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When Betterment CEO Jon Stein called out Warren Buffett on tax-loss harvesting and robo-advisors, many investors stood up and took notice.
His startup Betterment was one of the first – and undoubtedly the oldest – robo-advisor. The company recently surpassed $22 billion in assets currently under management, which also makes it the largest firms in terms of independent robo-advisors.
While Betterment is made to be easy for beginners, it may not be the right platform for DIY investors who also want hands-on controls.
However there is no minimum balance to open an account, and customers have access to tax-loss harvesting, which can help you gain bigger profits year-over-year.
Betterment Ratings and Quality Scores
Investor Warning: Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment LLC’s charges and expenses.
Betterment Pros and Cons
- Lower management fees than most other robo-advisor services
- No minimum account balance for Betterment Digital plan (Basic services)
- Algorithms and automated investing mixed with human advisors
- Automatic tax-loss harvesting and rebalancing
- No direct indexing for taxable accounts over $100,000
- Some weird snail mail practices if you ever want to close your account
- 4 to 5 day wait time on withdrawals
Quick Summary of Betterment Features
Management Fees and Account Minimums
- Betterment Digital: 0.25% annual fee, includes basic services with hands-off digital advice and some tools. No minimum required to get started.
- Betterment Premium: 0.40% annual fee, includes a full team of certified financial planners for account monitoring, plus unlimited broker-assisted phone calls and email messages. Requires $100,00 minimum investment.
- No account closure fees, annual fees, or transfer fees
Score: 9/10 – Betterment offers lower costs than most robust robo-advisors. You get a ton of value from their services, even at the Premium level.
- Betterment manages to keep ETF expense ratios between 0.07% and 0.17%
Score: 9/10 – While it depends on the fund, 0.07% and 0.17% are pretty low minimums and maximums for equity funds, hybrids, bonds, money market, target-date, and equity index funds.
- Individual and joint taxable (non-retirement) accounts
- Traditional, Roth, SEP, and rollover IRAs
- External accounts can be linked for advice (but not managed)
- Cash accounts (no charge for management)
Score: 10/10 – All major account types are supported, and Betterment is one of the better robo-advisors to allow external accounts to be monitored in your investment portfolio.
- ETFs from 12 asset classes
- Socially responsible investments
- Smart beta portfolios: Seeks higher returns by calculating in systematic risks
- Income portfolio with bonds
Score: 9/10 – Everything is included here to keep investors happy with goal-setting and SRI options.
- Calculates tax-loss every day
- Uses “Tax-Coordinated” tool to allocate assets across all taxable and non-taxable accounts, filtering for tax impact
- Access Tax Impact Preview to see warnings about portfolio changes
- Donate appreciated assets through the charitable giving tool on Betterment
Score: 8/10 This is an amazing feature for any robo-advisor to have, and it comes free with Betterment Digital.
- Daily rebalancing
- Free on all account types
Score: 9/10 Betterment knows that robo-advisors must have this tool in order to keep investors happy with how their portfolio is progressing.
- Advice packages for an extra fee
- Access Premium for additional management fee to get unlimited broker-assisted help via phone or email
Score: 8/10 If you need any help, Betterment offers pretty average phone support. There are no 24/7 options, but they are available on the weekends by email.
Socially Responsible Investing
- Choose your goals and interests when you set up an account or choose SRI portfolio to set up conscientious investing
- Investors can pick what industries and companies they don’t want to support
Score: 8/10 This is one area where DIY and hands-on investors can enjoy about Betterment. You don’t have to invest in an S&P stock simply because they’ll make you money. Investors have a choice when it comes to SRI.
How Much Does Betterment Cost?
Overall, you don’t have to spend very much to use this excellent robo-advisory tool. We think the value more than makes up for their annual percentage.
Here are some more details into those costs:
Betterment is one of the only companies to offer a completely free robo-advisor tool with it’s Digital plan. While this plan does not require a minimum deposit, there is an annual 0.25% management fee for this basic Betterment Digital plan, which is charged yearly.
This is relatively small in comparison to many of the other firms out there, who may charge upwards of 0.40% to 0.80% in some cases.
