Reader Question on Investing for Beginners: Review

Investing_For_Beginners_Betterment_Review Review

Today, we have a reader question about the site  If you have a question for me, feel free to send me an e-mail.

Reader TA writes in:

I’m wondering if you’ve heard anything about the site?  I’m interested in learning/starting how to invest, and this site looks like a good place to start for a beginner.  There’s a lot of great reviews from other PF blogs, but was just curious if you had any opinions about it? is a site that’s been around for a while and they offer a low cost investment strategy for beginners.  What I like most about Betterment is that they keep it simple and they don’t invest in anything too complex.  There are definitely some financial advisors out there who will put you into a bunch of crazy funds and tilt towards certain sectors in order to justify a 1-2% fee. But most of these antics won’t do anything to improve returns.

No 401k Option

One thing you should be aware of though is that Betterment only offers IRA/after-tax investment services.  You shouldn’t even consider Betterment until you’ve taken advantage of the company match in your 401(k).  After that, you need to compare the different investment options in your 401(k) and see if it makes sense to continue contributing there or open up an IRA with a separate company.  And remember, this money should be invested for the long term, stocks are not a good place to invest your car or house fund.  Even though interest rates are brutally low, be patient and work on your rate of savings if you’re young and anxious.

Simple Interface

The way Betterment is set-up, it requires very little day to day management.  You can sign-up, set-up automatic monthly deposits and forget about it.  Betterment will automatically invest your money and re-balance at appropriate times.  They will help you set your asset allocation at the beginning and you won’t need to worry about it after that.  If you’re a hands-off investor and don’t want to worry about anything, I think Betterment provides just what you’d need.

No Fee is the Best Kind of Fee

I hate paying fees, everyone probably knows that by now.  But these companies have to make a profit somehow right.  Here is Betterment’s fee structure:

  • 0.35% per year for investors with less than $10,000,
  • 0.25% per year for investors with $10,000 to $100,000, and
  • 0.15% per year for investors with more than $100,000.

For what they provide, these fees are pretty low.  What I like most about Betterment is that they promote buy and hold passive investing.  They won’t do anything fancy and they’re one of the best at what they do.  Getting started with them is pretty simple too since you can invest with as little as $100/month.  There’s a $3/month fee if you don’t contribute at least $100/month which I actually like since it forces you to invest your money.

Investment Options

I really like Betterment’s investment options and I actually hold VTI myself in one of my retirement accounts.  Anytime you see companies like Vanguard or iShares, the fees should be pretty low.  Here’s the breakdown of what funds you’ll be invested in(the average expense ratio of these funds is ~0.17%)

Stock Portfolio

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

Bond Portfolio

  • iShares Barclays TIPS Bond Fund ETF (TIP)
  • iShares Barclays 1-3 Year Treasury Bond Fund ETF (SHY)

How Does Betterment Compare?

Betterment is one of the best companies out there offering low cost investment options for beginners but there is another simple way to re-create what they do.  The alternative is to open an account with Vanguard and invest in one of their target retirement funds like Vanguard Target Retirement 2050 Fund (VFIFX)(adjust the fund to whatever year you plan on retiring).  This fund will invest in a very comparable asset allocation to Betterment and the expense ratio is only 0.19% while Betterment’s ER is around 0.52%(the average ER of the funds Betterment invests in is .17%).  If you have less than 10k invested with Vanguard there is a $20 annual fee, but thatt’s waived as long as you choose e-statements.

The simplicity and low cost funds make Betterment a good starting point for beginners, but it’s clearly more expensive than Vanguard.  Fees will play an important role in the performance of your portfolio as your balance grows but in this case a .33%(.52-.19) difference on $10,000 is only $33.  Still, I’d go with Vanguard since they offer a comparable product at less than half the cost.  Eventually, your accounts will grow and at that point you won’t want to be paying an ER of .52% so why not start with a company like Vanguard now?

Readers, have you ever used Betterment’s services?  Do you think it’s a good starting point for beginning investors or should they start somewhere else?

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

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    • says

      Yep Lance, we are definitely on the same page. I don’t know why someone wouldn’t take the time to do research their finances but there are lots of people who wait until later on in life. At least Betterment is one of the cheaper options for those people.

      • Rhod says

        Harry, I have been called “lazy, stupid” and have had people tell me that I shouldn’t even invest because I am not willing to do my homework… The same old garbage.

        Betterment is perfect for me because I HAVE tried to do my homework… and it just doesn’t “click” in my slow mind. I believe there are alot of us out there with this problem.

