Updated April 2018 with custom ETF allocations. Betterment is an independent hybrid digital/human advisor that will manage a diversified mix of low-cost index funds and help you decide how much you’ll need to save for retirement. (By independent, I mean that they are not tied to a specific brand of funds like Vanguard or Schwab). Betterment is also an RIA, which means they have a legal fiduciary duty to keep client interests first. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Large Value, US Mid Value, US Small Value, International Developed, Emerging Markets, US Corporate Bonds, US Total Bond, Inflation-Protected Treasuries, Muni Bonds, International Bonds, and Emerging Market Bonds. For the most part, Vanguard and iShares ETFs are used.

The traditional Betterment portfolio has a more pronounced tilt towards the size premium and value premium than the cap-weighted indexes. You could argue the finer points of whether this will really create higher risk-adjusted returns, but overall it is backed by academic research. Betterment has also added a Socially Responsible Investing (SRI) portfolio option.

In April 2018, Betterment added Flexible Portfolios which lets you manually adjust the percentages of each asset class. As a DIY investor with assets spread across multiple accounts, this customization has been something I’ve been waiting for. This option is currently available only to clients with $100,000+ in assets.

Both the SRI and Flexible Portfolio options will work with Tax Loss Harvesting and Tax Coordination features (see below).

Free access to human advice for everyone. In July 2017, Betterment announced that all of their customers can message a licensed financial experts. Digital members (0.25% annual fee) can ask questions any time via their mobile app. Digital members should expect an answer in approximately one business day. Betterment Premium members (0.40% annual fee) have unlimited e-mail and direct phone access to “Certified Financial Planner professionals”. From their press release:

Our experts can assist with deciding which funds to move to Betterment, setting goals (like saving for college, a house, or retirement), and identifying which Betterment tax features may be right. They can also help you make important investment decisions, like choosing risk levels, amounts to invest, and types of accounts.

Reading between the lines, Digital members get “licensed financial experts” while Premium members get “Certified Financial Planner professionals”. This suggests that while Digital members will still get fiduciary (client-first) advice, Premium members will get priority access to the more-experienced advisors in exchange for paying their higher fee.

Retirement planning software with external account balances. RetireGuide is Betterment’s retirement planning software, first launched in April 2015. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your balances without having to manually input them. According to their methodology guide [pdf], they don’t analyze your transactions to estimate savings rate, they are just pulling in balances.

Example questions: How much do I have invested elsewhere? Am I saving enough money? How much estimated income will I have in retirement? Your future Social Security income is estimated for your based on your chosen retirement age and birthdate. You can change many of the variables as you like.

Account types. Betterment now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, SEP IRAs, and Inherited IRAs.

Tax-efficent asset location. Tax-Coordinated Portfolio will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. In addition, if you have multiple types of accounts at Betterment (i.e. both IRA and taxable), it will manage multiple accounts as a single portfolio, placing assets that are taxed more into more favorably taxed accounts (like IRAs). Note that this only works across accounts that are held at Betterment. It does not adjust for non-Betterment accounts. This is called their Tax-Coordinated Portfolio (TCP).

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Daily tax-loss harvesting. Betterment’s Tax-loss Harvesting+ (TLH+) software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Betterment side of things in their whitepaper. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Invest your excess cash automatically. Automatic contributions are good, but perhaps you don’t want to commit to a set amount each month. (Ideally, you do commit to a set amount, and this service invests more money on top of that.) Called SmartDeposit, you link your checking account and choose your Checking Account Ceiling and Max Deposit amount. If your checking account balance goes above the ceiling, Betterment will automatically sweep over money and invest it for you. Betterment will account for future scheduled deposits so you don’t over-contribute.

Fee schedule. Betterment has a fee structure with two tiers.

• Betterment Digital. No minimum balance. Digital portfolio management and guidance. Unlimited access to “licensed financial experts” via mobile app with ~1 business day turnaround time. Flat fee of 0.25% of assets annually. The management fee on any assets over $2 million is waived.
• Betterment Premium. $100,000 minimum balance. Digital portfolio management and guidance. Unlimited access to “CFP professionals” financial experts” via e-mail or phone. Includes more in-depth advice on investments outside of Betterment. Flat fee of 0.40% of assets annually. The management fee on any assets over $2 million is waived.

In my opinion, the main concern of any outside advisor is the same: you are handing over control to someone else. Betterment could change their investment philosophy, their pricing structure, and feature set in the future. Digital advisors are constantly changing, and some of their new features could be great or it could just be a fad.