However, that 0.40% management fee does come into play if you upgrade to Betterment Premium. This plan includes access to unlimited advice from brokers and financial planners, but you also need at least $100,000 in assets.
If you have a higher account balance, the fees drop to 0.15% for Betterment Digital and 0.30% for Betterment Premium. However, your balance needs to consist of $2 million in assets.
However, older customers enjoy free management thanks to a legacy policy with Betterment. We don’t understand why they would not want to carry this through for customers who have $2 million currently and want to sign up with the robo-advisor. It seems a bit silly!
Do you need more? Betterment offers a financial planning package.
Betterment has been in the business a long time. Their views on financial planning are essential to help clients understand their portfolios and make better decisions.
To this end, the company offers financial planning packages that are aimed at specific life events. For example, new clients may sign up for a $199 “Get Started” package that helps them set up their Betterment accounts, get a hands-on tutorial of tools and features, and get advice on what to invest.
The other packages cost $299 for an hour-long phone call with advice that helps people with marriage, retirement, general financial health, and college planning. Each call includes a one-on-one with a CFP.
Typical costs for a CFP per hour range from $170 to over $400 depending on the expertise and type of financial planning. We think $299 is pretty high for this specialized service, but it may not be if you are looking to invest over $100,000 and need specific advice concerning your assets.
What We Like About Betterment
Betterment really has improved year-after-year to offer the best overall robo-advisor service. Why’d do we love it? It’s practically free to open an account and start investing.
Here are some other highlights that we found:
Some robo-advisors seem like they are created by math enthusiasts who want to rely solely on algorithms. Betterment understands that investing is about more than the math. Their investment philosophy is based on modern portfolio theory, which stipulates that the more you diversify, the better your portfolio you will do.
The company uses 12 different asset classes within ETFs. These are assessed based on your goals and risk tolerance levels.
If you want some DIY tools to pick and choose, Betterment has added “flexible portfolios” to help clients adjust the percentage of money invested in any specific ETF.
There are three different portfolio investing options:
- Goldman Sachs Smart Beta: This investing type focuses on ETFs that generally get high-than-average returns, but they may have more risk.
- BlackRock Income Portfolio: These portfolios only use bonds and work best for low-risk investors.
- SRI Portfolio: These investments are made with ETFs that are in line with the client’s beliefs on social causes.
If a company has a poor record in human labor laws or ocean preservation, you may want to steer away from those funds. Betterment can help you do that with an SRI portfolio using positive screening.
While there are some SRI funds, you won’t find a large majority of these currently. Betterment has said that they plan to expand this option in the future.
Any good robo-advisor helps your account stay on-track with your goals. Betterment automatically rebalances your portfolio whenever cash flows in or out, whether that is through withdrawals, contributions, or dividends. An account may also be automatically rebalanced if it drifts 2% to 3% away from the target goals.
Algorithms check your accounts every day, assessing on-track performance. In addition, Betterment uses fractional shares to ensure that you do not have any uninvested cash in your portfolio with the help of rebalancing.
Premium clients also have human financial advisors monitoring the rebalancing and algorithmic changes to ensure the highest performance.
Set Your Goals and Save
The set up process of Betterment is super easy and user-friendly. Clients go through a fun, goal-setting exercise that feels intuitive and fluid.
You enter your age, current income, and some other information to receive a series of goals related to your answers. The tool spits out a variety of numbers including a safety net covering 3 to 6 months of your expenses, retirement targets, and more general investing goals.
Each goal that you set comes with a target and asset allocation, and you can adjust these manually as you need. You can also add other personal goals that change the account types used and show the best way to invest your assets.
Furthermore, Betterment makes it easy to set it and forget it with auto-deposits for each goal.
Perhaps you just want to save for a rainy day, and you haven’t done much with your bank savings account. Betterment offers their own take on a savings account with an “Everyday” account, which comes with an interest rate of 0.30 percent.
Your savings is also covered in $1 million through FDIC insurance. There is no minimum, and you never pay any fees on the balance.
Save More with Two-Way Sweep
This is something different that most robo-advisors cannot keep with. Betterment wants to give you more ways to build and grow your money pile.