        That said, I AM more intelligent than most people in other areas (i suspect that includes certain people that make comments on certain investment websites).

        I am intelligent enough to know Betterment is PERFECT for someone like myself and I will be sending them part of my investment cash every month for a long time to come.

        Your comments are typical of people I do not discuss finance or religion/politics with at this point in my life.

        I totaly understand if this post is not allowed on this site.

        • says

          Don’t worry, not very many people visit this site so I allow most comments :) As for Betterment, did my article really make it seem that bad? I actually pointed out quite a few things that I like about Betterment: low cost funds, good for beginners, etc. Honestly, it won’t make much difference when your account is sub 6 figures if you do Betterment or not, your contributions and rate of savings will greatly eclipse AA and fees.

          If you don’t get a little hard on when you start reading up about personal finance like I do, that’s fine(in fact I think that’s probably more normal than what I do) but I don’t think it’s very hard to go to or and set up an account, calculate when you’re going to retire, and pick an appropriate target date fund. That will save you a lot of money in fees once your account grows to 6 figures +. I plan on retiring in ~2050, so I select Vanguard Target Retirement 2050 Fund (VFIFX), was that so hard??

  1. Bichon Frise says

    Why is Betterment pushed on other PF blogs? Perhaps we should find out what they are paying for an affiliate link and we most likely shall find out.

    • says

      Haha yea that might be why. I didn’t include an affiliate link since it’s not a product I use but if Vanguard had an affiliate link, I would have included them haha.

      I think I made it clear in my article that you should choose Vanguard over Betterment right? If not, I might have to go back and edit it :)

  2. says

    Hi, Harry.

    Betterment CEO, Jon Stein, here.

    Thanks for taking the time to review Betterment. It’s a big compliment when bloggers talk to their readers about us.
    I’d like to respond to some of the reader comments about how Betterment compares to Vanguard, because it’s an important question.

    In short: Vanguard makes great stuff … we make their stuff great for you.

    Betterment is focused on delivering personalized, goal-based advice for each and every one of our customers. We automate good behaviors and eliminate many bad habits – making better investing happen no matter what. For example, we automatically rebalance your account.

    Other advantages that are of interest to the more detail-oriented investors are that we invest dividends and other cashflows in a tax-efficient way, using each to re-balance the account. We trade in fractional shares to properly diversify our customers’ portfolios.

    Sophisticated investors form the core of our customer base. Our low barriers to entry (easy signup, no minimum) make it a good starting point for new investors too, as you have suggested, but people who understand how to invest and have a lot of money at stake get the most value out of our service.

    Happy to answer any questions readers have.


    • Bichon Frise says

      Jon, I have some questions. So you are basically offering advisory services? Since you’re registered with FIRNA, is it fair to say you are a “budget” financial advisor?

      I’m also curious, say I get a dividend. What do you do that is tax efficient? Regardless if I reinvest that dividend in the same investment, or another investment, or I put it in my checking account, or give it to a homeless person on the street, I have still received a dividend, and I will have to pay taxes on it. So, what do you do with the dividend that qualifies as “tax efficient?” In fact, I would argue in most cases you are tax inefficient. Say I transferred over my taxable account to your advisory service (aka betterment). And I find some allocation I am happy with. But, my taxable account can also be “balanced” through transactions in my IRA. Your service would be buying and selling (creating taxable events) while normally, I would do the rebalancing with my tax advantaged accounts.

      Finally, do you offer any incentives for bloggers to promote your advisory services (aka Betterment)? If yes, can you give us an idea what a blogger would receive for getting someone to sign up and transfer say $5000 into your advisory services (aka Betterment)?

    • says

      Jon, thanks for taking the time to respond. That is pretty cool to see the CEO of a company you review taking the time to respond to a blog article.

      As for Betterment, I like the direction you guys are headed compared to other investment services. But I think it’s tough to beat a Vanguard life cycle fund with an ER of .19% For people that want more of a hand-holding approach, I think Betterment is one of the better options with it’s low costs, simple choices, etc. but I’m a little biased. I think everyone should take the time to research how to invest and learn about investing. I mean it’s only your future but whatever.

  3. Chris says

    I am a satisfied Betterment customer. And given the sense of paranoia on this board I should note I am not affiliated with the company, nor do I believe they pay bloggers, who are always desperate for content, to review their services.

    Because many of you have taken the time to educate yourselves, I think you forget what’s it’s like to feel overwhelmed and confused by one’s options in the investment world. There is so little clarity and so many factors to consider, from taxes to commissions to fees. Subsequently, most people do nothing.

