Is Betterment a Legitimate Brokerage Firm?
Betterment.com is a robo-advisor in the online brokerage sector. Founded in 2010, the company offers investment management services and advice. Betterment
uses technology and automation to reduce investment costs and maximize efficiency.
It is the largest independent so-called "robo-advisor" in the country. In other
words, the company acts as a financial advisor without the one-on-one interaction that an investor would get from a human financial advisor. By using questionnaires,
algorithms, and specialized software programs to automate as much of the investing, administering, record keeping, and portfolio monitoring as possible, the company
claims to offer a low-cost way for any investor to benefit from professional portfolio management.
Betterment's basic premise is constructing individualized portfolios for customers based on their goals, risk tolerance, and time frame using ten indexed, Exchange Traded Funds (ETF) and rebalancing periodically to maintain the client's desired asset allocation. Automatic monthly investing is offered along with automatic reinvesting of excess cash and immediate rebalancing of the portfolio when deposits or dividends are received in the account.
Another feature Betterment offers is utilizing their automated Tax Loss Harvesting+ (TLH+) program in order to improve total return by selling certain ETFs at a loss in order to offset taxes on capital gains and income from other ETFs.
All this automation is touted by Betterment to improve total return for all investors, even those with small accounts. According to Betterment's website, "Betterment customers can expect 4.30% higher returns than a typical DIY (do-it-yourself) investor." Betterment breaks down this amount into gains from smart rebalancing, global diversification, avoiding market mistiming, and avoiding expensive investments.
Is Betterment Scam?
Betterment is definitely not a scam. The company earns money by charging clients an annual management fee which is a percentage of
the total value of the portfolio. This fee is 0.25% of entire account balance
(Charles Schwab charges nothing for the same service).
The robo-advisor management fees compare favorably to fees charged by most human financial advisors. Those average about 1% per year,
but could go as high as 2% or more.
Is Betterment Insured and Regulated?
Betterment.com does not offer accounts that are federally insured by the FDIC. It's a broker so there is a risk of losing principal as
with any other brokerage firm. Betterment Securities is a registered broker-dealer with the SEC (Securities Exchange Commission). The firm is also a member of the
Financial Industry Regulatory Authority (FINRA) as well as the Securities Investor Protection Corporation
(SIPC).
Betterment's membership with these three agencies means that they comply with all the rules and regulations governing the investing
industry. The only risk for an investor is if Betterment fails and has to liquidate its assets. In this case, SIPC insurance guarantees
investors' accounts of up to $500,000 (including $250,000 in cash).
Betterment represents a new wave of investing that combines technology with personal service to make investing easier for unsophisticated investors as well as giving them investment returns that are better than returns they might expect from constructing their own portfolios. Confining one's investment universe to only 13 index ETFs seems limiting. Investors can easily be overwhelmed by the thousands of investment options available, so simplifying investing the way Betterment does is a safe and attractive choice for many investors.
Betterment BBB Rating and Complaints
The investigation on the Better Business Bureau web-site shows that Betterment BBB rating is F. There
are 97 closed Betterment complaints on the website - click here to see.
Betterment Complaints: Business Model Problem
A closer look at Betterment's investment model does raise some questions. Ten of the 13 ETFs used
by Betterment to build portfolios are Vanguard ETFs. Any Charles Schwab
account holder may purchase these Vanguard ETFs for no commission. The other three ETFs are iShares funds
brokered by BlackRock. All these may be purchased commission-free
at Charles Schwab. Also, Vanguard ETFs could easily be substituted for the three
iShares ETFs. Therefore, Betterment's portfolio options are low-cost or no-cost to begin with. Any investor could construct a diversified portfolio of ETFs themselves
and save the annual management fee. This is one huge complaint Betterment has to deal with!
This means that Betterment's strongest selling points are convenience, one-stop service, and automatic portfolio rebalancing and investing, which does help remove the
emotion from investing. Emotions tend to spur investors to make poor investment decisions—one of Betterment's keys to avoiding poor returns due to mistiming the markets.
Even so, many online brokers and financial management software programs allow investors to allocate their investments a certain way and monitor portfolio changes so
they can do their own periodic rebalancing. However, if investors prefer the investing discipline and automated services of a robo-advisor such as Betterment, then a
small annual fee may be well worth the extra cost.
