In this article, I’ll be reviewing Betterment, an investment services provider based in New York. This review is meant as a guide to help you be more informed about the positives as well as the negatives of the investment platform the company offers.
If you’d like more detailed advice, perhaps to see how Betterment’s services might work out for your personal circumstances, then don’t hesitate to contact me.
My contact details are hello@adamfayed.com and WhatsApp +44-7393-450-837.
The information in this article is for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.
Founded in 2008, Betterment is a New York robo-advisor service that aims to help people to achieve their investment goals by offering automated advice to users of the service. In short, you can think of it as an artificial intelligence system designed to make it easier for ordinary investors to find their way through the often tricky world of international finance.
Betterment has grown since its early days to become one of the largest independent financial advisory services using an online platform in the United States. That fact alone makes it worth looking into. Why are so many people using it?
Jon Stein and Eli Broverman began Betterment after Stein had initially come up with a Java-based software application for providing financial advice. As soon as Stein realised he needed to be regulated by offering such a service commercially, he brought Broverman in for his legal expertise as a securities lawyer.
Since then, Betterment has grown and grown in terms of the number of users it has attracted, largely under the leadership of Stein, as CEO, and Dustin Lucien, the company’s COO. By 2017, the quantity of assets that were under the management of the company had surpassed the $10 billion mark.
In March 2019, Betterment made a significant change to its operating practices. Prior to that point, investors needed a minimum account balance of $100,000 to be maintained. This threshold was removed, thereby opening up the platform to a much larger cross-section of the population.
As mentioned, Betterment is an online service that provides so-called ‘tools’. These allow users to set their financial goals, whether that is to create an investment portfolio for their retirement or to help with their tax strategy.
The tools on offer within Betterment’s investment platform are available around the globe. They are largely made up of passive index-tracking tools which are tied to equity funds. These might be in stocks and shares in various exchanges around the globe, not just Wall Street.
Investors can take advantage of fixed income exchange-traded funds, otherwise known as ETFs, within the Betterment software investment platform. Other financial products offered are individual retirement accounts (IRAs) and certain tax-advantaged investment accounts.
As a business that essentially provides financial advice and has investors place their money into accounts through its platform, Betterment has to be registered with the Securities and Exchange Commission in the US.
However, it should not be considered as a bank where money is simply stored. Investors still make their own decisions based on the advice they receive. As such, Betterment is also a US-registered investment advisor as well as an accredited brokerage dealer.
Finally, I should mention that Betterment also falls under the auspices of the Financial Industry Regulatory Authority (FINRA) in the US. This should give investors some reassurance but there have been questions put to the company in the past by FINRA about some specific aspects of its platform.
Betterment is a useful platform for people who have specific goals they want to achieve from their investments. The goal-oriented tools on offer within the platform are certainly geared up to this sort of approach.
Having said that, there is nothing to put general investors off – people who just want to make the most of the global financial markets to grow their nest egg. It is simply that Betterment has been designed to suit targeted growth.
If you like automated rebalancing – something that automatically adjusts a portfolio when there are market fluctuations to even them out – then Betterment may well be for you.
That said, how automatic rebalancing works and how you set the tools to make it function in a way that suits, for example, your attitude to risk does need a bit of expertise.
Overall, I’d say that Betterment’s entry-level investment platform, known as Betterment Digital, is suited to investors who want a hands-off experience, the sort of people who are happy to sit back and allow the algorithms to take over.
Given that its tools are often targeted for long-term growth people who want to use it to save for their retirement are also likely to find it useful. Given that you can start from zero with Betterment Digital, this really means anyone of working age.
Bear in mind that with Betterment Digital, fees of 0.25 per cent of your assets under management (AUM) are levied annually. On the other hand, if you opt for Betterment Premium, then you will obtain access – by phone only – to the company’s financial planners as well as the online automated advice.
In order to gain access to those premium services, however, you can expect an annual AUM fee of 0.4 per cent. In addition, you will need to set aside at least $100,000 since this is Betterment Premium’s account minimum.
As such, although Betterment Digital will suit a wide variety of investors, Betterment Premium is only likely to appeal to wealthier individuals who want a more personalised service.
Given that you can obtain this elsewhere without relying on all of the automation tools in the software, I’d say you can do better elsewhere. Therefore, in the interests of fairness, for the remainder of this review, I’m going to be mainly focussing on what Betterment Digital has to offer.
With any savings and investment platform, there are always cons to go with all of the pros, so it is important to look at some of the downsides you might experience with Betterment, too.
The term robo-advisor has grown in usage to mean something that automatically provides financial advice. Although it should be noted that no two robo-advisors will ever be built in exactly the same way, the trading algorithms that sit behind them are nothing more than lines of code.
In short, a robo-advisor can only ever be as good as the software developer behind it.
Clearly, the popularity of Betterment demonstrates that many people trust the automated advice offered by the platform. It certainly suits people who want to leave it to the mathematical expertise of software developers.
However, automated financial advice cannot always be nuanced in the way that in-person advice can be. Nor is it as good at dealing with unprecedented events in a changing world.
The financial models that such algorithms utilise are necessarily based on the precedents of the past, not on determining what might occur if those precedents no longer stand up.
In summary, I’d say that you can do worse than experiment with Betterment Digital. Because there is no minimum account balance you need to maintain, why not try it out with a few hundred dollars and see if it is for you or not?
The goal-oriented investment tools are very practical and this makes Betterment stand out from other robo-advisors you might also be considering.
Overall, I’d err on the side of caution before transferring all of your available investment funds into it, especially if you live outside of the US and won’t necessarily be covered by all of the financial regulations and safeguards in that country.
The biggest drawback is if you have significant amounts of money, or fall into a niche like being an expat.
These kinds of services are therefore better for newer investors with small amounts of money.
Further Reading: HSBC Expat Review