Betterment Review and $25 Bonus for New Account

Review of: Betterment
Discount Stock Broker:
0.35% annual fee

Reviewed by:
On October 1, 2012
Last modified:October 9, 2012


Betterment lets you invest in a basket of stock and bond ETFs that cover broad market with relatively low cost. With Betterment, you can adjust the allocation of stock and bond investments in your portfolio and get automatic portfolio rebalancing without additional cost. Betterment offers three different account types with different pricing schemes.

If you have never heard of it, it’s probably because they are so new in the brokerage industry. is a New York based startup that promises to provide investors with “simpler, smarter, and safer” investment strategy. The strategy behind such a claim is building a well diversified investment portfolio that consists of both stock and bond ETFs and let investors, a.k.a Betterment customers, choose the desired asset allocation between bonds and stocks based on their preferences or needs.

Betterment Investment Strategy

$25 Bonus from BettermentOn surface, this seems to be a simple idea that could also be very appealing because there are investors who may not have the necessary knowledge to build a diversified portfolio on their own, so having some professionals (at Betterment, the ETFs are selected by an investment committee) choose what ETFs to invest and the percentage of each element in the portfolio has its obvious benefits. It relives some of the burdens of using the right mix of stocks and bonds to build a portfolio from investors. Currently, Betterment’s Stock Market Basket have six exchange-traded funds from Vanguard and iShares (the allocation has changed since I first looked at in May 2011):

  • 25% Vanguard Total Stock Market ETF (VTI, ER 0.07%)
  • 25% iShares S&P 500 Value Index (IVE, ER 0.18%)
  • 25% Vanguard Europe Pacific (VEA, ER 0.20%)
  • 10% Vanguard Emerging Markets (VWO, ER 0.12%)
  • 8% iShares Russell 2000 Value Index (IWN, ER 0.41%)
  • 7% iShares Russell Midcap Value Index (IWS, ER 0.25%)

Its Bond Market Basket has two ETFs:

  • 50% iShares Barclays TIPS Bond Fund (TIP, ER 0.20%)
  • 50% iShares Barclays 1-3 Year Treasury Bond Fund (SHY, ER 0.15%)

From what I can see,  Betterment’s investment method is quite similar to that of target-date funds which also usually consist of a basket of bond and equity funds. Of course, the key difference between Betterment’s approach and life-cycle funds is that investors can adjust the desired allocations of stocks and bonds with Betterment (as shown in the screenshot below) , but not with life-cycle funds, whose asset allocation is adjusted by fund managers based on investment target date.

Betterment Review: Asset allocatioin

By allowing investors to adjust the allocation themselves at any time, Betterment gives its customer some control on how their money should be invested (though they can’t select what ETFs to invest). In addition to the manual adjustment, Betterment also does automatic rebalancing if the asset allocation of the portfolio shifts away from its target due to valuation changes of the component ETFs. Another benefit for investors who don’t always rebalance their investment regularly.

Cost to Invest with Betterment

Fee is always top on the priority list when I select a discount broker. Unlike other discount brokers that charge per trade commission, Betterment’s fee schedule is quite simple. Since you don’t have the choice to buy or sell either the basket or individual ETFs in the basket (of course, when you change the allocation of your portfolio, Betterment will make the necessary trades on your behalf to bring the allocation to the target of your choice), you don’t pay commission for the trade that you don’t initiate. Rather, Betterment offers three different account types with three different fee schedules. The first one is the Builder Account that charges a 0.35% annual fee of the total account value. The Builder Account doesn’t have a minimum account balance requirement, but it does require a $100 monthly deposit into the account. If you don’t make $100 automatic deposit while having an account balance that’s less $10,000, you will then be charged $3 per month as management fee and have your account upgrade to the next option. The second option is the Better Account with an annual fee of 0.25% and a minimum account balance of $10,000. If you have more than $100,000 in your investments, then you can upgrade to the Best Account with a lowered annual fee of 0.15%. Remember, each ETF in the baskets has its own expense (shown as ER, expense ratio, in the above ETF list) and that’s not included in the annual fee that you pay Betterment. Both the Better and Best Account have no monthly deposit requirement. Better and Best Account holders also addition service available for them, such as next day deposit. If you have the Best Account, you will also get personal consultation.

Is It Worth It?

While I like the idea of offering investors a simple investment approach that also gives them the diversification they need, I do see a few issues with Betterment’s investment strategy. First, the cost to invest with Betterment may not be low, especially for small accounts. Sure, 0.35% account fee for the Builder Account won’t be that much of money if you a few thousands in the account. However, unless you can maintain the automatic monthly deposit of $100; otherwise, you will face a $3 monthly fee, which will add to the overall cost. For accounts more than $10,000 or even $100,000, then there’s the issue of the selection of ETFs. Yes, from the ETFs listed above, you pretty much have everything you need to build a broad, diversified portfolio that includes domestic large-, mid-, and small-cap categories, as well as emerging and developed market equities. But the allocation of each class is fixed, so you won’t be able to make adjustment to the weight of each individual ETF. Also, it’s not possible to add any specialty funds, such as real estate or precious metal, or foreign bonds, into the portfolio, since they are not offered by Betterment. Finally, of the 8 stock and bond ETFs offered by Betterment, 3 are from Vanguard. As you may have known already, trading Vanguard ETFs with Vanguard directly is commission free, meaning you don’t have to pay any addition fee. Since Vanguard offers a much wider selection of ETFs, the chances of finding an Vanguard equivalent of those funds in the Betterment portfolio are pretty good. In that case, why you want to pay the extra fee to invest with Betterment?

The bottom line is with Betterment, you avoid the hassle of building a diversified investment portfolio and maintaining the asset allocation yourself, but you need to watch the cost. If you have a large account, for example, $100,000 or more, the cost for investing with Betterment is reduced to a much lower level. If you are a DIY person, then I think you can find cheaper alternatives, such as investing with Vanguard directly or using Motif Investing, which in my opinion is a better choice.

Betterment Promotion

So what do you think of Betterment? If you want to try it, you can test drive Betterment for free for 30 days. They are also offering a $25 bonus for a new account if you make $250 or more initial deposit when opening an account.  They also have a demo account if you want to see what it looks like and how it works before signing up.

Betterment lets you invest in a basket of stock and bond ETFs that cover broad market with relatively low cost. With Betterment, you can adjust the allocation of stock and bond investments in your portfolio and get automatic portfolio rebalancing without additional cost. Betterment offers three different account types with different pricing schemes.

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