There’s a lot of competition in the robo-advisor game, but Betterment has emerged as the current leader of the independent launches, with more than $3.2 billion in assets under management. The company also claims to have more customers than all of the competition combined, thanks in part to its $0 account minimum. But investors are also flocking to the service because of a powerful combination of goal-based tools and affordable management fees, particularly for accounts over $100,000, which pay just 0.15% of assets managed. Like other robo-advisors, Betterment uses exchange-traded funds, and clients pay no commissions or transaction fees.
NerdWallet's rating: / 5
Quick facts
- Management fee: 0.15% to 0.35%
- Account minimum: $0
- Promotion: Up to six months of free management
Betterment is best for:
- Hands-off investors
- Account balances over $100,000
- No minimum balance requirement
- Automatic rebalancing
- Goal-based tools
Betterment at a glance
| Overall |
|
|
| Account management fee |  |
• Accounts under $10,000: 0.35% with auto-deposits of at least $100 a month, otherwise $3/month • $10,000 to $100,000: 0.25% • More than $100,000: 0.15% |
| Investment expense ratios | |
ETF expense ratios range from 0.09% to 0.17% |
| Portfolio | |
ETFs from up to 12 asset classes |
| Account minimum | |
$0 |
| Account fees (annual, transfer, closing) | |
Accounts with balances of less than $10,000 that don’t initiate auto-deposits of $100/month or more pay $3 a month as a flat management fee |
| Accounts supported |  |
• Individual and joint non-retirement accounts • Roth, traditional SEP and rollover IRAs • Trusts |
| Tax strategy | |
Daily tax-loss harvesting on all taxable accounts |
| Automatic rebalancing | |
Free on all accounts |
| Customer support | |
Phone support Monday-Friday 9 a.m.-8 p.m. Eastern, Saturday-Sunday 11 a.m.-6 p.m. Eastern; email support and live chat. |
| Promotion | |
Up to six months of free management |
Where Betterment shines
Account minimum: There’s not much to say here, and that’s a good thing. Betterment is one of the few robo-advisors that requires no minimum deposit.
Investments: Like many robo-advisors, Betterment bases its investment philosophy on modern portfolio theory, which highlights the benefits of diversification. The company uses ETFs that represent up to 12 different asset classes, depending on the investor’s risk tolerance and goals. Betterment automatically rebalances your portfolio when cash flows in or out (in the form of dividends, contributions or withdrawals) or when the allocation to a particular asset class drifts more than 3% from its target level. The company’s algorithms check daily for the need to rebalance, and the company purchases fractional shares so there is no uninvested cash in your portfolio.
Betterment’s mix of ETFs includes U.S. and international stocks; short-term Treasuries; inflation-protected Treasury securities; municipal, corporate and international bonds; and emerging market stocks and bonds. It does not include exposure to alternatives such as natural resources or real estate.
Management fees: Betterment’s fees are based on account balance. Investors with $100,000 or more benefit from one of the lowest management fees available, just 0.15%. The fee schedule is as follows:
| Account Balance | Annual Fee |
|---|---|
| Less than $10,000 | 0.35% with $100 a month in automatic deposits, or $3 per month |
| $10,000 to $99,999 | 0.25% |
| $100,000 or more | 0.15% |
Here’s how those fees compare to competitor Wealthfront’s flat 0.25% management fee (which it applies only to the portion of an account above $10,000):
| Account balance | Wealthfront management fee |
Betterment management fee |
Wealthfront annual cost |
Betterment annual cost |
|---|---|---|---|---|
| $5,000 | None | 0.35% (or $3/month without auto-deposit) | $0 | $17.50 (or $36) |
| $75,000 | 0.25% | 0.25% | $162.50 | $187.50 |
| $100,000 | 0.25% | 0.15% | $225 | $150 |
| $150,000 | 0.25% | 0.15% | $350 | $225 |
Betterment’s management fee is based on the amount you have deposited, so if market fluctuations cause your account balance to shift to a more expensive fee tier (dropping from $100,000 to $99,950, for example) you will continue to pay the lower rate. However, if investment growth moves your balance up a fee tier, Betterment will reduce your fee accordingly.
