Betterment is a digital investment platform that provides automated portfolio management. The service constructs and maintains diversified portfolios of exchange-traded funds (ETFs) based on an investor’s stated goals, timeline, and risk tolerance, commonly known as a robo-advisor.
Founded in 2008, Betterment was a pioneer in the robo-advisory industry, aiming to provide institutional-level portfolio management to individual investors at a lower cost than traditional brokerage services. The platform has since expanded to include cash management, tax-coordination features, and multiple specialized portfolio strategies.
At a glance
- Mechanism: Uses Modern Portfolio Theory to allocate across global stock and bond ETFs.
- Fees: Standard investing fee is 0.25% annually of assets under management.
- Minimum: $0 for the digital investing tier; $100,000 for the Premium tier.
- Unique feature: Automated “Tax-Coordinated Investing” across multiple account types.
- Support: Digital-first, with human financial planners available at the Premium tier.
How does Betterment build portfolios?
The Betterment portfolio construction process relies on a quantitative assessment of an investor’s profile. During the onboarding phase, the platform uses a questionnaire to capture data points such as age, annual income, investment objectives (e.g., retirement or a major purchase), and comfort with market volatility.
Based on these inputs, the algorithm selects a “Core” portfolio allocation. This allocation typically consists of a mix of domestic and international equities along with fixed-income assets. The platform uses low-cost ETFs from providers like Vanguard and iShares. For example, the stock portion might include U.S. total market, developed international market, and emerging market ETFs, while the bond portion includes U.S. corporate and treasury bonds.
The choice of specific ETFs is dictated by liquidity, internal expense ratios, and tracking error. Betterment’s primary goal is to provide market exposure while keeping the underlying investment costs as low as possible for the user.
What portfolio options are available?
While the Core portfolio is the default, Betterment provides several alternative strategies to accommodate different investor preferences.
- Socially Responsible Investing (SRI): This strategy emphasizes ETFs that score higher on environmental, social, and governance (ESG) metrics. Within this category, users can choose specific focuses such as “Climate Impact” or “Social Impact.”
- Goldman Sachs Smart Beta: Designed for users seeking to “outperform” the market through factor-based investing. It weights securities based on factors like value, momentum, and low volatility rather than just market capitalization.
- BlackRock Target Income: A 100% bond portfolio designed for investors seeking regular yield with lower relative volatility compared to equity markets.
- Flexible Portfolios: For investors who want more control, this option allows users to adjust the weights of specific asset classes within the model, provided they stay within certain risk-based constraints set by Betterment.
Regardless of the strategy chosen, the platform continues to provide automated rebalancing and dividend reinvestment to maintain the target asset mix.
How does tax-loss harvesting work?
Tax-loss harvesting is a core automation feature designed to enhance the after-tax value of taxable brokerage accounts. It works by identifying securities that have declined in value since their purchase and selling them to realize a capital loss.
These realized losses can be used to offset capital gains realized elsewhere or to reduce up to $3,000 of ordinary taxable income per year in the United States. Betterment’s system monitors accounts daily for these opportunities. When a loss is harvested, the proceeds are immediately reinvested in a similar, but not identical, ETF to maintain the portfolio’s target risk and return profile. This ensures the investor does not miss out on potential market rebounds while capturing the tax benefit.
The utility of this feature varies by individual. Investors in higher tax brackets with significant taxable balances typically see the most benefit. For those in lower brackets or those with small account balances, the tax savings may be minimal relative to the 0.25% management fee.
What is Tax-Coordinated Investing?
Betterment offers a proprietary feature called “Tax-Coordinated Investing” (TCI) for users managing multiple account types, such as a taxable brokerage account alongside a Traditional or Roth IRA.
The mechanism behind TCI is “asset location.” Some investments, like dividend-paying stocks or high-yield bonds, generate more tax liabilities than others. TCI automatically places these tax-inefficient assets into tax-advantaged accounts (like IRAs) while keeping more tax-efficient assets in taxable accounts. According to Betterment’s research, this coordination can potentially increase total after-tax returns without changing the overall risk of the combined portfolio.
