Online service simplifies investing -- and limits fees
Betterment.com offers a service that’s supposed to simplify investing by putting your money into a stock and bond portfolio that’s weighted to fit your circumstances.
The service eliminates the research and decision-making that scare a lot of people away from investing.
One of the tenets of good investing is to minimize your fees. So I wanted to know how much damage Betterment’s fees would do, especially for investors just starting out.
The bottom line: What this online service charges is not unreasonable.
Betterment is marketed primarily to people who don’t have the knowledge or time to choose and manage their own investments.
Like many such services, Betterment charges a percentage fee based on how much money you invest. The more you put in, the lower the percentage you'll pay in fees.
If you have less than $10,000 to invest, you must automatically deposit at least $100 a month, or you’ll be charged a $3 monthly fee.
If you missed the minimum requirement every month, you’d pay $36 for the year.
That's not a lot of money, but if you only have a little bit to invest, it represents a significant percentage of your capital.
The good news is that Betterment will not charge you its usual annual fee on top of the $3 per month fee.
Investors who meet the standard minimum requirements pay an annual percentage fee.
With a $100-a-month automatic deposit and no minimum balance, you’ll pay 0.35% per year.
Let’s say you make the automatic deposits and have $1,200 at the end of the year; your annual fee would be $4.20.
That’s an incredibly low fee and a savings of $31.80 compared to not making the $100 a month automatic deposits.
If you’re going to sign up, commit yourself to at least the $100 minimum.
If you can’t afford that commitment, don't open an account.
If you invest $10,000 or more, the annual fee drops to 0.25%. That’s $25 a year for every $10,000 invested.
Those with balances of $100,000 and up pay the lowest rate, 0.15%.
No matter which category you fall into, you get to try the service free for 30 days before paying any fees.
So what do you get in exchange for your fee?
Betterment puts your money into exchange-traded funds with very low expenses.
ETFs are similar to index funds, a longtime staple of retirement investing, but they can be traded like stocks and have lower fees. (Yes, you'll also pay a fee, called an expense ratio, to own an ETF.)
Betterment gives investors broad diversification and exposure to most major components of the market. It currently puts your money into the following investments:
- 25% VTI: Vanguard Total Stock Market, 0.06% expense ratio
- 25% IVE: iShares S&P 500 Value Index, 0.18% expense ratio
- 25% VEA: Vanguard Europe Pacific, 0.12% expense ratio
- 10% VWO: Vanguard Emerging Markets, 0.20% expense ratio
- 8% IWS: iShares Russell Midcap Value Index, 0.26% expense ratio
- 7% IWN: iShares Russell 2000 Value Index, 0.40% expense ratio
- 50% TIP: iShares Barclays TIPS Bond Fund, 0.20% expense ratio
- 50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund, 0.15% expense ratio
According to data from the investment research firm Morningstar, the ETFs Betterment uses have expense ratios that are at or below average for their respective categories. Low expenses mean you keep more of your investment gains.
As for returns, Betterment says its portfolio returns 7.86% on average, based on an allocation of 70% stocks and 30% bonds, and accounting for reinvested dividends and fund fees. The website says that figure is not based on actual customer returns, which aren't necessarily set at the recommended allocation. (The company would not provide data on actual returns.)
Betterment stresses that its focus is not on beating the market but on matching the market's long-term performance at the lowest cost.
In addition to doing the dirty work of researching and selecting investments, Betterment automatically rebalances your portfolio on a regular basis.
Rebalancing is important for meeting your investing goals because it keeps your money in your chosen percentages of stocks and bonds as the market changes the value of your holdings.
Using Betterment is certainly cheaper than hiring an investment adviser, and the barriers to entry are much lower. If you want someone else to make investment decisions and transactions for you at Fidelity or Vanguard, you’ll need at least $50,000.