What Is Betterment and How Does It Work?

Betterment is an automated investing platform for investors, one of a number of robo-advisers that have sprung up in recent years.

Betterment is one of a number of robo-advisers that have sprung up in recent years to offer investors an alternative to more traditional human financial advisers. Robo-advisers have evolved over time and there are a number of alternatives to choose from. Betterment is one of the larger players in this space.

What Is Betterment?

Betterment was founded by Jon Stein and several others. They launched their service in 2010.

Betterment offers an automated investing platform for investors. Over the years the service has evolved, and they offer a number of features and related services for investors. They offer access to a live human adviser in some cases, and also offer the ability for financial advisers to partner with the firm.

Betterment is a registered investment adviser with the Securities and Exchange Commission.

How Does Betterment Work?

As a robo-adviser, Betterment uses algorithms (formulas) to allocate and invest client money in a fashion that these algorithms deem as best for their situation, based on the client's answers to a number of questions.

The Process

According to their site, the process works like this:

  • They ask a number of questions and gather data about you.
  • Based on these answers, they build a portfolio for you. Betterment uses various ETFs to build their portfolios.
  • Based on your investing goals and objectives, they indicate that they will help you decide how much to invest initially and how much to invest on an ongoing basis in order to help you reach your goals.
  • They use their technology to invest your money. They indicate that this technology will help determine how to reinvest any dividends when earned and will also help manage the sale of any holdings in the most tax-efficient manner possible.


Betterment offers two levels of service:

Their digital service has no account minimum and offers:

  • Personalized advice
  • Access to Betterment's various diversified ETF portfolios
  • Automatic portfolio rebalancing
  • Advanced tax-saving strategies
  • Access to their customer service people

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Their premium service requires a $100,000 minimum investment and offers the following benefits in addition to those offered with their digital service:

  • Advice is available on investments held outside of Betterment including your 401(k), real estate and individual stocks.
  • Unlimited access to their Certified Financial Planner professionals for guidance on life events such as marriage, having a child, managing equity-based compensation such as restricted stock or retirement.

On this last bullet, it's interesting to note that Betterment has come "full circle" on the topic of financial advisers. Founder Jon Stein wrote a now-deleted post on their site entitled "Financial Advisers are Bad for Your Wealth" in which he ripped traditional financial advisers. That was in 2012, now Betterment both offers access to live financial advisers and seeks to partner with advisers as well.

How Much Does Betterment Cost?

The Digital service described above has a fee of 0.25% of the assets invested. Consultations with a CFP professional is available but will carry a fee that will vary based on the life event consultation being used.

The premium service carries a cost of 0.40% of the assets under advisement.

Their site indicates that investors will not incur additional fees for trades made on their behalf, portfolio rebalancing or for transferring funds into or out of their account. As with any investments in managed vehicles like ETFs or mutual funds, there are expense ratios that investors absorb in that returns are net of these expenses. The fact that Betterment uses ETFs in building their portfolios is a plus in this regard as ETFs are generally on the lower end of the expense spectrum.

What Are the Benefits of Betterment?

Betterment offers a number of benefits for investors including:

  • Investment strategies based on computer-driven algorithms versus human decisions. This can be positive in that it takes the emotion out of investing.
  • Low costs. Betterment's fees for advice are quite low, even when their premium service is used. The use of ETFs also serves to keep expenses low.
  • They offer a number of beneficial features within their service offerings such as tax-loss harvesting.
  • Investors can choose from several types of accounts such as taxable accounts, IRAs and others.
  • Their Retirement Guide feature is a robust retirement planning tool available to clients.
  • They continue to add portfolio options including new portfolios geared toward investors interested in smart beta investing, socially responsible investing and those whose goals are income-oriented.
  • Betterment also makes it easy to donate appreciated shares to a charity for those investors who want to do this. 

Is Betterment a Good Idea?

For investors who are looking for a simple, low-cost solution Betterment can be a viable option.

That said, investors should also perform their own due diligence on Betterment before committing their hard-earned dollars. They should look at other robo-services as well as traditional human advisers to see what type of arrangement is best for them. As with most things in the financial advice realm, there is no single best answer for everyone.

Services like Betterment and other non-traditional advice options tend to be a bit disruptive within the financial services space and this is a good thing for investors.