Betterment Pricing
One of Betterment’s major selling propositions is its ability to provide fee transparency. Fees are something
often overlooked by beginner and hands-off investors. What often comes as a surprise though is how much money
can actually be saved or lost by just 0.25% of account balance.
According to Betterment’s website, many typical mutual fund fees can come close to a 1% of the total portfolio. Betterment advertises a total cost for a typical 70/30 stock portfolio of low-cost ETFs to run close to 0.31%. To a new investor, fees of 0.3%, 0.4% or 0.5% may not seem like much, but when factored against time they have a dramatic impact over the life of an investment. In the next figure, Betterment’s web site helps visualize this point.
In this example, for a modest investment of about $10,000, the difference between a 1% account fee
and a 0.25% fee can save an investor up to $5K over 20 years. For a $100K investment, up to $55K
can be saved, and a $500K investment can see savings close to $280K.
Betterment’s fees can be broken down into management fees and fund fees.
Fund Fees
Each of the ETF funds that make up the Betterment index-fund portfolio have an expense ratio that is typically between 0.09% - 0.17%. This is a cost that an investor would pay regardless of which brokerage the fund was purchased through.
Betterment Hidden Fees
Betterment does not charge any hidden fees.
Find a Financial Advisor
If you are looking for a professional money management service in your area, you can
find a Financial Advisor on the Wiser Advisor
(or read
Wiser Advisor review).
Visit Wiser Advisor
Is Betterment Safe: Take Away
Rest assured - Betterment is not a scam. The firm brings sophisticated, low-cost, highly-diversified passive income strategies to the average person. The service is online 24 x 7, available on both desktop
and mobile. The user interface is simple, clean and elegant. Important investment questions can be answered within minutes. Fees are transparent and highly
competitive.
Portfolio allocations are objective and backed by solid investment algorithms that have been around for years making it one of the best robo advisor
companies for investors. Of course, there are a number of Betterment complaints to consider, and a
major competitor that charges nothing for a better service.
Betterment Review
Knowing that Betterment is legit, now it’s time to take a look at what financial services that company actually delivers to its customers.
Investments Choices
Betterment offers managed accounts only. There is no self-directed option with this investment firm. Every securities account is a robo account, although there are add-on packages that have human financial planners.
Betterment’s automated accounts come with several useful features at no additional cost. These are:
- Tax-loss harvesting
- Portfolio rebalancing and auto-adjust
- Socially-responsible portfolios
- Multiple account types, like joint accounts and trusts
Inside these digitally-managed accounts, only ETFs with low expense ratios are traded. There are no other asset classes, like stocks or options. Betterment has purchased Makara, a crypto broker. This will bring digital currency choices on board at a later date. But for now, only exchange-traded funds are available. Fund families include Vanguard, SPDR, and Schwab.
Betterment Fees Review
And what does all of this cost? Surprisingly little for robo-only accounts. Betterment charges 0.25% annually for its portfolio management. There is no minimum balance. The funds in the program have expense ratios, and these will increase the overall cost of the program.
Adding a Certified Financial Planner to the mix increases the annual fee to 0.40%. The minimum balance requirement also increases from $0 to $100,000. Although this is a pretty massive change, it may be worth it for Betterment customers who feel they need some human advice. Plus, this account option comes with unlimited phone calls and emails with the company’s CFP® professionals. They will even provide advice on investments outside of Betterment.
Clients who stick with the 0.25% program can purchase one-time phone calls with CFP® advisors. These range from $299 to $399 for an hour or less.
Customer Service
Betterment does not have any physical locations, which isn’t all that surprising for a robo-only investment firm. The company’s website has a Contact Us link at the very bottom of the site. On the page it produces, we found a chat bot. During our testing of it, we found it moderately useful. Questions the bot is unable to answer can be sent to the company’s customer service desk.
Other resources on the Contact Us page include addresses for mailing paperwork in, information on transferring accounts, and tax FAQs. A Help Center on the Betterment site has even more FAQs.
Clients who can’t find what they’re looking for can simply email the company at support@betterment.com. And then there’s old, traditional phone service. Betterment is open during the weekday only. Its phone number is not toll free.