Bottom line. Betterment is an independent digital advisory firm with nearly $10 billion in assets, which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Wealthfront review) are (1) access to human advice available to all customers and now (2) the ability to customize your target asset allocation ($100k+ in assets). Other notable features include: Retirement planning software that syncs with external accounts, tax-loss harvesting, tax-coordinated portfolios (when you have both IRA/401k and taxable at Betterment), and SmartDeposit which automatically invests excess cash from your checking account.

Updated. Robinhood is one of the new wave of brokerage apps. They started with free stocks trades, but have since expanded their suite of services to the following:

• Free stock and ETF trades. No minimum balance requirement.
• Free options trading. No commission and no per contract fee, plus no exercise or assignment fees.
• Free trading of Bitcoin and other cryptocurrencies 24/7.
• Free share of stock for new users with referral.

Top alternatives to Robinhood.

• WeBull (free stock bonus). WeBull app is also good for active traders with free stock trades and free options trades, but adds a real customer service phone number where you can talk to a human, as opposed to Robinhood’s email address.
• SoFi Invest ($75 bonus). SoFi also offers free stock trades and “slices” (fractional shares), along with a sign-up bonus and free tickets to events (SoFi is short for Social Finance).
• Firstrade. Firstrade includes free trades of mutual funds, which is rare… if that is your thing.

Background. I’ve been Robinhood beta user since mid-2014. I was skeptical as I’ve been an long-time early adopter of free trading platforms (read: cheapskate investor). In August 2015, they rolled out both iOS and Android app and reported processing over 2 million free trades. In 2017, they reached over a million users. In 2017, Bloomberg reported them raising money at a $1.3 billion valuation. In 2020, CNBC reported them raising money at an $8 billion valuation!

Application process. You must provide your personal information including Social Security number, net worth, income, investing experience, etc. This is the same as any other brokerage firm, but this may also be the first such account for many users. Everything was done online; there were no paper documents that required mailing or faxing.

Core features review.

• Legit. Robinhood Financial is a member of the SIPC which protects the securities in your account up to $500,000. Data is encrypted with SSL. Apex is their clearing firm.
• $0 commission trades. Yes, it works, all with no minimum balance requirement.
• Market orders, limit orders, stop limit orders, and stop orders available. Certain orders may be entered as good for the day or good till canceled (GTC).
• No short-selling.
• Free options trading: No commission and no per contract fee upon buying or selling options, as well as no exercise or assignment fees. Level 2 self-directed options strategies (buying calls and puts, selling covered calls and puts) as well as Level 3 self-directed options strategies such as fixed-risk spreads (credit spreads, iron condors), and other advanced trading strategies are available.
• Customer service limitations. The Robinhood customer service phone number is (650) 940-2700 during during market hours (9:30am – 4:00pm EST), however many readers have reported difficulty getting through. (Update: I no longer see any mention of this phone number on their website.) They want you to use their customer service email “support@robinhood.com”. The lack of instant customer service via phone is one major way that Robinhood is not the same as a major brokerage account like Fidelity or Schwab.

Funds transfers. You can manually link any bank account with your routing number and account number, but you can also directly use your username and password at these banks: Chase, Bank of America, Citibank, Wells Fargo, U.S. Bank, Charles Schwab, PNC, Silicon Vally Bank, and USAA. ACH transfers are free and take approximately 3 business days (same as other brokerages). There is also a automatic deposits feature where you can schedule ACH transfers on a weekly, biweekly, monthly, or quarterly basis.

ACAT account transfers. Robinhood now accepts incoming stock transfers from outside brokerage accounts. To do this, go your app account menu, select “Banking”, then select “Stock Transfer” and follow the on-screen instructions. Incoming transfers are free. Outgoing transfers will incur a $75 fee.

Robinhood Instant. Robinhood Instant is a free upgrade that gets you a “limited margin account” that has the following features:

• Immediate access to funds from selling stock. That means you can reinvest those funds without waiting two days for settlement. (All brokerage margin accounts offer this.)
• Limited instant deposits. Use up to $1,000 of your pending bank deposits right away. No waiting 2-3 days for a bank transfer to complete.

What’s the catch? Getting free trades is great, but be aware of the following:

• Although they announced that a web interface is available, I have been on the waitlist since early November (currently #600,000 in line). Full rollout is not scheduled until some time in 2018. Everyone can access their account via a mobile Apple iOS or Android device (iPhone, iPad, iPod Touch, Android phone, Android tablet).
• There are unofficial sites that use the Robinhood API to provide web access, but I would be wary of sharing your login credentials with a 3rd-party.
• I’m currently on a wait list for the free options trading as well.
• Broker-assisted phone trades are $10 each, according to their fee schedule.
• Electronic statements are the default and only free option. I don’t even see an option to enable paper statements in the app, but according to their fee schedule paper statements cost $5 a pop.