With a two-way sweep option, clients can link checking accounts to their savings, and the two-way sweep tool moves any unused money into your savings. The money is analyzed first to check if it’s excessive based on your spending habits.
If your money gets low in your spending account, the robo-advisor tool automatically moves it back into your checking. Betterment also sends an alert before it makes any changes, so you can cancel the two-way sweep feature.
The Full Retirement Picture with RetireGuide
Betterment started RetireGuide as an AI that analyzes all of your savings and investment accounts, including your 401(k)s all at once. The tool offers custom retirement planning help for clients based on the accounts by comparing to current savings with your desired spending levels after retirement.
You can also get answers to questions such as if you are saving enough money to retire based on a timeline. Are you using the correct savings and investments tools? RetireGuide will make recommendations on what you could to improve.
The tool also includes social security data uploads and updates every day to sync with outside accounts.
Many robo-advisors claim to offer tax-loss harvesting, but Betterment truly offers something unique with their “Tax-Coordinated Portfolio” feature. The CEO has even spoken about how important tax strategies are to wealth management.
Betterment’s tool automatically looks for investments that you can sell at a loss to offset any taxes you might pay on capital gains. The tool tweaks your portfolio so that you are buying and selling assets at the best times, and ultimately, it tries to reduce your tax impact as much as possible.
On the surface, we like this tool for those who have low-cost accounts through Betterment Digital, but it may not be for everyone. Investors with $100,000 account balances should read our next section down on Betterment’s “no direct indexing” policy.
Have you ever heard of a brokerage that offers a tool for charitable giving right within the platform? Betterment allows you to donate shares to charities directly from your account.
This helps you eliminate capital gains taxes significantly, and you can support your favorite causes. It’s best if you consult with an advisor before selecting this option, according to customers who have used it in the past.
Where Could Betterment Improve
There are a few areas where Betterment does not excel, depending on the type of investor you are and what you want to invest in.
Bigger Accounts, No Direct Indexing
Betterment does offer tax-loss harvesting automatically, and they may be falling behind as some other robo-advisors like Wealthfront have beefed up their tools to include direct indexing for taxable accounts.
While Betterment does review your accounts everyday to reduce your tax impact, it doesn’t have a direct indexing feature, which also provides tax-loss harvesting on taxable accounts with balances over $100,000.
A robo-advisor with a direct indexing tool will buy a single security on an index, rather than the ETF that is tracking on the index. This provides more tax-loss harvesting for taxable accounts.
While Tax-Coordinated Portfolio tries to do something similar, it uses an asset location strategy that automates reduced-tax investments for taxable accounts.
Investments that may have a heavy-tax requirement go into a tax advantage account, such as an IRA to shelter those funds. This strategy requires that the investor have both taxable and tax advantaged accounts for it to work.
It’s a toss-up for how well this strategy competes with direct indexing, but investors probably earn a bit more with their taxable accounts through direct indexing (when compared agains numbers from Wealthfront).
Getting a Bit Greedy, Eh?
There is one area where we feel Betterment should not touch. Your safety net or emergency cash fund should remain untouched, according to most financial planners.
Warren Buffet said it best with the quote from his 2019 shareholder letter, “Rational people don’t risk what they have and need for what they don’t have and don’t need.”
However, CEO Jon Stein thinks that you can invest with a safety net goal, which the robo-advisor suggests allocating 40% to stocks and 60% to bonds. However, emergency funds are generally short-term savings that typically are not invested at all.
I mean, what if you need to access your funds right away? You might not want to wait to liquify your safety net in Betterment.
Betterment Just Won’t Let You Go
Perhaps you decide the company is not for you, and you want to end your relationship and take your money out. Well, Betterment makes clients send in a bunch of paperwork to do so.
That’s right, you may have to actually use physical mail in your future world of no-Betterment. However, there are no account closure fees.
Betterment Platform, Mobile Access, & Ease of Use
Most of the robo-advisor tools and analysis is online and accessible through your browser, but Betterment is also one of the best robo-advisors if you like mobile trading apps.
The website is fast and easy-to-use. Everything had a guide or hover tip so you know exactly what you’re looking at. The platform allows you to view and adjust your holdings, see performance data and projections, and get advice through RetireGuide.
