Betterment Review: How It Works, Pros & Cons

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If you’re reading a Betterment review, you probably already know something about robo-advisors. But how do they work, and what makes Betterment one of the better robo-advisor options?

In this article, I’ll explain how Betterment’s combination of low fees and features makes it such an attractive option for those who want investment guidance.


Table of Contents


Betterment Review: Quick Look

Company NameBetterment
Company TypeInvestment and financial services company
Key FeaturesNo minimum, low fees, goal-based philosophy
DownsidesSome features not optimized or missing
Best ForBeginners with less capital

What Is Betterment?

Founded in 2008 and based in New York City, Betterment was the first widely-available robo-advisor.

Over the years, Betterment has added asset classes, portfolio options and banking services. Because of its relative maturity in the robo-advisor space, Betterment has some of the most advanced features and perks in the industry.


How Does Betterment Work?

Betterment seems designed around two things: getting you to work toward specific goals and making it as easy as possible for new investors to use its products.

Once you’ve entered your name and contact information, Betterment gives you four account options:

  1. Checking
  2. Savings
  3. General investing (taxable)
  4. Retirement investing (IRA)
Clark Howard's Betterment review begins with a look at the onboarding process for investing.

From there, Betterment’s approach to signing up new customers seems designed to avoid pain points.

Specifically, it doesn’t ask any of the typical questions about your risk tolerance. Instead, onboarding involves three basic steps:

1. Filling Out Personal Information

  • Address
  • Date of birth
  • Social security number
  • Employment status
  • Tax status
  • Income
  • Assets
  • Initial goal, including completion date

Notice that final bullet point. This is the first instance where Betterment nudges you toward goal-setting, but it won’t be the last. Goals, and helping you understand what it takes to reach them, are a key part of the Betterment philosophy.

2. Setting Your Portfolio Asset Allocation

That jargon may sound intimidating, but don’t worry. Betterment does a nice job of walking you through your its pre-built options for your investment strategy.

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Once you choose one, you’ll have the opportunity to adjust the “allocation” of your portfolio. That’s a fancy way of saying you can choose what percentage of your investments you want in stocks vs. in bonds.

Back to portfolio strategy. All robo-advisors give you pre-built portfolios. Based on inputs such as your income, assets and age, robo-advisors match you with the portfolio that their algorithms think is best.

At Betterment, you get an additional level of choice that many robo-advisors don’t allow. Here are those options:

  • Betterment Core. This is Betterment’s standard, broadly-diversified portfolio.
  • Socially Responsible Investing (SRI). Betterment offers three options under this umbrella: a) broad impact, b) social impact and c) climate impact. Betterment’s SRI options still include ETFs, which often aren’t granular enough for social investing, as some websites that cover investing have pointed out.
  • Goldman Sachs Smart Beta. This strategy explicitly attempts to outperform the market by using algorithms to identify and invest in high-performing assets.
  • BlackRock Target Income. This 100% bond portfolio typically helps provide income for people nearing or in retirement.
  • Flexible Portfolio. This option gives you full control over your portfolio allocation, but Betterment will still give some automated suggestions and feedback on your decisions.

3. Connect Your Bank Account

Betterment will prompt you to set up recurring automated deposits.


How Much Does Betterment Cost?

Advisory FeesWeighted Average Expense RatioMinimum DepositAnnualized ReturnAccount Types
0.25%0.09%*$08.90%*Taxable, Retirement, Trust

*Based on Backend Benchmarking’s Fourth Quarter 2020 Robo Report. Betterment recommends different portfolios to different clients. Your actual results will vary based on the portfolio option you select as well as future market performance.

Betterment is among the least expensive robo-advisors.

The annual fee tends to be the most prominent cost associated with a robo-advisor, and at 0.25%, Betterment is on the lower end among its competitors. However, other variables are important as well including the average portfolio expense ratio.

Vanguard, typically the gold standard on cost, offers an average expense ratio of 0.07% on its entry-level robo-advisor product. Betterment charges 0.09% according to Backend Benchmarking.

Betterment Premium, which competes with Vanguard’s Personal Advisor Services and other hybrid models, requires a minimum investment of $100,000, and its annual fee is 0.40%. That’s an excellent price considering that Betterment can’t offset any of its costs by including its own funds in its portfolio offerings to earn expense ratios as Vanguard and Schwab do.

Betterment Premium also allows you unlimited access to advice from Certified Financial Planners. (It’s not free, though. More on that later.)

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And investors who have at least $2 million on deposit with Betterment get a discount on annual fees.


Betterment Review: Where It Shines

Our Betterment review uncovered a robo-advisor with no minimum investment requirement.