How do they make money? First, Robinhood will make some money the same way other brokers do: collect interest on your idle cash, charge you interest for margin loans, and sell order flow. The most innovative prospect is to the plan to sell API access to other financial apps.

The fact that Robinhood sells order flow may leave you with a slightly worse execution price as compared to other brokers with more complex order routing. If you are making large value trades, then this small percentage difference may add up to something significant that matters more than commission price. With my tiny order volume, I am fine with them selling my order flow if they are giving me commission-free trades.

Robinhood Gold is their premium service tier that gives you extending trading hours and interest-free margin for $10 a Month. My Robinhood Gold review.

User interface. Over the last 10 years, I’ve opened an account at the majority of the “discount” brokerage firms. I’ve had $0 trades before, along with $2 trades, $2.50 trades, $4.95 trades and so on. What makes Robinhood special is their modern, app-centric approach. I agree with this quote from Wired:

But the app’s simplicity is meant to be about more than style. Ease of access and understanding is meant to make Robinhood compulsively engaging for a new generation of investors that don’t find the stock market very accessible from the mobile screens at the center of their lives.

Screenshots.

Recap. Robinhood delivers on their $0 stock trades promise with no minimum balance. The app interface is clean and intuitive. Customer service can be slow to respond as they direct you to contact them only via email.

Wealthfront is one of the largest independent digital advisory firms (i.e. not tied to a specific brand of funds like Vanguard or Schwab). With a younger target audience (20s to 40s), their offering is for folks that are comfortable having nearly all interactions via smartphone or website. They frequently announce new features and improvements, so I will work to keep this feature list updated.

Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Dividend, International Developed, US Corporate Bonds, Muni Bonds, Emerging Market Bonds, REITs, and Natural Resources. For the most part, low-cost Vanguard and iShares ETFs are used. You could argue the finer points of a specific portfolio, but overall it is backed by academic research (Chief Investment Officer is Burton Malkiel).

Direct indexing. If your account is over $100,000, Wealthfront will buy all the stocks in the S&P 500 individually and commission-free. ETF expense ratios are pretty low now, so this is mostly used as an opportunity for more tax-loss harvesting. No other robo-advisor offers this feature. Here is whitepaper that details their position. As long as you meet the $100k minimum, there is no additional cost fee above the standard management fee.

Smart-beta. If your account is over $500,000, Wealthfront created Advanced Indexing as their answer to “smart-beta” investing. It works within its Direct Indexing feature in order to improve tax efficiency. As long as you meet the $500k minimum, there is no additional cost fee above the standard management fee.

Financial planning software with outside account integration. Path is Wealthfront’s new financial planning software, launched in February 2017. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your entire picture without having to manually input your balances and transactions. How much do I have invested elsewhere? How much am I spending? How much am I saving? How much can I spend in retirement?

Path can forecast your saving rate using the last 12 months of transactions. Investment returns are estimated using Monte Carlo analysis. It also accounts for your household income, birthdate, and chosen retirement age to estimate how Social Security will affect your retirement income needs. You can change up the variables and see how it will affect your retirement outlook.

College Savings Planning. You can select a college for real-time expense projections, get a customized estimate of financial aid, and receive a personalized college savings plan to cover the difference. This works with or without their own Wealthfront 529 College Savings account.

Account types. Wealthfront now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, and SEP IRAs. They also offer a 529 College Savings account.

Tax-sensitive account transfers. This is good news if you already have an existing portfolio with unrealized capital gains. Other robo-advisors may have a “switch calculator” to help you decide whether to move over or not, but Wealthfront will actually accept your existing investments and manage it for you alongside your new investments.

If you want to switch advisors or move your brokerage holdings into a diversified portfolio, you typically have to sell all your holdings and move in cash. This means you will more than likely have a large tax bill. Instead of selling your holdings, Wealthfront will directly transfer them into a diversified portfolio tax efficiently, saving you that tax bill.

Tax-efficent asset location. They will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. However, they do not treat them holistically (i.e. putting all one of one asset in IRA and none in taxable). Non-Wealthfront accounts are also not taken into consideration.

Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.

Concentrated holding of a single stock? Wealthfront caters to the tech start-up crowd with a unique Selling Plan service for people with much of their net worth tied up in a single stock. They’ll help you sell your positions gradually in a tax-efficent manner. Currently available to shareholders of: Alphabet, Amazon, Apple, Arista Networks, Box, Facebook, Pure Storage, Square, Twilio, Twitter, Yelp, Zillow.

Daily tax-loss harvesting. Wealthfront software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Wealthfront side of things in this whitepaper and Schwab comparison. Here is an outside viewpoint arguing for more conservative estimates.

