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Betterment Review and $25 Sign Up Bonus

Everyone knows I’m the first to sign up for a new account if there’s a sign up bonus. So when Betterment [1] showed up, of course I opened an account for the free $25!

But beyond the sign up bonus, what exactly is Betterment and how does it work? Here are my thoughts after opening my account [2] last spring.

Betterment Review

Betterment [1] makes it easy with only two portfolio components: stocks and bonds. You pick your asset allocation and Betterment manages the rest, using index exchange traded funds (ETFs) [3].

Betterment believes in indexing as one of their principles instead of using actively managed funds to try to beat the market. That aligns with my investment philosophy so I like what they’re working on here.

They select the ETFs for you and maintain diversification and your selected asset allocation. They pick the ETFs focused on low fees and high liquidity to keep the expenses down.

Here are the account details:

  • Account Minimum: None
  • Account Transaction Fees: None

Betterment Portfolio

Here’s what’s in the Betterment [1] portfolio right now (they review it quarterly):

Betterment Stock Market Portfolio:

  • 25% VTI: Vanguard Total Stock Market
  • 25% IVE: iShares S&P 500 Value Index
  • 25% VEA: Vanguard Europe Pacific
  • 10% VWO: Vanguard Emerging Markets
  • 8% IWS: iShares Russell Midcap Value Index
  • 7% IWN: iShares Russell 2000 Value Index

I’m pleased that they recently just added international holdings, as I thought the portfolio was lacking that dimension when I first signed up. Now the portfolio holds 35% in international (25% Europe Pacific and 10% Emerging Markets).

Betterment Bonds Portfolio:

  • 50% TIP: iShares Barclays TIPS Bond Fund
  • 50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The overall portfolio is designed to replicate the total market with a value and small cap tilt, which mirrors much of my target asset allocation.

Management Fees

Management Fees: The Betterment [1] management fee is 0.3% to 0.9% of your average balance based on the following tiers:

Portion of Balance Management Fee
$0 – $25,000 0.9%
$25,000 – $100,000 0.7%
$100,000 – $500,000 0.5%
$500,000 0.3%

The Betterment fee, which is charged quarterly, is on top of the expense rations for the ETFs (averaging less than 0.2%). If you withdraw your money, they’ll prorate the fee.

Obviously, 1.1% (0.9% + 0.2%) is a too high for my taste, since I like to keep our expense ratios very low (The last time I checked we were at a 0.148% overall expense ratio). But I also like to manage all of my own investments, so I would say I’m not their target customer.

However, if you’re not into selecting and managing your own portfolio, Betterment is trying to offer an interesting concept. Essentially you pay Betterment to make your trades, rebalance, and monitor the market for new and better ETFs for your portfolio.

Betterment Details

Rebalancing. Betterment [1] automatically rebalances your portfolio every quarter, or when you portfolio is more than 5% from the target allocation.

Partial Shares. Some of the things I like are the ability to invest without the need to buy whole shares. In addition, Betterment uses automatic dividend reinvestment.

Taxes. Betterment will send 1099s [4] (a 1099-B and 1099-DIV) at the end of the year. You’ll owe capital gains when you sell, and taxes on the dividends. Also, you need to be aware that any rebalancing that Betterment does on your behalf to maintain your target asset allocation will create a taxable gain or loss.

Fast Application. The application is fast. I timed it. 4 minutes. And I got my $25 bonus as soon as I verified my bank account, which always creates a good first impression!

Referrals. They have a referral program. When you refer your friends, you get $10 and your friend gets $25.

Betterment Concerns

Transactional Data. The activity data is a bit strange. They update “market changes” on a varying schedule. I understand the use of the baskets is probably driving it, but it’s very strange for those of us who like to track transactions in quicken. In addition, you can’t download your transaction history into a usable format right now, but it says that feature is in the works. I hope so, because frankly, a PDF transaction statement hurts my brain. Once the transactional data is improved, I think it will be more intuitive.

Peer Allocation. Betterment has a fun toy in the dashboard, comparing my asset allocation with my peers based on demographics. I’m at 88/12, but my peers are at 64/36. I found that a little unusual. In fact, when you look at males instead of females, it jumps up to 76/24. Ladies?

However, my bigger concern is that while the peer allocation is fun, it also implies that you should consider an asset allocation like your peers. I don’t agree with that. For example, just because the other women who are similar to me in age and income appear to be more conservative than I am, it doesn’t mean it’s correct.

Target Retirement Funds. While I like the idea for what Betterment is trying to accomplish, isn’t this very similar to target retirement funds? Specifically, much cheaper target retirement funds?

Betterment $25 Sign Up Bonus

Overall, let’s get back to the reason I tried out Betterment in the first place, to claim some free money! If you haven’t opened an account yet, it’s really easy to get the Betterment $25 sign up bonus [1], just open an account with $250.

What do you think of Betterment?