Betterment.com Review: Application Process, Updated Asset Allocation

betterment screenshot

Updated with new asset allocations 2013. Betterment.com is an online investment tool that rolls portfolio management, trading commissions, and rebalancing into one website. I opened an account when it started with $1,000 to look under the hood. Since then, they’ve actually made several changes in response to feedback and constructive criticism.

The main attraction of Betterment is simplicity. It boils everything down to a single slider (see above) to indicate your risk preference, and takes care of everything else in the background. ETF buying, ETF selling, rebalancing, and so on. On the surface, it’s as easy as having a bank account, besides the critical fact that you can lose money!

Application Process

The new account application was conducted entirely online. You provide your usual personal info and investing background, and they verify your identity using a quiz based on information from your credit reports (your actual credit score is not checked nor is it a factor). You then provide your bank routing and account numbers, and they deposit and withdrawal trial amounts to verify that you own that account. After that, you can transfer money electronically back and forth easily. This part was indeed simple and easy. Here’s a screenshot of part of the application:


(click to enlarge)

Asset Allocation (Updated)

Based on my answers to their risk questionnaire algorithm, I ended up with a 63% stocks vs. 37% bonds allocation. My initial review circa June 2010 was critical of the fact that (1) their stock allocation was all US-based and (2) their bond allocation was entirely Treasury Inflation-Protected bonds. As of November 2010, they indeed added nominal Treasury Bonds to their asset allocation. As of September 2011, the adjusted their stock portfolio to add international stock exposure in the form of a conservative 35% international/65% US split. (Market-cap weighting is closer to 55% international/45% US.) Below is their old target breakdown for stocks and bond portions (late-2011 to late-2013):

Stock Portion Only

  • 25% Vanguard Total Stock Market (VTI)
  • 25% iShares S&P 500 Value (IVE)
  • 25% Vanguard Europe Pacific (VEA)
  • 10% Vanguard Emerging Markets (VWO)
  • 8% iShares Russell Midcap Value (IWS)
  • 7% iShares Russell 2000 Value (IWN)

Bond Portion Only

  • 50% iShares Barclays TIPS Bond ETF (TIP)
  • 50% iShares Lehman 1-3 Year Treasury Bond ETF (SHY)

In September 2013, Betterment announced more tweaking to their asset allocations, with the bond portion now including the following ETFs:

  • “Cash” iShares Short 0-1 Year Treasury Bond ETF (SHV)
  • Vanguard Short-Term Inflation-Protected Bond ETF (VTIP)
  • iShares Core Total US Bond ETF (AGG)
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
  • Vanguard Total International Bond ETF (BNDX)
  • Vanguard Emerging Markets Bond ETF (VWOB)

The actual asset allocations are no longer fixed in terms of stocks and bonds, but you can roughly determine the breakdown with the chart provided below:

Happily, they are using passive index ETFs that offer good tax-efficiency and low costs. The average weighted expense ratio for the ETFs by themselves will vary with portfolio risk level, but should be a little under 0.20%, or 20 basis points.

I do like the current asset allocation a lot more than I did before, although I wish it was more carefully considered in the beginning because it resulted in a lot of unnecessary trades for early adopters like myself. The silver lining is that the tax info imports nicely into TurboTax software.

Implementation

Betterment.com tries to make things simple a la ShareBuilder, and thus also uses fractional shares. This way, you can own exactly $10 or $100 of an ETF, even if the price of a single share may be $76. I believe they buy and sell shares between other users of Betterment:

DUAL AGENT CAPACITY: In executing your trades Betterment Securities has acted as both an agent and dual agent, with the exception that in the case of a trade which totals a whole number of shares we have acted as an agent only. For portions of your trades for which Betterment Securities acts as a dual agent you received an execution price equal to the “bid” (when selling shares) or “ask” (when buying shares) quotes on the open market.

As long as they are providing a fair price and not using the system as a profit-generating venture, then that would make practical sense. If I need to sell some shares and someone else is buying, then swapping them out internally would save money and commissions all around.