    Traditional brokerage websites are poorly designed and confusing, even Vanguard. Customer service feels like a distant island, not a friendly email away. There is no voice saying, “This is how you should get started.” When my girlfriend heard about Betterment, she told me to check it out because she knew half of my money was rotting away in savings and the other half was gambled on risky, individual stock picks and a poorly allocated 401k and Roth IRA.

    Betterment appeals to the senses and offers a modern, clear answer to our emotional weaknesses as investors. Again, most people do nothing, and call it hand holding if you must, but Betterment makes you do something. And the fees are still pretty darn low, and you can control your allocation if you don’t want to be as conservative as some target retirement funds become.

    After eight months of use I continue to be satisfied, even recommending it to friends who are stuck. I check in on its great app everyday and watching the solid returns has motivated me to get my whole financial house in order. For the time being, I’m willing to pay the difference for liberating me from my .04% MMF and simplifying investing.

    • says

      Hi Chris,

      Thanks for stopping by, you make some valid points. I use the bogleheads forum a lot and most of the users there absolutely crush betterment. Like you mention, I think a lot of these ‘experienced investors’ forget what it’s like to just be starting out. How would you know to choose a Vanguard retirement fund in the first place?

      I do like Betterment because they represent the same principles that I believe in and I actually think their fee is pretty reasonable for the services they provide. So I think my assessment of them is pretty fair. But where I disagree with Jon is that, at some point fees become a big part of your investments and if you take a little time to research over the course of a few years, you can easily come up with an appropriate asset allocation for yourself. If you understand the difference between what Betterment does and what a Vanguard retirement fund does than you’re probably more advanced than you think and it would suit you to pick your own index funds and rebalance yourself. Investing is not that hard but I do agree with you that it can seem like a lot when you’re first starting out.

      And BF is referring to the affiliate commission paid by Betterment. I don’t think Betterment offers money to bloggers to review their service but they do offer a referral payment of $40 per lead. I was too lazy to include an affiliate link though as you can see :)

  4. says

    Thanks for the questions – and the kind words.
    Yes – Betterment is a registered investment advisor and broker dealer. We offer advice, and our efficient technology allows us to manage portfolios at a tenth of the industry average (as low as 0.15%). I don’t use the term “budget,” but you can’t find this level of advice at this price anywhere else.
    We use your deposits and dividends to rebalance your account in a tax efficient way. Say you earn a dividend today. Yay! We look at your portfolio and invest it in the funds that need to be topped up. At the end of the quarter, there’s less rebalancing to be done as a result. Which saves you capital gains taxes, while keeping you balanced. If you did this yourself you would have to make buys and sells to keep your portfolio balanced (funds typically re-invest dividends into the same fund).
    We save you the hassle as well as saving you tax on the gains.

  5. says

    I created a Betterment account awhile back and so far I’ve had a great experience with them. As with any investment, if you look at it day to day you can drive yourself crazy with the way the market fluctuates, however if you check in once a month or so I think you’ll be pleasantly surprised.

    Personally I have the risk cranked up to 95% (not sure why I didn’t just go to 100%) and I’ve had solid returns in a pretty steady clip. I’d definitely recommend it if you have any cash at all sitting in a savings account as I think it serves the same purpose, only you actually get a return worth talking about.

    • says

      Did you start investing in the last three years :) Because anyone in that time frame probably thinks the stock market is one of the best things in the world haha. I think if you look at it though with the mindset that you can’t touch the money for 20, 30 or even 40 years, who cares what happens in the intermediary? If the stock market returns negative after 40 years we’ll probably have a lot more than just financial problems.

  6. Frustrated @ Bettermnet says

    I want to bring this to the attention of clients of betterment that betterment charges a fee up to $400 if you want to do a direct (in-kind) transfer from betterment to another brokerage. I have been trying to do a direct transfer of Roth IRA from betterment to another brokerage firm and was quoted this amount.

    This fee is also listed in their customer agreement in section 23. Please be aware that your only option could be an indirect roll over if you don’t want to pay $400 in transfer fees.

    Betterment does not openly advertise this fee, which I think they must do when they list any or all fees on their website.

    • says

      Thanks for bringing this to my attention. I’ve seen this quite a bit in the industry though, I have $250 left in an old TDA Roth IRA b/c they were going to charge me $150 to close the account. SDIRA/Lending Club also charges a fee to close an IRA. These fees are BS but they seem to be an industry-wide trend. Guess we’ll just have to stick with good ol’ Vanguard to avoid fees.

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