Betterment Review: An Investing App Designed with Millennials in Mind

Betterment takes the guesswork out of investing with low-cost ETFs and automated rebalancing.
Last updated Oct 2, 2020 | By Kat Tretina
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Investing can be intimidating for many people, so much so that they put off opening a 401(k), IRA, or investment account. In fact, a Gallup poll found that a staggering 45% percent of Americans don’t invest in the stock market at all. Unfortunately, skipping the stock market can leave you behind when it comes to saving for long-term goals such as retirement.

Investing doesn’t have to be overwhelming. Betterment is an investment company and robo-advisor that aims to simplify it so everyone can start investing, even if they don’t have a ton of money saved.

In this Betterment review, find out how the platform works and how you can create an account.

Betterment Benefits

  • Your financial life all in one place
  • Customized portfolio recommendations
  • Personalizes investing for your specific goals

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What is Betterment?

Investing is one of the best ways to earn passive income. Many people think investing is only for the very wealthy, but that’s not true. Anyone can learn how to invest money, and Betterment makes it easy.

Designed as a beginner-friendly investment platform, Betterment has been in operation since 2010. It offers a variety of personal finance products, including high-APY cash reserve savings accounts and checking accounts, but Betterment is primarily known for its investment products, including 401(k) plans, Individual Retirement Accounts, and individual taxable accounts.

As of 2020, Betterment serves over 500,000 customers and has more than $20 billion assets under management.

Brokerage and advisory services are provided by Betterment LLC, which is an entity registered by the U.S. Securities and Exchange Commission as an investment adviser and broker-dealer. Betterment LLC is also a member of the Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SIPC).

How does Betterment work?

Betterment is a robo-advisor. When you create an investment account, it will ask you questions about your financial goals, risk tolerance, and time horizon.

Based on your answers, Betterment will recommend you invest your money in a pre-selected portfolio of exchange-traded funds. Unlike other companies that allow you to invest in individual stocks and bonds, Betterment only allows you to invest in ETFs. ETFs are a security made up of hundreds or even thousands of stocks or bonds that track an index or benchmark like the S&P 500.

Betterment uses ETFs rather than stocks or bonds because ETFs provide instant diversification and low management fees. It offers a diverse set of portfolio ETFs, including U.S. stocks, emerging market stocks, U.S. bonds, internationally developed bonds, and more. The diversification is a key benefit. If one security performs poorly, the other stocks or bonds within the ETF can offset the losses.

There are two plan options:

  • Digital Plan: The Digital Plan costs .25% per year. As a Digital Plan member, you get unlimited access to automated portfolio management, tax-efficient investing features, personalized financial support, and customer support. There is no minimum balance required to open a Digital Plan.
  • Premium Plan: The Premium Plan costs .40% per year. Premium Plan members are eligible for unlimited calls with Certified Financial Planner (CFP) professionals and licensed financial experts. You must have at least $100,000 invested to become a Premium Plan member.
Betterment Digital Plan Betterment Premium Plan
Account minimum $0 $100,000
Management fees .25% per year .40% per year
Account types available
  • Individual taxable account
  • SEP IRA
  • Roth IRA
  • Traditional IRA
  • 401(k)
  • Account rollovers
  • Individual taxable account
  • SEP IRA
  • Roth IRA
  • Traditional IRA
  • 401(k)
  • Account rollovers
Asset classes Exchange-traded funds (portfolios made up of U.S. and international stocks and bonds) Exchange-traded funds (portfolios made up of U.S. and international stocks and bonds)
Features
  • Recommended asset allocation
  • Automatic rebalancing
  • Advanced tax-loss harvesting
  • Recommended asset allocation
  • Automatic rebalancing
  • Advanced tax-loss harvesting
  • Unlimited calls with a financial advisor

Who can use Betterment?

Betterment is available for anyone to use. It’s especially valuable for those who are new to investing and aren’t sure where to start. Because the Digital Plan doesn’t require an investment minimum, you don’t have to save hundreds or thousands of dollars before you can begin investing as you would with some other companies.

Betterment takes a lot of the guesswork out of the equation, and you don’t have to do a lot of work to manage your investments, which makes it a good choice for passive or hands-off investors. You simply answer a few questions, and Betterment creates a portfolio of ETFs for you. The company rebalances your investment portfolio as needed, so the account continually works hard for you.

How much can you earn with Betterment?

Because Betterment uses low-cost ETFs, choosing Betterment for your investments can help you produce long-term returns. With ETFs, you can earn capital gains — when you sell an asset for more than you paid for it — and dividends — distributions of a company’s profits to shareholders.

Betterment uses an investment strategy called modern portfolio theory, which is designed to optimize investment portfolios over time. According to Betterment, using its retirement recommendations could lead you to have 38.8% more after-tax money in retirement than using the typical investment options. Over the long-term, Betterment’s recommendations could lead to an estimated 1.48% greater return annually compared to the approach taken by the typical investor.

To put Betterment’s performance in perspective, consider the following example. The Betterment portfolio — one of its preset options — is 90% stocks and 10% bonds. According to Senzu.io, the average annual return for this investment portfolio is 5.86%.

