A persistent advertising campaign has many investors asking whether Betterment is really a better way to invest. After a deep-dive into the company’s metrics and model, the answer is a definite “yes.” By the data, Betterment does appear to beat individual advisors in terms of both fees and performance. The results aren’t magic but based on a very low fee structure, tax efficiency and openness to any level of investment.
Betterment doesn’t claim to beat the market or other robo-advisors but instead aims to make investing cheap, easy and accessible. Thanks to efficient algorithms and automated functionality, Betterment offers a high level of money management not traditionally available to the average Joe. The company has over 170,000 customers to date, nearly double since this time last year. It manages $4.8 billion in assets, making it the biggest of the robo-advisors.
In a nutshell, Betterment is to the individual wealth manager what online banking is to local banks. It’s cheaper, more efficient and generally does a better job. While not for the savvy hands-on investor, it should more than satisfy both relaxed long-termers and beginning investors alike. Read the full Betterment review below.
What is Betterment?
Betterment is an online investment service or “robo-advisor.” Investors tell Betterment their goals, timeline and risk-comfort level and Betterment does the rest. Based on the company’s assessment, the investor’s money is placed in a range of stock and bond funds with varying levels of risk and return. Customers can adjust their goals and preferences to fine-tune their results. Betterment provides simple, diversified, fully-automated investing at very low cost.
How Does Betterment Work?
Betterment works by first taking each investor through a goal-setting exercise. The site asks for details like age and annual income. It then suggests retirement and other investing goals along with recommended targets. Customers adjust these goals and add personalized goals of their own. Once the goals are chosen, the service suggests an appropriate portfolio of different stock and bond ETFs or “Electronically Traded Funds.”
Betterment then manages these investments on a day-to-day basis. The service takes advantage of automatic rebalancing and daily tax loss harvesting to maximize returns.
Is Betterment Safe?
Betterment does appear to be safe. As a Registered Financial Advisor (RIA) they’re subject to intense SEC scrutiny. Given their level of publicity and the generally “hawk-eyed” nature of SEC regulators, any chinks in Betterment’s armor would be found out pretty quickly. They’ve made the Financial Times FT 300 List of top RIA’s two years running. They’re also the fastest growing advisor on the list. They manage $4.8 billion in assets, which makes them the biggest robo-advisor on offer.
The facts above combine to paint a picture of a safe and trusted investment management firm. While no investment is “safe,” the FT 300 List takes into account asset growth, size of assets, company age, industry certifications of employees and SEC compliance record. By all these measures Betterment is indeed safe.
How is Betterment Different from Other Investment Methods?
Betterment is a fully online, fully automated robo-advisor that tailors investments and actions to each customer’s needs. It differs from traditional investors in the following ways:
- Individual investment advisors generally charge much higher advisory fees than Betterment. The difference here can easily add up to thousands of dollars per year. Individual advisors also generally reserve their services for larger account balances, charging higher fees for lower balances if they serve smaller accounts at all.
- Online brokerages like Scottrade, Etrade and TD Ameritrade are geared to the hands-on investor. Rather than advising or managing an investor’s account, these services charge per trade and let investors pick their own stocks. By contrast, Betterment isn’t about stock picking. Instead, it lets customers invest in diversified funds with long track records.
- As a robo-advisor, Betterment makes regular adjustments to each customer’s portfolio to take advantage of tax savings and rebalance investments as they age. On average, Betterment gets slightly higher returns than other robo-advisors like Wealthfront.
Betterment’s Low Fees
Financial advisors can charge advisory fees of 1% to 1.5% per year. On a $100,000 investment earning 6% per year or $6,000 annually, fees can easily eat up $1,500. That’s 25% of all earnings. Betterment’s advisory fee is a much lower 0.15% on an investment of the same size. That’s $150. Even on the smallest possible account balance their fee is still only 0.35% per year.
Betterment Fees vs Others ($100,000 Account)
|Fee Amount||Annual Cost|
The chart below shows approximate annual fees based on a total account size of $100,000.
Betterment’s Account Rebalancing
One of Betterment’s key features is account rebalancing. The idea here is that over time a traditional investment portfolio will get increasingly off-kilter. Take a portfolio that starts out as a blend of 70% stocks and 30% bonds. That’s a good mix for a long term investor because it balances a high percentage of high-risk stocks with a low percentage of more stable bonds. It will earn less than a 100% stock portfolio during “up” times but lose less during down times.
Over time, this portfolio won’t be 70/30 anymore. That’s because the stock portion will make or lose money at different rates than the bond portion. Traditional advisors make periodic adjustments to correct this “portfolio drift.” Betterment makes these adjustments automatically, keeping its customers on target to their goals.