Goal-based saving: Betterment’s sign-up process takes you through a goal-setting exercise, asking for your age and current annual income. It then suggests a series of goals based on your answers, ballparking a safety net of three to six months of expenses, a retirement savings target, and a general investing goal. Each goal comes with a recommended target and asset allocation, which you can adjust. You can also add new personalized goals that will dictate the account types used and how your money is invested. And you can set up auto-deposits into each goal.
Why is this a useful feature? First of all, research suggests that you’re more likely to reach concrete goals. It’s easier to save $50,000 for a down payment on a house, for example, than it is to just save $50,000. But Betterment also uses your goals to determine your asset allocation and give you strategic advice about how much to save per month.
Smart Deposit: This optional feature harvests unneeded cash out of your checking account so it goes to work for you. You set a maximum amount you need in your checking account — enough to cover a couple months of expenses plus a buffer, for example — and Smart Deposit will monitor your account weekly and pull out excess. You can set the maximum amount you want Betterment to take out at one time, and opt to skip any Smart Deposit before it happens. This is in addition to any automatic deposits you’ve set up.
RetireGuide: Launched in 2015, Betterment’s RetireGuide allows customers to link their non-Betterment accounts, including 401(k)s, giving a full picture of all savings and investment accounts. With this information, the tool can offer retirement planning advice that considers all of your accounts, no matter which firm holds them. RetireGuide compares current savings levels to your desired spending levels in retirement, answering questions about whether you’re saving enough money, when you’ll be able to retire, and if you’re using the correct savings vehicles and investments. It updates and syncs to outside accounts daily, and allows for Social Security data uploads.
Where Betterment falls short
Automatic deposit requirements: Yes, Betterment has a $0 initial balance requirement. But if you don’t have money to open the account, you’d better be ready to start contributing: Betterment will assess a $3 monthly charge on account holders who don’t auto deposit at least $100 a month, up to a $10,000 balance. That can add up, particularly when you compare with competitors that charge no management fees on the first $10,000.
No direct indexing: Like many other robo-advisors, Betterment offers tax-loss harvesting on taxable accounts. The platform automatically reviews your investments daily to reduce tax exposure. But it doesn’t have a direct-indexing tool like Wealthfront, which provides this service on taxable accounts with balances of $100,000 or more.
Direct indexing purchases the individual securities held by an index, rather than the ETF tracking that index, which can help single out tax-loss harvesting opportunities. The process can save investors with taxable accounts significant money, perhaps giving Wealthfront an edge among investors who qualify for that offering.
Safety net goals: As mentioned above, one of Betterment’s suggested goals is a safety net (read: emergency fund), which it advises investing 40% in stocks and 60% in bonds. Conventional advice says short-term savings such as an emergency fund probably shouldn’t be invested at all, particularly if your goal is underfunded, because you may need access to it quickly — hence the name emergency fund — and it’s not money you want to risk losing.
Betterment says its tests show that this allocation is a reasonable alternative to cash, but investors should make an individual decision about whether they’re comfortable investing their emergency fund; many people would sleep better at night with at least some of this money instantly accessible in a standard savings account. Also, the company concedes that taking money out of your safety net account could have capital gains tax implications — including short-term capital gains, which are taxed at higher rates. Withdrawals from a savings account are untaxed, of course.
The bottom line
It’s clear why Betterment is attracting assets and clients: The company offers innovative tools, a diversified investment portfolio and reasonable management fees. The service is especially appealing for clients who have IRA account balances of $100,000 or more; these clients won’t benefit from Wealthfront’s direct indexing service and will benefit from Betterment’s significantly lower fee at this account level. New investors with little to invest may want to look to other options that charge lower — or even no — management fees on smaller balances.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter:@arioshea.
This post updated Feb. 2, 2016. It originally published July 21,2015.
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