After reviewing Betterment, here are the ways I think the company excels:

  • No account minimums. I’ve researched dozens of robo-advisor companies. I’ve come across a handful of them that require minimum deposits of $5 or less. Now that Betterment has acquired Wealthsimple, it’s the only robo-advisor I’ve seen with no account minimum I’ve seen that offers tax-loss harvesting. Betterment offers a ton of impressive features for a company that doesn’t require a minimum deposit.
  • Inexpensive. Betterment’s all-in cost is about 0.34% including the annual fee and average expense ratios. Vanguard’s Digital Advisor undercuts Betterment at 0.22%. But you’d be hard-pressed to find another cheaper robo-advisor that uses the annual fee model.
  • Goal-based philosophy. If you love goals or if goals tend to help you stay on track, you’ll appreciate the ways that Betterment uses goal-setting and offers consistent reminders and suggestions to help you maximize your chances.
  • Excellent banking options. Betterment’s savings account in particular is competitive with the best online banks. And it offers most of the other services you’d consider to be within the purview of traditional banks.
  • Highly-customizable portfolios. As I detailed in the “how it works” section above, Betterment offers almost every option one could want in the world of pre-built portfolios.

Betterment Review: Where It Falls Short

Review Betterment and you'll realize that the company's one-time consultants with financial advisors are on the expensive side.

After reviewing Betterment, here are the areas where I think it could stand to improve:

  • Middling tax strategy. The good news is that Betterment offers tax-loss harvesting for every account, no matter how small. Many robo-advisors offer the service only to customers who meet certain investment thresholds, and some don’t offer it at all. Betterment’s tax strategy is just fine, but rival Wealthfront is among the robo-advisors with a more sophisticated tax strategy.
  • Somewhat pricey financial advisor consultations. Betterment is unique among entry-level robo-advisors in that it gives clients (and non-clients) the opportunity to consult with Certified Financial Planners. That’s a nice perk about which I’ll explain more soon. But starting at $299 for 45 minutes, it’s not cheap.
  • Missing some features of its biggest rival. Betterment doesn’t offer any 529 plans for college investing. It also doesn’t give clients the option to borrow money against their portfolios. (To be fair, Betterment also includes some features that Wealthfront doesn’t.)
  • Peculiar emergency fund strategy. Betterment’s version of an emergency fund is called “Safety Net.” The investment company goes against the grain in suggesting that clients keep 30% of their emergency fund invested in stocks. Reading their explanations, Betterment’s emergency fund philosophy makes sense despite going against conventional wisdom, especially in today’s climate of historically low interest rates. But it’s understandable if that philosophy could be a little confusing for new investors.
  • Limited human involvement. If you invest $100,000 and opt into Betterment Premium or if you pay for a one-time consultation, you can talk to a financial advisor. Otherwise, your human contact is limited to phone calls with customer service during business hours. If personal advice is important to you, a robo-advisor such as Betterment may not be your favorite option.

Betterment’s Free Financial Planning Tools

Betterment’s tools are all about goals.

Betterment starts with a specific goal and works backward, providing a realistic timeline, a proper portfolio allocation and an amount you need to save and invest each month to stay on track.

The Structure of Betterment’s Goals

Every goal you set inside of Betterment includes three things:

  • A target dollar amount.
  • A completion date.
  • At least one attached investment account to track your progress.

You can set up multiple specific goals. There are five types of goals in Betterment’s platform:

  1. Retirement Savings: helps you save money for retirement.
  2. Retirement Income: for retirees making withdrawals.
  3. Safety Net: the Betterment version of an emergency fund.
  4. Major Purchase: for working toward buying something like a house or a car.
  5. General Investing: if you’re not sure how you’ll use the money you’re investing.

You can set up different investment strategies and portfolio allocations for your different goals.

Rather than giving you a binary indication of whether your investment plan is on track, Betterment gives you a range of possible outcomes from good (or maybe lucky) to bad (or maybe unlucky). The company does a nice job of illustrating what factors will determine whether you end up on the good or bad end of the range.

Along those same lines, Betterment can help you figure out the impact of changes you’re considering such as a one-time transfer, a increase in your recurring transfer or a shorter timeline to reach your goal.

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Finally, Betterment also features a charitable giving tool. It purports to offer a tax-efficient way to donate to charity straight from the Betterment platform.

The Value of Connecting Outside Financial Accounts

To zoom out for a second, Betterment’s financial planning tools work best if you take the time to give it access to all your financial accounts. If you’re squeamish about giving that type of personal information to Betterment, you may not be able to fully realize the value of its planning tools.

If you include outside accounts, Betterment can more accurately track your progress. Betterment tells you if you’re falling behind on a goal. It also offers suggestions if it disagrees with the way you’ve split up your portfolio within any outside account.


Betterment’s Customer Perks

In addition to its digital planning tools, here are some other benefits that Betterment offers its customers.

1. Banking Alternative

Betterment offers checking and savings options. In fact, its banking features are quite advanced; Betterment is fully capable of replacing your bank if you don’t mind forgoing physical branch locations. Money expert Clark Howard recommends the online banking model. Especially if you bank with one of the Big Four (Bank of America, Chase, Citi and Wells Fargo), Betterment probably can do better on rates, fees and deposit requirements than your bank.