Betterment’s Daily Tax-Loss Harvesting
Betterment gets higher returns for customers automatically by using something called tax-loss harvesting. The idea here is that although a portfolio may grow, portions of it will shrink. When this happens, Betterment sells off a subset of losing funds to realize tax losses on a daily basis. The upshot is that Betterment gives customers real tax savings each year while still working to grow their overall portfolios.
The tax-loss harvesting happens automatically in the background and is available at no charge to Betterment’s customers.
How Many People Use Betterment?
As of 12/14/16, Betterment manages money for 170,000 customers. That’s up by 70,000 from the same date last year. To date the company manages $4.8 billion in assets. Compare that to $31 billion for Vanguard, $5.3 billion for Charles Schwab and $2.8 billion for Wealthfront.
Does Betterment Get Good Returns?
Betterment’s returns have historically been moderate to high. While the old litany of “past performance doesn’t indicate future growth” holds true, the company has done well in the past. As the screenshot below shows, an 80/20 mix of stocks and bonds with Betterment has seen 6.5% annual growth since 2004. To fine tune the results by mix and time, click through to their interactive chart here.
Betterment Returns vs Others
Betterment appears to get competitive returns compared to other robot advisors and individual advisors. It outperforms the average hands-on individual, which isn’t surprising considering that most hands-on investors get historically low returns. It’s difficult to compare Betterment to other investing methods in a general sense. It’s easier to break our analysis down into different time periods like one-year and five-year blocks.
Betterment Short Term Returns vs Other Methods
The chart above and table below are based on a 12-month study by CondorCapital. The firm actually opened investment accounts with seven different national advisor services. It then tracked the performance of those accounts over the next year. It found an average return of 7.19% vs the lowest return of 5.49% from Vanguard Personal Advisor Services. The highest return of 9.08% came from Acorns. Betterment scored somewhere in between at 6.51%.
These results wouldn’t be identical year-to-year based on market fluctuations. They do however give a decent picture of Betterment vs several other online advisors. The findings here are consistent with Betterment’s claim that they don’t aim to outperform the market. Rather, their focus is on increasing total customer returns with lower fees and tax savings.
Betterment Short Term Returns vs Others (Based on a Study by Condor Capital)
|Schwab Intelligent Portfolios||9.36%|
|Vanguard Personal Advisor Services||5.49%|
|Vanguard Balanced Index Fund||7.39%|
|T. Rowe Price Capital Appreciation Fund||7.86%|
|Average Return for Robo-advisors||7.19%|
Betterment Long Term Returns vs Other Methods
Looking at long-term returns shows a slightly different picture. The chart below shows average returns over the 2011-2016 period for different potential investments. The S&P 1500 saw the highest rate of return at 12.99%.
That’s expected, since the 1500 is a highly diversified group of stocks with no bonds included to balance things out. If the chosen five year period had included a recession, the S&P results would almost certainly have been negative. Next comes the S&P 500, which is again made up of 500 stocks. The next item in the chart is an aggregate. To get it, we added the average single year return of all Vanguard’s stock ETFs, blended 80/20 with the same return for all their bond ETFs. In other words, someone investing in 80% stocks and 20% bonds with Vanguard would have seen an average return of 7.48% per year.
Betterment Returns vs Others (Long Term)
|Vanguard Average ETF Returns, 80/20 Stock/Bond Mix||7.48%|
|Private Client Investor (80-100 equity risk)||4.00%|
|Private Client Investor (60-80 equity risk)||3.50%|
|Five-Year US Treasury bills||1.30%|
Betterment came in next at 6.4% per year, followed closely by Wealthfront. The private client investor came next at about 4%. Bringing up the rear is a 1.3% return from a five-year T-bill.
Betterment definitely appears to outdo the average individual investment advisor. It doesn’t stand out against other robo-advisors, but with low fees and tax savings, it’s a solid choice for the individual investor.
The upsides to investing with Betterment are its low fees, ease of use, tax savings and lack of account balance minimums. The downside is mostly investor-specific. That is, the investor who’s new to the game or the long-term investor who doesn’t want to hassle with his or her investments will love Betterment. The company is legit and historically has earned comparable returns to other robo-advisors. It outperforms the average individual investment advisor.
The investor who wants to take a hands-on approach should steer clear of Betterment. For that investor, a non-managed service like Scottrade will have even lower fees, since Scottrade lacks an annual advisory fee. That’s expected, since Scottrade also lacks the kind of portfolio management service that Betterment excels at.
Another potential drawback to Betterment is its lack of accreditation from the Better Business Bureau. The firm gets a B- from the BBB. Mitigating that score is its basis in only eight complaints, with only one complaint unresolved. That’s not a terrible record for a company with 170,000 clients. These eight complaints are mostly customer service and billing related.