Betterment Website Review
The Betterment site emphasizes minimalism. There are no trading tools (remember, this is a robo-only advisor). During our exploration, we found mostly account management tools. These include things like:
- Account linking
- Document download
- Transaction history
- Schedule online consultations with an advisor
- Balance information
- Profile update
- Recurring deposits of cash
- Debit card locking
The main menu is in the left-hand column. This is where most of the tools mentioned above will be found. A Transfers link has several resources on moving funds. There is even a link to donate assets in a Betterment account to charity.
Near the bottom of the site, Betterment presents a goal creation widget. Multiple financial goals can be created, such as planning for retirement or managing cash. These goals are linked to various account types that Betterment offers.
Due to the lack of sophisticated trading tools, Betterment’s website is easy to use, which is about the only really good thing we can say about it.
Mobile App
Moving over to the company’s mobile app, the situation remains much the same. The Betterment app is designed for phones, not tablets. Most of the tools we found on the website appear on the app. Accounts (both Betterment and non-Betterment) can be linked on the app, and this is also possible on the website.
Under the main menu on the app (represented by three horizontal bars in the upper-left corner), there is a Rewards section. Tapping on this link generates a new page where customers can find ways to earn rewards. One current promotion we found was a cell phone deal: pay your cell phone bill with the Betterment debit card and get reimbursed for phone theft or damage.
Tools we hoped to find on Betterment’s app but didn’t find include mobile check deposit and streaming video news.
Investment Education
But Betterment does offer a few avenues of financial education. First up is a library of articles on a wide variety of topics. These tend to cover general economics and personal finance rather than investing specifically, although we did find some articles on investing. Examples include:
- How To Keep Your Financial Data Safe
- The Betterment Portfolio Strategy
- The Role Of Life Insurance In A Financial Plan
- Welcome to Student Loan Management by Betterment
- What To Do With An Inheritance Or Major Windfall
The educational section on the Betterment site has a drop-down menu with a variety of subject headings that helps to narrow down a search. Although articles aren’t integrated in the mobile app, there is a link to a mobile-enhanced website where the articles can be accessed.
Betterment also has 7 (yes, just 7) videos on its website. These are just a few minutes long and cover topics like adding beneficiaries to an account and setting up an emergency fund.
Security Research
Betterment has almost no tools to look for investments on its platform. This shouldn’t be all that surprising from a robo firm, although we did find one page with brief information on the funds that are available through its automated investing service. This page has just a short paragraph on each ETF the software program trades. Here are some of the funds:
- VTIP: Vanguard Short-Term Inflation-Protected Securities ETF
- GBIL: Goldman Sachs Access Treasury 0-1 Year Fund
- IWS: iShares Russell Mid-Cap Value Fund
Miscellaneous Services
Extended Hours Trading: Betterment sends orders in batches to the exchanges during the regular market day. It does not use pre-market or after-hours trading.
DRIP Availability: Cash received from dividends inside a Betterment account is reinvested into additional shares of the funds that paid them.
Cash Management Features: Betterment has two deposit accounts (cash reserve and checking), and both are FDIC-insured. The cash account is basically a savings account that pays interest. At the time of publication, it’s 0.75%. The checking account pays no interest but comes with a Visa debit card and no ATM fees—ever.
Individual Retirement Accounts: Roth, Traditional, and SEP accounts are available on the Betterment platform. There are no IRA fees.
Initial Public Offerings: Something Betterment doesn’t offer is access to IPOs.
Fractional Shares: Betterment’s computer program trades ETFs using fractions of a share.
Recurring Mutual Fund Purchases: Mutual funds are not available at Betterment.
Recommendations
Small Accounts: Betterment has a $0 deposit requirement for its regular automated program,
which is fantastic for investors who are starting without much money.
Retirement Savers and Long-Term Investors: A Betterment IRA combined with financial planning would be a good solution.
Beginning Investors: New traders just starting out will be well served with a robo account at Betterment.
ETF and Stock Trading: Betterment offers no stocks and only a handful of ETFs. A better
idea would be a self-directed account at
Webull.
Mutual Funds: Although Betterment doesn’t offer any mutual funds, we can recommend
Charles Schwab,
who has thousands of funds open to new investors.
Betterment Review Take Away
Betterment was the company that launched robo advising. It is still the most popular choice for
robo investing.
Updated on 10/7/2024.
Chad Morris is a financial writer with more than 20 years experience
as both an English teacher and an avid trader. When he isn’t writing
expert content for Brokerage-Review.com, Chad can usually be found
managing his portfolio or building a new home computer.
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