Lately I’ve been hearing a lot about a new investing website and brokerage account through Betterment.com. What is Betterment? At it’s very basic it’s another in a long line of online brokerages that allow you to hold stocks and bonds as investments via ETFs, like an account through Etrade or ShareBuilder. But it’s more than just that. It’s also a tool that helps automate the investing process to make it simpler for the average user, and for those who are just too busy to stay on top of their investing accounts all of the time. So today I thought I’d do a review of Betterment.com.
Betterment.com is a new player as far as brokerages go. Betterment.com was founded by Jon Stein in 2008. Betterment.com launched at TechCrunch Disrupt 2010 NYC. In December 2010 Betterment.com received $3 Million in a series A financing round from Bessemer Venture Partners (lead) and Anthemis Group.
Betterment LLC is a Registered Investment Advisor with the SEC and they’re SIPC insured. You can be assured of the same protections as you would with a larger financial institution. Of course since this is an investing account and not a savings account, there ais no assurance of not losing your money.
Betterment only launched a few months ago, but it is receiving a lot of buzz with writeups in The New York Times, CNNMoney, Investment News, Mint.com and more.
While the website was only launched at the end of 2010, it is already receiving some recognition for it’s innovative ideas and approach.
- TechCrunch Disrupt NYC 2010 “Battlefield Finalist”
- TechCrunch Disrupt NYC 2010 “Best NYC Startup”
- FinovateFall 2010 “Best of Show”
So they haven’t had a lot of time to get awards, but to have some recognition for their fresh ideas as a startup is a good start.
How Does Betterment Work?
So what exactly is Betterment, and how does it work? The basic idea is this – a lot of people are either just too busy to get too far into the weeds with their investment decisions, or they are too intimidated by the array of choices out there when it comes to investing. Betterment attempts to take the confusion out of the process by making investing simple.
So when you set up an investment account with Betterment, they make the process super simple. After you signup (get a $25 signup bonus here), The only choices you’ll need to make are:
- How much to invest.
- How much of your investment you want in equities (Stock Market).
- How much you want in Treasury bonds (TIPs).
You can also set up automatic investments on a regular basis if you want to.
Within stocks and bonds, they divide up your holdings into a variety of ETFs so that you are diversified. Here is what you get on the stocks side:
- 10% SPDR Dow Jones Industrial Average ETF (DIA)
- 20% iShares S&P 500 Value Index ETF (IVE)
- 20% iShares S&P 1000 Value Index ETF (IWD)
- 15% iShares Russell 2000 Value Index ETF (IWN)
- 15% iShares Russell Midcap Value Index ETF (IWS)
- 20% Vanguard Total Stock Market ETF (VTI)
For Treasury bonds, you get
So the stocks and bonds you get will give you a nice diversified portfolio.
Asset Allocation And Visualization Tools
To me one of the selling points of Betterment are the allocation and visualization tools you can use to set your investment goals (demo). You can update your asset allocation, and investing time horizon and see about what kind of returns you can expect to see given your amount invested, level of risk and historical returns. It’s pretty interesting to play with the tool and see the differences you can expect given different allocations.
Let’s say that you have about $50,000 invested as the demo account does. If you have 80% invested in stocks and 20% in bonds, given a 20 year time horizon it will show you a forecasted range of returns that you could expect to see – anywhere from $100,000-$600,000. Change the percentages and timelines and it can drastically affect your results.
So if you decide you want to change your allocation either to include more stocks or bonds, you just move the slider up or down, and then hit the “change” button, and Betterment will update your account holdings and purchasing decisions going forward. Piece of cake!
One of the nice things about an account with Betterment is that it will automatically re-balance your portfolio for you every three months, or if your allocations drift more than 5%. Without re-balancing your account can easily shift over time to have an allocation that is heavier on stocks or bonds than you want it to be. If you start out at say 80/20 stocks to bonds, if you don’t reallocate over time you could one day find that your account has an allocation more like 75/25 or 70/30.
This is one of those things that most investors neglect to do on a regular basis, so it’s nice to have that part of the account be automatic.
Fees And Charges
Here is where the rubber meets the road – what kind of fees and charges can you expect for using Betterment?
UPDATE: As of 2/22/2012 Betterment has lowered their fees for all users. You can now expect fees in the range of .15%-.35% depending on your balance. That’s quite a reduction from their previous fees, which you see below. Betterment Fee Reduction Details Here.
There are no minimums to invest, and there are no fees for trades. Betterment charges a pro-rated yearly fee that is in a range of 0.3% to 0.9%, depending on your account balance.
For balances under $25,000 the fee is 0.9% annually. The portion of balances over $25,000 will be charged 0.7% annually, the portion of balances over $100,000 will be charged 0.5% annually, and the portion of balances over $500,000 will be charged at 0.3% annually.
For many folks this is where they’ll probably stop reading as having a 0.9% fee on account balances would be far too high, especially folks who are more versed in the stock market and have confidence that they could buy a target retirement fund, or low fee index fund via Vanguard or similar low cost mutual fund company. That would mean a much lower cost in the range of .20%-.30% in many instances. Depending on the balance that can be quite a bit of money you’d be saving by doing it all yourself.
For others who have a low amount to invest or who don’t want to mess around with buying or reallocating their own investments, this could be a good option and something they’ll want to investigate. It is super simple to use, and the automatic nature of investments and re-allocations make it a winner.
Betterment.com just launched at the end of 2010 and already are receiving a ton of good press and accolades for their innovative investment platform. I have to admit that I am impressed with how they have taken a difficult subject – investing – and made it much more accessible to the average person. The fact that you can make automatic investments, allocations are automatically adjusted, and that it can be a cost effective option for some investors with smaller amounts to invest make it an attractive offering.
All in all – I think Betterment will be a great offering for many folks who are investing smaller dollar amounts, and who don’t want to do all the legwork and regular re-allocation of assets. If they want a set it and forget type account, Betterment should probably be one of the first that they consider. And now that they’ve got a $25 bonus just for signing up, I think there’s really nothing to lose! I’ve signed up now, and I’ll be reporting back once I’ve been using it for a few months.
Have you used Betterment.com, or are you considering it? Tell us your thoughts on Betterment in the comments!
Last Edited: 12th March 2013