Fees (Last changed early 2012)

When Betterment first rolled out, it offered a flat fee of 0.9% annually for accounts with balances up to $25,000. There were no monthly fees, no maintenance fees, no minimum requirements, and no commission charged for any trades. As of March 2012, their fee schedule has been changed to lower fees for most users, but also raised some fees for certain smaller accounts. However, if you were an existing customer which opened an account before February 21, 2012 , you can choose to keep your old fee schedule.

Here’s the new fee schedule, which breaks down into three plan options:

Betterment Fees

Note that for accounts under $10,000 in size, there is a requirement to add $100/month to your account. Otherwise, you’ll be subject to a $3 monthly fee. For smaller accounts that don’t contribute $100 a month, this is comparatively a fee increase. However, I think this requirement is understandable because Betterment needs active and growing accounts for their business model to work, and this also encourages a certain level of saving. If you do add $100 a month, your annual fees are now 0.35% instead of 0.9% previously. Once you reach $10,000, there is no monthly requirement and you are looking at 0.25% annually.

All in all, I think the updated fee structure is more equitable than before and a more realistic solution for the long-term. For a $1,000 account that adds $100 a month, your annual costs will be about $6. Less than ten bucks a year, including all commission costs but on top of the expense ratios of the individual ETFs? That’s a pretty good deal even if you wouldn’t mind making trades yourself. Even with a discount brokerage you’d pay $7/trade at Scottrade or $3.95/trade at OptionsHouse. When you look at the whole fee picture, Betterment can be very economical. Here is a screenshot of my automated transaction history:

Custom portfolios. $100,000 is a lot of money, but this is where I think Betterment is getting somewhere cool. With $100k they will let you design a custom basket of ETFs and then maintain it for you. For example, I could add ETFs that cover Real Estate, Commodities, or Gold. Now, 0.15% of $100,000 is $150. I actually think I might pay a few hundred dollars a year for them to maintain an ETF portfolio as that would include trade commissions. The only problem here is portfolio fragmentation – my money is split in a bunch of different accounts (IRAs, 401ks, Solo 401ks) which makes holistic asset allocation harder to achieve using automated tools.

Alternatives. You can already buy a nice all-in-one mutual fund from Vanguard like the Vanguard 2045 Target Retirement Fund (VTIVX) with a $1,000 minimum investment. In a similar manner, you can manage your overall asset allocation by altering the date and they’ll maintain and rebalance for you as well, gradually becoming more conservative as time goes on. You can transfer funds to/from a bank account in $100 increments. Transactions are also free when you hold them at Vanguard.com, and all this costs just 0.20% annually including all fees.

Betterment Leaderboard

Comments

  1. i just looked at this the other day, and i was thinking the same thing about the international stocks.

    I also didn’t see if they had the ability to make any of the accounts IRA/ROTH IRA.

    all in all, i think the idea has promise, and i like it a lot more then the myriad of target date funds, but for anyone who is just making weekly contributions to vanguard mutual funds, i ‘m not sure that it makes sense.

    • Randy Katz says:

      There is no assurance Betterment will perform better than a Target Date fund. Just because it is shiny or goes blink blink has nothing to do with performance long term.

  2. Alex Martsenyuk says:

    I think they launched as a savings account replacement and so probably looked to compile a portfolio wih relatively low volatility to not scare users.
    That being said it will be interesting if they introduce more portfolio options down the road and enter competition with other advisory firms or just stick with the current model.

  3. vijaianand says:

    I might like to try it out for my IRA periodic invstments but not sure they support IRA account. Going to check it out and see.. If they do, I would start my account to check them out.

  4. I opened my account with Betterment a few weeks ago and it was really simple. I will really go nuts if they give me the ability to open a Roth IRA with them. That would be amazing.

  5. I opened my account and it did nothing but lose money. I’ve had my account since April 2011. I’m withdrawing it all now.

  6. @Jim,

    What is/was your asset allocation?

  7. Cooper's dad says:

    Are accounts insured by SIPC through Betterment or another party?
    What is the risk that Betterment doesn’t fulfill one of my buys or doesn’t pay proceeds of one of my sells? In other words, what is their relationship among me, the fund sponsors (vanguard, iShares, etc)???

  8. Jenna, Adaptu Community Manager says:

    Thanks for sharing your review with us.

