Betterment is changing the game in the financial technology (fintech) world with its robo-advisor platform. The digital tool helps users navigate the complexities of investment, retirement, and portfolio management by creating a tailored portfolio of inexpensive, diversified exchange-traded funds (ETFs) to meet their unique financial needs.
Betterment was conceived in 2008, but it wasn't until 2010 that their platform went live. Fast forward to today, and the company serves over 850,000 customers, managing more than $45 billion in assets.
The company offers limited investment management services at a lower cost. The algorithm underpinning its platform assembles global portfolios in keeping with user's risk tolerance and investment timeline. These portfolios consist solely of inexpensive stock and bond ETFs across 14 different asset classes.
Although the robo-advisor makes investment straightforward, investors wanting to take a more hands-on approach can fine-tune their portfolio's specific asset allocation. This includes giving greater weightage to certain types of stocks over others.
In terms of saving plans, Betterment gives U.S. customers access to several tax-advantaged options, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs.
The 70/30 stock-to-bond asset allocation of Betterment's Core portfolio makes it an appealing choice for most investors, offering a balance between growth while minimizing risk.
However, recommended allocation varies across the finance industry. Some subscribe to the "100 minus your age" rule, suggesting the portfolio of a 30-year-old would be made up of 70% stocks and 30% bonds, shifting to a 60/40 mix by the time they turn 40.
Betterment's annual management fee stands at 0.25%, in addition to ETFs' fees. While these costs might seem high, customers are paying for the convenience and ease-of-use that Betterment provides.
To reproduce Betterment's recommended portfolios, investors can open an account with a broker, then handpick their preferred ETFs and their respective weightings. This requires the investor to perform their own portfolio rebalancing to maintain the target asset mix.
On offering Roth and traditional IRA accounts, Betterment allows investors to withdraw from their Roth IRA anytime, though early withdrawals may have tax implications. While there's no limit to the number of Roth IRAs a user can have, increasing their number doesn't raise the total yearly contribution amount.
Opening a Roth IRA can offer tax advantages because they're funded with after-tax dollars and aren't taxed upon withdrawal. But the burdensome task of deciding on the right investment mix can be eased with Betterment's platform, which recommends a portfolio based on an individual's risk tolerance and retirement goal.