How Betterment’s Tech Helps You Manage Your Money

Our human experts harness the power of technology to help you reach your financial goals. Here’s how.

illustration of hand holding up smartphone

When you’re trying to make the most of your money and plan for the future, financial advisors are really helpful. But there are some things humans simply can’t do as well as algorithms. And investing is an area where automation and digital tools can help improve your outcomes and make advanced strategies more accessible.

Here at Betterment, we’re all about using technology—with human experts at the helm—to manage your money smarter and help you meet your financial goals.

In this guide, we’ll

  • Explore the concept of a “robo-advisor”
  • Talk about Betterment’s human approach to technology
  • Share how we help your investing avoid idle cash
  • Share how our tech helps you plan for the future
  • Show how you can access additional advice

A quick primer on the rise of robo-advisors

There’s a word for the investment firms who first used technology in new and exciting ways in the service of everyday investors: robo-advisors. By letting their human experts and technology do what each does best, robo-advisors provide some key benefits:

  • Optimized time.Robo-advisors use algorithms and automation to do all the busy work, optimizing your investments faster than a human can. The result: you spend less time managing your finances and more time enjoying your life.
  • Lower fees.Because of their efficiency, robo-advisors cost less to operate, which translates to savings for you. While the specific fees vary from one robo-advisor to the next, they all tend to be a fraction of what it costs to work with a traditional investment manager.
  • Lower barriers to entry.Almost anyone with Internet access can use a robo-advisor. No special expertise required. And you don’t need a big minimum investment to get started.
  • Personalized recommendations.Robo-advisors help you focus on your specific reasons for saving, adjusting your risk based on your timeline and target amount.

Robo-advisors do the heavy lifting behind the scenes, managing all the data analysis and adapting investment expertise to fit your circumstances. All you need to do is fill in the gaps with details about your financial goals.

If you have the time to research, implement and routinely manage your own investment strategy, you still can, but you don’t have to. That’s the beauty of working with a robo-advisor. The experience is as hands-on as you want it to be. Or you can relax in the knowledge your investments are in good hands, so you can simply live your life.

How we combine human expertise with technology

Automation is what we’re known for. But our team of financial experts is our secret sauce. They research, prototype, and implement all the advice and activity that you see in your account. Our algorithms and tools are built on the expertise of traders, quantitative researchers, tax experts, CFP® professionals, behavioral scientists, and more.

Then we use technology to help accurately and consistently execute your investment strategy. Our automated processes manage your portfolio, monitoring for opportunities to rebalance and then rebalancing once accounts cross a $50 threshold if it drifts too far from your target allocation, and executing any tax strategies you’ve enabled. Technology also lets us put all of your deposits to work and avoid idle cash. Keep reading for more on that.

How we automate to help you avoid the cost of idle cash

Cash is an essential part of our financial lives. You can’t pay for this week’s groceries with stock, after all. And it may reassure you to keep your emergency fund in cash, although we’d politely point out you have other options to consider there.

But there’s little benefit to letting cash sit idle in your investing accounts. That’s because it’s missing out on potential market returns, while at the same time losing value in times of inflation, which is most times.

This double whammy can mean serious setbacks in achieving long-term investing success. That’s why we use technology to invest every penny of yours put toward a portfolio of ETFs. Here’s how:

  • We automatically reinvest the dividends your investments pay out. Dividends are the cash earnings companies regularly distribute to shareholders.
  • We purchase fractions of shares on your behalf, meaning if you deposit enough money to purchase 2 ⅔ shares of an ETF, that’s exactly how many shares you’ll get. For years, many investing firms would round up or down to the nearest whole share and leave the remaining cash idle in your account.

Speaking of other brokerage firms, you may still have investing accounts with some. So what’s an investor to do in that case? Well, if you connect these external accounts to Betterment, we can highlight each of your external portfolio’s total idle cash. We hope this information is a starting point that helps you decide whether it’s worth it to transfer that money to a different firm.

How we help you plan for the future

Nobody knows the future. And that makes financial planning tough. Your situation can change at any time. And we can’t predict how external factors like markets, inflation, or tax rates may shift. But that doesn’t mean you should give up and stop planning.

Our tools and advice can help you see how various changes could affect your goals. We show you a range of potential outcomes so you can make more informed decisions.

We estimate how market performance may affect your investments

Financial experts use many different methods to estimate future returns of a portfolio. Many financial calculators simply assume a constant average return. This is usually based on historical returns of a benchmark, like the S&P 500 index. But there are several problems with assumptions like this:

  • You aren’t usually invested exactly like the benchmark. Different mixes of stocks and bonds or other assets in your portfolio will result in different ranges of outcomes.
  • You probably have multiple financial goals, each with their own time horizons. The different risk allocations for each goal shouldn’t have the same returns assumption.
  • Assumptions based on a historical estimate are sensitive to the time horizon used to calculate them.

At Betterment, we’ve made three improvements to this method to make more accurate estimates:

  • We use a return estimate for the specific portfolio you select for each goal. For example, our estimate for a 90% stock portfolio is different from our estimate for an 85% stock portfolio. Each is based on the asset classes you actually hold.
  • We factor market volatility into our estimates. This produces the range of returns you see on the goal forecaster. For example, our savings estimates assume a somewhat conservative 40th percentile outcome (60% chance of success) rather than the simple average (50% chance of success).
  • We assume that a risk-free component of expected returns can vary over time. When interest rates rise (or fall), so should your expected returns.

We consider the impact of tax rates

We may not be able to predict future tax rates, but we can be pretty sure that certain incomes and account types will be subject to some taxes. This becomes especially relevant in retirement planning, where taxes affect which account types are most valuable to you (such as a traditional IRA or Roth IRA) and your current and future income.

Here’s how we estimate tax rates for your accounts:

  • We use the latest tax data available. We always update federal tax information on January 1. State tax rate information is harder to come by, but we update it as soon as possible. Historically, that has been six to twelve months into the year.
  • Tax bracket ranges are typically adjusted for inflation, so we assume that inflation by itself will not cause major changes to your tax rate.
  • Your income will likely be different in the future, and that will affect your tax rate. So we use income increases due to inflation and typical salary growth to estimate what your future tax rate might be.
  • We allow tax deduction and dependent overrides, which can affect your personal rate.

We plan ahead for inflation

We don’t know how inflation will change, but we can reference known historical ranges, as well as targets set by fiscal policy. The most important thing is to factor in some inflation—especially for long-term goals like retirement—because we know it won’t be zero.

We currently assume a 2% inflation rate in our retirement planning advice and in our safe withdrawal advice, which is what the Fed currently targets.

Getting additional advice

At Betterment, we automate what we can, and leave the rest to humans. Machines are ideal for rule-based decisions, calculations at scale, and data-aggregation. But people are usually better at complex decisions, abstract thoughts, and flexibility in logic and inputs.

Human advisors are much better at behavioral coaching, building advice models, and dealing with complex financial situations. So we complement our automated advice with access to our financial planning experts through advice packages or our Premium plan, which offers unlimited calls and emails with our team of CFP® professionals. Whether you need a one-time consultation or ongoing support, you can always discuss your unique financial situations with one of our licensed financial professionals.

Managing your money with Betterment

Our mission is to empower you to make the most of your money, so you can live better. Sometimes the best way to do that is with human creativity and critical thought. Sometimes it’s with machine automation and precision. Usually, it takes a healthy dose of both.