This feature requires the user to give the Betterment algorithm control over the allocation across all linked accounts, which may limit the user’s ability to manage individual accounts independently.
How is the fee structure calculated?
Betterment’s cost structure is divided between its advisory fee and the internal expenses of the ETFs utilized in the portfolios.
| Tier | Annual Advisory Fee | Minimum Balance | Key Feature |
|---|---|---|---|
| Digital Investing | 0.25% | $0 | Automated management and tax tools |
| Premium | 0.65% | $100,000 | Unlimited phone access to CFP advisors |
The 0.25% advisory fee is calculated daily and deducted from the account balance quarterly. For every $10,000 invested, the annual fee is approximately $25. In addition to this, investors pay the internal expense ratios of the ETFs, which typically range from 0.05% to 0.15%. Combined, the total cost of ownership is generally between 0.30% and 0.40% per year.
While this is lower than the ~1.00% charged by many traditional human advisors, it is higher than the cost of purchasing the same ETFs directly through a self-directed brokerage account. The fee represents the price of the automation, rebalancing, and tax management services.
What are the tradeoffs and exit frictions?
Using an automated platform like Betterment involves certain constraints that may not suit every investor.
Limited Customization. Users cannot buy individual stocks or bonds. If you have an existing position in a specific company, you cannot hold it within the managed Betterment portfolio. This lack of control may be a disadvantage for investors with specific sector views or concentrated positions elsewhere.
Exit Frictions in Taxable Accounts. If a user decides to move their investments from Betterment to another brokerage, they may face challenges. Betterment allows for “in-kind” transfers of most ETFs, meaning the securities can be moved without being sold. However, if the user’s new broker does not support the specific ETFs held by Betterment, or if the user wants to liquidate, it will trigger capital gains taxes on any appreciation in taxable accounts.
Model Dependency. The performance of the portfolio is entirely dependent on Betterment’s asset allocation models. These models are heavily diversified internationally. During periods where the U.S. market significantly outperforms international markets, Betterment’s diversified approach may result in lower returns compared to a U.S.-only index fund.
Common questions
Is Betterment FDIC insured?
Not for investment accounts. Securities held in Betterment brokerage accounts are protected by SIPC up to $500,000 (including $250,000 for cash). However, Betterment’s “Cash Reserve” account is FDIC-insured through partner banks up to $2 million (or more for joint accounts) once the funds are swept to the partner institutions.
Can I change my portfolio risk level?
Yes. Betterment allows users to adjust their “stock/bond” allocation at any time. However, making a significant change may trigger rebalancing trades that result in capital gains taxes in taxable accounts.
Does Betterment provide human financial advice?
Yes, but it depends on the account tier. The Digital tier provides access to automated support and goal-setting tools. The Premium tier ($100,000 minimum) provides unlimited phone consultations with Certified Financial Planners (CFPs) for questions about broader financial planning, such as retirement or debt management.
How do I withdraw funds from Betterment?
Withdrawals can be initiated through the website or mobile app. Betterment will sell a proportional amount of your holdings to raise the requested cash. It typically takes 4-5 business days for the trades to settle and the funds to arrive in your linked bank account.
Common misconceptions
“Tax-loss harvesting is a ‘free lunch’.” While it provides tax benefits, it is essentially a tax deferral mechanism. By selling at a loss and buying a new asset, you lower the “cost basis” of your new holding. This may result in higher capital gains taxes in the future when you eventually sell the entire position.
“Betterment guarantees the best returns.” Betterment manages the process of investing through diversification and rebalancing. It cannot predict market movements or protect against market crashes. Your returns are dictated by the performance of the underlying asset classes (stocks and bonds), minus fees.
“Robo-advisors are only for beginners.” Many sophisticated investors use platforms like Betterment for the specific purpose of automating tax-loss harvesting and asset location, which are labor-intensive tasks when performed manually in large, complex portfolios.
