisers”, these investing platforms are designed to take the fear and guesswork out of investing in the stock market by actively investing, managing, and trading stocks and bonds on your behalf. Their goal is to make investing super easy for novices.
But Betterment’s goal isn’t just to get you to start investing – they want you to get your entire financial house in order.
Betterment uses “Modern Portfolio Theory” to make investments based on the risk tolerance of the investor.
When you sign up, Betterment will ask you a number of different questions – such as your goals and timeline for investing – to determine your risk tolerance. This risk profile determines your asset allocation, which Betterment uses to pull together a unique portfolio for you, picking an optimal amount of stocks and bonds based on your particular situation.
Betterment uses globally diversified Exchange Traded Funds (ETFs) to build your portfolio. An exchange traded fund is a collection of funds that tracks an index, like the S&P 500, but trades like a stock.
These stocks and bonds are highly diversified across market caps, in emerging or developing markets, and long term or short term.
By purchasing baskets of stocks and bonds that hold assets from hundreds of different companies, we can diversify our portfolio, which helps to minimize risk while maximizing returns.
While every customer will have a portfolio completely unique to them based on their risk tolerance, time until retirement, etc., every portfolio uses a mixture of the following 14 funds:
Based on your goals, Betterment will pick an asset allocation for you.
Betterment does not currently offer investing in assets such as real estate, gold/silver or cryptocurrency.
Betterment does offer a few different portfolio options for those who have specific goals or needs that can’t be met with a standard portfolio.
A few of the portfolios available are:
Whether you want to save for retirement, fund your child’s education or just beef up your emergency fund, Betterment offers a wide range of accounts that can accommodate many of your personal goals, including joint accounts for spouses and trust accounts for beneficiaries.
Betterment offers the following types of accounts:
You can choose any of these account types when you sign up. You can also align each of your accounts to a different investment goal, whether that’s investing, saving, or setting up a beneficiary.
Betterment has two tiers of service, each with their own account minimums and fees: digital and premium.
To most people, these fees probably sound like peanuts. But properly understanding fees goes a long way to understanding how much of your money gets eaten up by fees. For an investor with $1,000 in a portfolio, you’ll be paying $2.50 per year to have Betterment manage a portfolio with the basic digital service.
Premium also comes with unlimited access to Betterment’s certified financial planners, who can give you advice on your portfolio, whether your assets are inside or outside of Betterment. They can also advise you on events outside of investing, such as saving for a child’s education, or helping newlyweds merge their finances together (more on that below).
Choosing between Betterment digital or premium will depend on how much you plan on investing with Betterment and if you want access to Betterment’s more robust features.
Whether you’ve reached a new stage of life or just need some general guidance, Betterment financial advisors can help you plan for many of life’s most common milestones. If you’re a premium member, you’ll pay no additional fees for these calls.
Each financial package comes with a phone call, an action plan written by your expert and exclusive educational content.
You can speak to a financial adviser about the following topics:
And if you need more regular and comprehensive financial planning than what’s offered above, Betterment can set you up with your own dedicated certified financial planner via the Betterment Advisor Network (minimum $100,000 investment).
In addition to investing, Betterment also offers users a high-yield savings account that earns 1.83% APY*. It requires just $10 to sign up and has no additional account fees. Deposits are FDIC insured up to 1 million dollars, and the account comes with several noteworthy features, such as unlimited withdrawals and deposits (you can typically only withdraw from a savings account six times per month).
Betterment is also preparing to launch a checking account with a host of cool features, such as no overdraft fees, no minimum balances, ATM-reimbursement and FDIC-insurance protection for up to $250,000, but it’s not yet available in every market. You can join the waitlist here.
*You can see the current APY here.
While no financial advisor can keep your portfolio from losing value in the stock market, Betterment’s algorithms do their best to help reduce your exposure to risk.
Additionally, Betterment takes precautions to safeguard your money. One of the ways they do this is by making sure your assets and Betterment’s assets are kept completely separate. This way, you have full access to your assets, and can add, withdraw and transfer them as you wish.
Furthermore, your Betterment account is protected by insurance from the Securities Investor Protection Corporation (SIPC), insuring each of your Betterment accounts up to $500,000 in the event of a broker error or the failure of the company. (Note that market losses are not SIPC covered).
Betterment also encrypts all of your personal data, such as your financial information like bank account and your tax identification number, to personal data such as your social security number and security questions. This ensures that your data is kept private as it makes its way through the Internet.
A few additional ways you can keep your assets safe:
People who should use Betterment:
People who shouldn’t use Betterment:
If you’re a beginner investor just starting to build wealth and are looking for an automated, hands-off approach to investing with tons of extra features, then Betterment may work great for you. Whether you need general investment advice or financial planning for many of life’s significant events, Betterment can help.
Betterment also offers investing at a great price, as its fees are right in line with similar robo-advisers like Wealthfront, who charges an identical management fee of 0.25%.
Betterment offers additional features such as financial planning and two-way sweep you can’t get from places like Wealthfront, making it an even more attractive option among robo-advisors.
Before you decide where to place your money, it’s crucial to identify your long-term goals. For investors looking to get their feet wet in the world of investing, you could do a lot worse than Betterment. Their investments are highly diversified, charge low fees, and are fully-automated.
If you’re wanting to actively trade stocks or want a little more control over your portfolio, then a robo-advisor like Betterment may not be the investing platform for you. But if you’re a new investor and want someone to manage your money for you, Betterment may be right up your alley.
Sign up and deposit $10 to get started.