Today, we have a reader question about the site Betterment.com. 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 Betterment.com 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?
Betterment.com 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.
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.
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%)
- 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)
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?