New start-up website Betterment.com wants to make investing more easy… imagine something as simple as your existing savings account but with higher returns. Too good to be true?
Betterment.com Review: Investing Made Simple, But Is It Worth The Cost?
June 4, 2010 By 18 Comments
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At it’s very core, Betterment is a standard brokerage account, like E*Trade or Scottrade, which holds stocks and bonds in the form of exchange-traded funds (ETFs). On top of this, Betterment provides a lot of automation and simplification so that a user’s required day-to-day involvement is minimized.
Using a short questionnaire or a simple slider bar, you can choose a basic asset allocation (AA) of, say, 80% stocks and 20% bonds. After that, you just link a checking account and transfer money in and out as you please. When you move money into Betterment, they’ll buy ETFs automatically for you according to your chose asset allocation. If you want to withdraw, they’ll make the needed sell trades for you. Dividends are reinvested automatically, and your portfolio is rebalanced quarterly if off by more than 5%.
Asset Allocation Tools
For me, the part I played with the most was the interactive demo that illustrated potential returns based on past results. The dark blue line shows the historical average, dark blue bands indicate where 80% of outcomes have fallen, and the light blue bands show where 95% of outcomes have fallen. Here are some screenshots for a $50,000 portfolio of 85% stocks/15% bonds over 1 year and 10 years (click to enlarge).
(Past performance does not guarantee future results…)
Replace your savings account?
Betterment.com has been getting some heat – in my opinion rightfully so – for some of it’s marketing slogans as a “savings account replacement” or “better than a bank”. This is not a bank. You are buying stocks and bonds. You can lose a lot of money. Even their most conservative option of inflation-linked bonds can lose money in the short-term due to interest rate fluctuations. Yes, they admit this all somewhere, but it should be clearer. You just can’t compare yourself even indirectly with a savings account when the risk levels are so different.
Another example is this quote in their “Safe and Secure” section on the front page:
We are a member of the Securities Investor Protection Corporation (SIPC), which means the securities in your account are protected up to $500,000.
SIPC-insured is not the same as FDIC-insured. SIPC only covers restoring assets to investors if your firm goes bankrupt. It does not insure the value of those assets. It does not cover investment fraud. Will people get confused? I think there is a good likelihood that some will.
Portfolio
So what are you actually buying? For the stock portion of your account, you are buying a basket of ETFs broken down as follows:
- 10% SPDR Dow Jones Industrial Average ETF
- 20% iShares S&P 500 Value Index ETF
- 20% iShares S&P 1000 Value Index ETF
- 15% iShares Russell 2000 Value Index ETF
- 15% iShares Russell Midcap Value Index ETF
- 20% Vanguard Total Stock Market ETF
In my opinion, there is a lot of unnecessary overlap here. Of course, they’re paying for the trades, so maybe that in itself doesn’t matter that much. But more importantly, where’s the international exposure? I’d rather be invested in something as simple as 50% Vanguard Total Stock Market (VTI) and 50% Vanguard FTSE All-World ex-US ETF (VEU). You’d own fewer ETFs but more different companies and be globally diversified.
As for the bond portion, that’s 100% Treasury Inflation-Protected bonds via the iShares Barclays TIPS Bond ETF (TIP). Here, I’d rather see a 50% split between TIP and some nominal Treasuries bonds like IEF or SHY. (As recommended by David Swensen.) More diversification, same high credit quality.
Fees
There are currently no minimum balances required to invest. You don’t pay commissions per trade, but instead are charged a flat 0.9% annual management fee on top of the ETF management fees of about 0.20%. Just for their fees, that’s $45 a year on a $5,000 account, and $450 a year on a $50,000 account. So what you have here is a really simple wrap account. (Compare with Fidelity Portfolio Advisory Services.) In exchange, you get a lot of automation. No manually placing trades or remembering to rebalance.
If you have a low-balance account, this works out to be a pretty good deal *if* you like their portfolio above. Even a discount brokerages range from $7/trade at Scottrade to $3.95/trade at OptionsHouse. If you have only a couple thousand dollars to invest, Betterment can be very economical. (Though I suspect that they will have to change their pricing structure at some point for small accounts that trade a lot.) If you have $25,000 or more in assets, you can do much better on your own, and it’s more likely to be worth your time to expand your investment mix.
Reinventing the wheel?
Time to compare this with existing alternatives. You can already buy a nice all-in-one mutual fund from Vanguard like the Vanguard 2045 Target Retirement Fund (VTIVX) with a $3,000 now $1,000 minimum investment. In a similar manner, you can choose your general asset allocation and they’ll maintain and rebalance for you as well, gradually becoming more conservative as time goes on. International stock exposure including emerging markets is included. They’ll let you transfer funds to/from a bank account in $100 increments. Those trades are also free when you hold them at Vanguard.com, and all this costs just 0.20% annually including all fees. Compare this to 1.1% in total expenses you’ll pay at Betterment.
Finally, a quick note about tax efficient placement of assets. When possible, it’s usually better to place less tax-efficient assets like bonds into tax-sheltered accounts like IRAs and 401k plans. You can’t do this easily with such all-in-one systems.
Last updated: April 8, 2017
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Great analysis. With the many faults, the only situation where this may be useful is if you have less than $3k to invest and you just _have_ to use a Web 2.0 brokerage.