You can use Betterment’s mobile app to do just about everything that you do on the browser. Mobile clients also get an overview of all your accounts, change funding accounts, manage auto-deposits, and set up two-way sweep accounts.
Another tool is called the “goal-to-goal” transfer, which can be used to transfer funds between non-IRA goals within your account on mobile.
Want to earn rewards? You can refer a friend through the mobile app and select your earned reward right within the menu on the left.
Some things you can’t do on the mobile app that you can only do in the browser include:
- Sync new external accounts
- Manage existing external accounts
- View tax forms, statements, and other documents
- Edit your portfolio strategy
- Delete goals
- Close your account
What Type of Investors Should Use Betterment
Betterment offers a low-cost robo-advisor to younger investors and retirement investors who want risk tolerance levels, goal-setting, automatic rebalancing, and hands-off investment strategies.
If you want to set your goals and accounts up with basic monitoring, then Betterment Digital is perfect for you. It’s also the best robo-advisor if you only have a small amount to invest since the fees are lower than average.
Frequently Asked Questions About Betterment
How can you withdraw funds from Betterment?
Betterment does not charge any fees to withdraw your money. You do not have to pay any trading fees or penalties. You can log into Betterment on a web browser and click on “Transfer” and then “Withdraw” to access your money.
You should keep in mind that when you withdraw money, you may incur taxes once shares shared. However, Betterment tries to minimize the amount of taxes you owe, even when you are withdrawing money.
How long do Betterment transfers take?
Betterment estimates that your transfer may take 4 to 5 business days from the time you request a withdrawal. This is because your securities have to sell first before it can be cashed and sent to your bank.
While Betterment does process funds quickly, you also have to consider bank processing timelines. The process may be faster depending on your bank.
What’s Betterment’s customer support like?
Betterment does not have 24/7 customer support, but they do offer phone and email support during business hours from Monday through Friday, 9:00 AM to 6:00 PM. Saturdays and Sundays have access to email support from 11:00 AM to 6:00 PM. All times are in eastern.
Customer support ratings are generally above average. In our experience, the call was answered promptly with no wait at 10:00 AM on a Friday. The representative was courteous and took the time to walk through the website until we found the tool, and then we received an email listing how to use the tool’s features and where to find it again.
Where can I learn more about Betterment’s portfolio strategy?
The core of a Betterment portfolio is typically through ETFs, utilizing some stocks and bonds. You can see example portfolios, learn more about their investment strategies, and see client testimonials here.
Conclusion: Is Betterment the Best Overall Robo-Advisor?
Betterment has always been at the top of the pack when it comes to automated investing. With a variety of different tools and Jon Stein’s tax-loss harvesting strategies, the company offers great returns to its investors.
Hands-off investors will get the most enjoyment from this tool, but anyone who appreciates automated investing for retirement and wants to keep more of their money will also love the low-cost of this platform.
For our Betterment robo-advisor review, here is the criteria we used to rate the company:
- Low-to-no management fees: We look at the fees assessed by the robo-advisor, which is typically a percentage of your assets charged annually. This number should be low, equating to less than .23% annually.
- Expense ratios: Many mutual funds, index funds, and ETFs have low-to-no expense ratios. Your robo-advisor should invest in funds that do not have high expense ratios. It’s also important to know the average expense ratios by fund type.
- Available account types: Robo-advisors should have retirement accounts for tax advantages and taxable accounts to cater to both passive and active investors.
- Available investments: What does the robo-advisor like to invest in? Most use a combination of low-cost index funds and ETFs.
- Tax-loss harvesting: Robo-advisors should be able to identify losing investments and cut losses by eliminate taxes you would owe on capital gains.
- Rebalancing: Automated investing also means remembering goals and bringing back allocations when necessary. Robo-advisors should check this daily and ensure they are investing with your goals in mind.
- Human advisors: Some free robo-advisors do not offer any financial advice from a human, so this isn’t always important, but if you are new to investing and want to ensure your money is spent right, you may want this option.
- Socially responsible investing: Most robo-advisors have a quiz or survey at the beginning to understand your SRI or socially responsible investing type. These are values that may exclude some industries, such as fossil fuels or guns.