If you made an initial investment of $500, then contributed $200 per month to your investment account within this portfolio and earned an average annual return of 5.86%, you would have $199,449.72 after 30 years. You would have invested just $72,500 of your own money; the rest of the money would have been due to investment capital gains and dividends.

Maximizing your earnings with Betterment

To get the most value from your investments with Betterment, follow these tips:

  • Take advantage of expert advice. Betterment offers financial advice packages, where you can get personalized financial planning advice from an investment advisor. You can review your family’s financial situation with a CFP and get professional guidance on where you are and your goals. It can be well worth the $199 to $299 fee to check in about college planning or retirement savings.
  • Change your allocation. If you want to maximize your earnings and are willing to take on more risk for the chance of a higher rate of return, you can adjust your allocation. For example, the default allocation for safety net goals is 15% stocks and 85% bonds. You can adjust the allocation to be more heavily weighted in stocks to increase your returns, but there will be more risk.
  • Allow Betterment to reinvest dividends. Instead of cashing out your dividends, leave your money in your account. Betterment will automatically rebalance your dividends and reinvest your dividends, which reduces your tax bill.

How to stay safe investing with Betterment

Although investing always comes with some risk, there are ways to minimize that risk:

  • Consider long-term vs. short-term financial goals. Only invest money you don’t need for at least five years. If you think you’ll need the money sooner than that, keep the money in a savings account so it won’t lose its value, and you can access it quickly if needed.
  • Think about your timeline. It’s easy to panic when you see the market dip, especially if you're investing during a recession. But keep your timeline in mind. If you're focused on retirement planning, and retirement is years away, you have time for the market and your investments to recover. Stay the course, and keep investing your money.
  • Reduce your stock allocation: If you’re uncomfortable with the current level of risk in your portfolio, you can reduce the percentage that is invested in stocks. By investing more in bonds, you’ll get lower returns, but you’ll have less risk.

Common questions about Betterment

Is Betterment a good investment?

Investing your money with Betterment can be a smart idea. Betterment’s portfolios of ETFs have proven track records of returns. With low annual fees and no trade fees at all, it’s a low-cost option.

Unlike some other platforms, Betterment also offers socially responsible investing options. If buying shares in a company that aligns with your values is a key part of your investment strategy, a Betterment brokerage account could be a good option.

How safe is Betterment?

The SIPC protects Betterment investment account balances up to $500,000 per account against any losses that occur due to broker error. However, that protection is only against errors on Betterment’s behalf, not market changes.

Although Betterment is a reputable company registered by the SEC, no investment is guaranteed. There is always a level of risk when you invest your money, and your investment could lose value.

Is Betterment good for beginners?

Betterment is an excellent choice for beginner investors. There’s no investment minimum, and you can purchase fractional shares of ETFs so you can start investing with a very small amount of money. After you answer a few basic questions to sign up, Betterment will invest your money in ETFs for you based on your financial goals and risk tolerance.

Can you lose money with Betterment?

Yes, as with any investment, your investments with Betterment can lose money. If the market drops, your investment could lose value. Unlike checking or savings account deposits, investments are not FDIC insured, and there is no bank guarantee.

Is Betterment better than Vanguard?

Whether Betterment is better for your needs than Vanguard depends on your investment goals and approach. With Vanguard, you can invest in individual stocks, bonds, and mutual funds. However, Vanguard has a much higher minimum investment level, which may be intimidating for many new investors.

For novice investors who want a more hands-off approach, Betterment makes it easier to get started. With preselected portfolios, automated rebalancing, and a handy mobile app, Betterment makes investing simple.

How to sign up for Betterment

Creating an investment account with Betterment is simple and can be completed in just a few minutes. You can get started in five easy steps:

  1. Click “Get Started.” On the top right of your screen, click “Get Started.” The site will prompt you to choose what kind of account you’d like to create. You can choose to open up a retirement account or an individual investment account.
  2. Create an account. Next, the site will prompt you to enter your email address, create a password, and type in your contact information.
  3. Answer questions. Betterment will ask you questions about your age, financial goals, and when you’ll need to access your money to design your portfolio.
  4. Fund your account. You can sync your Betterment account to an external account, or rollover an existing investment account to start funding your investments.
  5. Set up contributions. Once your brokerage account is created, you can make one-time contributions to your account, or you can set up recurring investments.

Other investment apps to consider

Although Betterment is an excellent choice for many investors, it may not be for everyone. If you’re looking for other options, consider the best investment app alternatives:

  • Stash: Stash allows you to invest in stocks, bonds, and ETFs. You can set up the app so it syncs with your bank account and rounds up your transactions, depositing and investing your spare change.
  • Fundrise: With Fundrise, you can invest in a portfolio of real estate funds without needing thousands of dollars. The minimum investment is just $500.

Robinhood Benefits

  • When you sign up, a surprise stock appears in your account
  • Commission-free trading with no account minimums
  • Trade stocks, options, and cryptocurrencies