Perhaps most impressively, Betterment’s “Cash Reserve” savings account offers 0.40% APY, which is on par with the best high-yield savings accounts in 2021.

Betterment works with several different banks which allows it to offer $1 million in FDIC insurance on its savings product. Banking with Betterment includes no fees and no minimum deposits. Other features include:

  • Unlimited ATM reimbursements.
  • “Two-Way Sweeps” that track your spending and then automatically transfer excess dollars from your checking account into the high-yield savings account  or vice versa if your checking account runs low).
  • “Cash Goals” that allow you to save for multiple goals at once in defined “buckets.”
  • Cash back and rewards when you shop with Betterment partner merchants.

2. Consultations With Certified Financial Planners

Clark is adamant that you should consider only fee-only fiduciaries when hiring a financial advisor. And Betterment’s fiduciaries are all Certified Financial Planners (CFPs).

Most people don’t need a long-term relationship with a full-service financial advisor, Clark says.  But it can be beneficial to consult with a financial advisor on an ad hoc basis and just pay an hourly rate.

Most people don’t need a long-term relationship with a full-service financial advisor, Clark says. However, in certain situations, it can be very beneficial to consult with a financial advisor by paying an hourly rate.

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Betterment offers that through its CFPs, although as I mentioned earlier, it can be somewhat pricey, starting at $299 for a 45-minute consultation.

Betterment offers consultations for general financial health, retirement planning, college planning, marriage planning and getting started with Betterment’s tools and services.

3. Tax Benefits

As I mentioned earlier in this article, Betterment will automatically manage your investment portfolio in a way that limits your tax liabilities no matter how much money you invest.

Betterment’s tax strategies don’t go quite as far as rival Wealthfront, which probably boasts the best tax strategy in the robo-advisor industry.

However, Betterment does offer two nice tax-related perks.

Tax-Coordinated Portfolio: If you open both a taxable account and a retirement account with Betterment, the company ensures that it will place tax-efficient investments in your taxable account and tax-heavy investments in your retirement account.

Tax Impact Preview: If you’re considering a portfolio adjustment or some sort of change to your investments and you’re using Betterment’s financial planning tools, Betterment proactively notifies you of the potential tax implications.

4. Time-Sensitive Risk Management

The closer you get to reaching a financial goal such as retirement, the more cautious you want to be with your investments.

In investing jargon, you want to “reduce volatility” as you approach your goals.

When you have a longer timeline, you have the luxury of riding out the inevitable market ups and downs. In fact, to an extent, a bit more risk (usually this means investing a higher percentage of your portfolio in stocks) leads to better return on average.

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However, more risk also equates to more short-term fluctuations. As your target date for your goals gets close, you want to eliminate that risk. Betterment does this for you automatically by adjusting your portfolio allocations.


Who Should Use Betterment

As a group, robo-advisors have their own set of attractive qualities. You can set up an investment account in minutes, create a recurring deposit and then sit back and watch.

Robo-advisors invest in portfolios that are suited to your goals and income. They automatically rebalance your portfolio and take care to minimize your tax burden.

On top of that, Betterment is a great option for people who want to consolidate their financial accounts and manage them from one platform.

Because Betterment’s platform is so helpful when it comes to setting and working toward specific goals, the benefits of tracking your overall finances through Betterment go beyond simply seeing everything in one place. If you need gentle nudges to work smarter toward your financial goals, Betterment will provide them.

Betterment also is outstanding if you have a limited amount of investible money and you’re looking for inexpensive and trustworthy guidance.

Because of its lack of a minimum deposit requirement, low fees and educational approach, it’s great for beginners. Backend Benchmarking named it “best robo for first-time investors.”

If you want a high-yield savings account and/or a checking account that’s connected to your investments, Betterment checks that box as well.


Betterment Alternatives To Consider

If you’re going to invest through a taxable account as opposed to an Individual Retirement Account (IRA), I’d suggest Wealthfront as a better option because of its superior tax treatment (and higher annualized returns in the last five years).

If you’re looking for a higher level of guidance than a robo-advisor provides, consider Vanguard’s Personal Advisor Services (PAS). Clark strongly recommends PAS to anyone looking for a financial advisor. Unlike entry-level robo-advisors, hybrid models such as PAS offer unlimited access to financial advisors.

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You can also consider managing your own investment portfolio, hiring a full-service financial advisor, checking out our list of the best robo-advisors or looking at our list of the best investment companies.


Final Thoughts

As I’ve tried to demonstrate in this Betterment review, if you’re looking for a strong overall robo-advisor or you simply want some inexpensive, software-based financial guidance that will help you stay on track with your goals, Betterment is a company you should consider.

Before you invest with Betterment, it’s a good idea to make sure that a robo-advisor is the best choice for you.

If you’re not going to invest through a retirement account (an IRA), you may want to take a close look at Wealthfront.

As per above, take time to understand your options. But, since its inception, Betterment has maintained its place at the top of a small list of the best robo-advisors. It can make a case for being the best overall robo-advisor on the market.


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