  9. As this is a brokerage account, tax prep should be taken into account. It’s a mess at tax time, due to the holdings in various funds. So if you buy and sell with some frequency and/or reinvestment your money, it’s a big ol’ headache come tax time.

    They don’t mention that anywhere in regards to this outfit, this review or others. If you like tracking down fractional shares and every little buy and sell you make with this outfit, go right ahead. For everyone else, it’s a headache that just compounds.

  10. I opened an account with Betterment in June ’11. And as Jim mentioned, it went way down but has come back up (up 8.3% as of today). But that was a result of market fluctuations so Betterment can’t be blamed.

    Betterment is SIPC insured but you don’t trade, you set your stock to bond allocation ratio and that’s it. If you want to buy or sell you’ll have to do it through another broker.

    For me, tax prep was a breeze. Like Jon’s, my 1099-B was gigantic but Betterment set it up to import easily into my favorite tax software.

    I recommend Betterment to anyone that wants to invest/ save money but doesn’t have the time/ knowledge to do it. Even someone like myself, who has a little knowledge and even less money, keeps a small balance with Betterment. I have IRA’s, 401k’s and other investment accounts as my primary investment vehicles but Betterment sure makes it easy. I bet if you compare year over year returns from each investment vehicle Betterment would do fairly well (at least compared to the returns of my trading account, yikes! Hot tip my a$$)

  11. How does betterment compare to wealthfront?
    From all I can tell, wealthfront seems to be more upfront about what it does, and charges lower fees. Otherwise the services seems very similar.
    Any opinions?

  12. Not related to this but do you have a blog on benefits of investing in Vaguard funds via vanguard brokerage versus other broekrages? I’m considering using the WF PMA accounts for buying into a Vanguard fund but unable to find information on the way the fees will be different for doing so… Thanks much!

  13. Wouldn’t it just be easier to mimic this basket @ Vanguard?

  14. @Maxim – I don’t know if it would easier, because you don’t get automatic re-balancing and automatic distributing of new inflows to the proper funds if you DIY at Vanguard, but it would be cheaper.

  15. Living Off Dividends says:

    interesting concept, although with TDA, you can invest in a similar set of ETFs for Zero commission.

  16. MyMoneyBlog Follower says:

    Since Betterment trades on your behalf, do you think they are making making off bid/ask spread? You don’t have control over what time during the ETF’s are bought and their commissions seems pretty low. How do you really know if you’re getting a fair market price of the EFT?

  17. MyMoneyBlog Follower says:

    Since Betterment trades on your behalf, do you think they are making money off the bid/ask spread? You don’t have control over what time during the trading day your ETF’s are bought and their commissions seems pretty low. How do you really know if you’re getting a fair market price on your EFTs?

  18. Frustrated @ Bettermnet 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 the 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

    • In the updated user agreement, Betterment will charge a fee of up to $1000 for an in-kind transfer! That’s absurd and way higher than industry standard for other broker-dealers.

    • Randy Katz says:

      According to the agreement they don’t even have an obligation to approve the transfer, I wonder if this applies to IRAs/rollovers as well?

  19. My investments are split equally between Vanguard, Schwab and T Rowe Price target date funds. Does anyone have an opinion as to whether this is a better strategy than Betterment? Thanks!

  20. I contacted Betterment and the custom portfolio is now only available if you have $500,00 in assets.

    For what it’s worth, the customer service rep said that the reason they don’t include REIT’s in their portfolio is that they found in their modeling that these perform very similarly to mid-cap stocks – only more volatile. I’m not sure if I personally agree. I wonder if they also try to avoid REIT’s because many of their customers mainly have taxable accounts.

  21. For what it’s worth, I just opened an account with WiseBanyan. They are like Betterment except free (and they offer ETF’s). It looks like they, Betterment, and Wealthfront all use MPT (modern portfolio theory), so the portfolios are very similar. WiseBanyan has REIT’s included, so perhaps the algorithm that they are using or the way they are applying MPT is slightly different. They have a waitlist right now, but I referred 10 friends and they sent me an invitation.

  22. Meant to include this in my first post: I emailed their support about transfers out after reading this, and they told me that it was a $75 fee for the ACAT or free if I wanted to liquidate my portfolio. Still pretty reasonable.

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