Betterment was named one of the Finovate Fall 2010 Best in Shows and they’re looking to make investing as simple as possible. The basic idea is that you open an account at Betterment (they are a registered broker-dealer), deposit funds, pick an allocation, and then go about your day. They offer a taxable investment account (no IRA’s yet) and two investing options.
With Betterment, you just pick how much of your investment you want in equities (Stock Market) and how much you want in Treasury bonds (TIPs). Within each category, they divide it up into a variety of ETFs so that you get diversification in that category. For Treasury bonds, you get iShares Barclasy TIPS Bond Fund (TIP). For the Stock Market, you get a mix of IWS, IWD, VTI,IVE, DIA and IWN.
If this sounds like a Lazy Portfolio, you’re right.
Why So Few Options?
The first question I asked Jon Stein, their CEO, was why there were so few options? He gave me an excellent answer – it’s important to keep things simple. A lot of the other investment options only act as distractions. You throw in a small cap option, a dividend option, an emerging market, and it doesn’t necessarily improve returns. By keeping it simple, you keep the fees low, remove distractions and focus on the core, and lower the hurdles that prevent people from saving this way.
Their fee structure is very simple, there’s an annual 0.9% fee prorated across the year and charged after each calendar quarter (at 0.225% a quarter). There are no transaction fees, no deposit fees, no withdrawal fees, no rebalance fees, no maintenance fees, and no other hidden fees. Just 0.9% prorated over the year, collected every quarter, and you’re all paid up.
One of the other features of the Betterment account is automatic rebalancing. “Betterment rebalances you back to your desired allocation quarterly, or whenever your portfolio composition drifts by 5%.” Rebalancing is one of the most often cited, least implemented piece of investing advice. Rebalancing refers to the idea that you need to move your assets back to your desired allocation on a regular basis. Since different assets perform differently, you may find an 80/20 allocation drift to 75/25 over the course of a few months. Since 80/20 is your desired allocation, you should rebalance back to that. Betterment does that for free.
Finally, Betterment LLC is a Registered Investment Advisor with the SEC and they’re SIPC insured, so they’re legitimate. Those aren’t rubber stamp type of credentials so you can be assured of the same protections as a larger named financial institution. That said, this is an investment account, no a savings account, so your account may lose money.