I’m telling my friends/family to stick with Vanguard.
This is great that you put a review of this here. I think that there is good reason to be skeptical of this, and not just as someone who is somewhat interested in managing my investing.
I would concede that this is a service that may be a perfect instrument for some people who want this exact set of investments and doesn’t want to actively manage their investments themselves, but with the many (cheaper and more internationally-diversified) options out there, it would be difficult to justify this economically to too many people.
I know that one of their big selling points was to be the social networking. Apart from that, this seems like an idea that is a little behind the times because of the accessibility of information online and the proliferation of discount trading sites.
@Ben – Social networking is interesting. I wonder if they’ll share their data with non-account holders. For instance… what is the average asset allocation for a 30-year old Betterment user with $50,000 a year income?
“….on top of the ETF management fees of about 0.20%.”
Please site your source.
This is a great review. Thanks! Are there any zecco account opening promotions out there?
@F – Just click on the ticker symbols linked to Morningstar in the original post, which will list the expense ratio of each ETF in the Betterment portfolio. The weighted average expense ratio of all of the stock ETFs in their listed ratios was calculated to be 0.197%. The expense ratio of ticker TIP is 0.20%. I rounded to 0.20% total.
I’ll stick with my Schwab One account and free Schwab ETF trades. No account fees nor minimums, great customer service, decent research tools. What’s not to like.
With so many free options like the free Schwab ETF trades, why pay the extra fees?
Fidelity doing free iShares trades too.
This is a very nice review. You explained it very well, and you make some very good points.
Unfortunately, this system has the same flaw as any other of its type. Any time you start making future projections of market investments based on historical data, you’re on very shaky ground.
This sort of thing, though perhaps well-meaning, depends on the same time-worn myths and misunderstandings that Wall Street has been using for years to sell its wares.
These future values are unknowable, and always have been. For a person to base their hopes and dreams on these phantom numbers is a tragedy waiting to happen, as many are experiencing now. It’s especially sad when there are much better ways to accomplish those goals without taking on such risk.
As we’ve seen, risk does NOT equal opportunity. Risk equals risk.
I’m afraid many are learning that the hard way. Most retirees don’t have 20 to 30 years to get their money back.
Marc
Nice review. A wrap account wrapped in a nice little package. May be good for the unsophisticated investor, but the fees will eat you up. The viability of the their business model is so clearly dependent on volume. Without they will die.
This is perfect for someone like me. I don’t have 3k lying around to open a standard account or portfolio. I try to throw about 50 bucks into it a month or pay period if I have it. We’re talking 300 to 500 bucks total right now. I love the way I can immediately withdraw money I need in emergencies and put it right back via the linked checking account transfer.
Even with $50 balance, I earned $17.00 (98% stock 2% treasury).
That my friends is a winning situation. Once I earn up to 3k this route, I can then go to a bigger investment strategy. I’m 32 right now and want to get investing but don’t have the start up to do so…I have time and want in with the big boys, but need to start somewhere. I liked this over penny stocks.
Had to add another comment to notify my of comments via email. I’d love to hear from some of you on what to do at my age of 32 with little to invest on. Maybe someone could sponsor me (a disabled veteran) to get in the game and return the money once the investments take off. 🙂
I made a similar comment about them comparing themselves to a bank on another review and the CEO of betterment.com replied to my comment with what was a futile attempt (IMO) to defend how they compared themselves to a bank. They clearly deserve heat for what I see as a deceptive marketing strategy. Great point on people not understanding SIPC insurance.
I also noticed the same thing about the portfolio overlap.
Almost 1% for what amounts to automatic re-balancing and asset allocation change is way too high, IMO. Re-balancing takes 5-10 minutes either quarterly or yearly. Lastly, being able to change your asset allocation with a quick click of the mouse can be dangerous in my opinion. I think it encourages day trader like habitats. Pick a strategy and stick with it.
Good idea, bad execution.
On the other side of the investment coin, I have a small savings account that I add to monthly in small regular drafts from checking. It made $0.37 interest in a bit over a year. I want to pull the money out in six years for a specific purpose. I am willing to chance a gain rather than the certainty of 0.1% interest and it is easy to do…
Great article, Glad to be a little more informed!
Wouldn’t you guys admit though that Betterment is probably better for those of us trying to diversify and that don’t have a lot of money to invest right now?
This review is a little snobbish to me- is there anyone out there with some tips for first-time, low-income investors like Kevin, Shaun and I? This sounds like a pretty good deal for ignorant peasants like us ;P Thoughts?
@Ashley – Sorry to hear that, can you tell me exactly how the review came off as snobby? Haven’t heard that before.
Betterment remains a pretty good deal for low-balance accounts, as noted in the review. The Vanguard retirement funds (also mentioned in the review as alternative) now have an investment minimum of only $1,000, or you can start with zero dollars and $50 a month commitment at T. Rowe Price and their line of similar retirement mutual funds.
No need for apologies, saw the ‘note’, it just struck me as dismissive. “Only $1000” haha sorry but as a college student that’s hilarious! I don’t even have a sure $50 a month to “guaruntee” on my budget right now, but I would still like to have a chance to invest something, even a little, for my future that returns more than 1% a year. Maybe Betterment should focus its marketing toward first-time investors? Anyway, I think I’ll set up my Betterment account now 🙂 Thanks!