My opinion is that there is long-term value in tax-loss harvesting and especially daily monitoring to capture more losses. However, I also think it’s wise to use a conservative assumption as to the size of that value. (DIY investors can perform their own tax-loss harvesting as well on a less-frequent basis. I do it myself, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it was cheap enough.)

Portfolio Line of Credit. If your taxable balance is over $100,000, Wealthfront will automatically give you a line of credit of up to 30% of your balance. There is no application, no fees, low interest rates, and you can get cash in as little as 1 business day. The rates are advertised to be even lower than a Home Equity Line of Credit (HELOC). Keep your loan balances modest though, as this is a margin lending product and they may force you to sell your investments if your outstanding balance exceeds your available margin.

Fee schedule. The fee schedule for Wealthfront is simple – Everyone gets charged a flat advisory fee of 0.25% of assets annually (first $10,000 waived). All of the features listed above are included. As your asset size increases, you get access to some additional features like Direct Indexing and Advanced Indexing (Smart-Beta).

Bottom line. Wealthfront is an independent digital advisory firm with over $7 billion in assets. Independent which means they aren’t tied to any specific brand of funds like Vanguard, Fidelity, or Schwab. Their main differentiators from the other independent firms (see my Betterment review) are (1) Direct Indexing and Advanced (Smart-Beta) Indexing portfolio management for optimal tax-efficiency and (2) customized assistance with transferring in your existing investments (including company stock) and then selling them tax-efficiently. Other notable features include: Financial planning software that incorporates external accounts, tax-loss harvesting, 529 college saving plan and guidance software, and a portfolio line-of-credit.

Special offer. Open a Wealthfront account via my invite link and get your first $15,000 managed for free, forever. This is an additional $5,000 above the standard $10,000 balance waiver. You can then invite your own friends for more savings (your friend gets $15k managed free as well, and you get another $5k managed for free.)

The robo-advisor evolution continues. Betterment just announced some significant changes that include the option to upgrade to a Certified Financial Planner (CFP®) and a more simplified flat fee structure. Here are highlights from the new plans:

• Betterment Digital. Their original product with digital portfolio management and guidance. Now at a flat 0.25% annually (no more tiers). No minimum balance. There is no longer be a $3/month fee if you don’t make monthly auto-deposits. The management fee on any assets over $2 million is waived.
• Betterment Plus. Digital features above + an annual planning call from a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” You will also have unlimited e-mail access. The plan is a flat 0.40% annually. $100,000 minimum balance required.
• Betterment Premium. Digital features above + unlimited phone access to a “team of CFP® professionals and licensed financial experts who monitor accounts throughout the year.” You will also have unlimited e-mail access. The plan is a flat 0.50% annually. $250,000 minimum balance required.

Betterment’s previous fee structure for Digital was 0.35% for balances under $10,000 with $100/mo auto-deposit (or a flat $3 a month without), 0.25% for balances of $10,000 to $100,000, and 0.15% for balances above $100,000. This means that with the new flat 0.25% fee structure, people with balances under $10k will end up paying less while those with $100k+ will be paying more. If I had a big balance at Betterment, I’d be quite unhappy with the price hike. Existing customers on the 0.15% tier will stay on that fee structure until June 1st, 2017.

Here’s how this breaks down in terms of your account size:

• $10,000 account balance. Digital would cost just $25 a year ($2.08 a month). There is no longer any requirement for auto-deposit to avoid a $3 a month fee. Plus or Premium not available.
• $50,000 account balance. Digital would cost $125 a year ($10.41 a month. There is no longer any requirement for auto-deposit to avoid a $3 a month fee. Plus or Premium not available.
• $100,000 account balance. Digital would cost $250 a year ($20.83 a month). Plus would cost $400 a year ($33.33 a month) and include an annual planning call with a human advisor. Premium not available.
• $250,000 account balance. Digital would cost $625 a year ($52.08 a month). Plus would cost $1,000 a year ($83.33 a month) and include an annual planning call with a human advisor. Premium would cost $1,250 a year ($104.17 a month) and include unlimited calls to a human advisor.

Commentary. I don’t write about robo-advisors all that often, but Betterment adding human advisors as an upgrade option signals a big change in the industry. For the investors with modest balances, the flat fee is cheaper but it has always been pretty cheap; at $50k in assets it costs the same as a Netflix subscription. Perhaps more important is knowing that as you continue to grow assets, a human advisor will become available without having to move your money elsewhere.

For those with at least $100k in assets, the upgrade cost to talk to a human advisor annually appears reasonable ($150 a year more at $100k asset level). You also get unlimited e-mail interaction for quick questions. If you go to an independent CFP and request a one-time consultation, that will usually cost a $400 to $500 flat fee. Potential concerns include that you don’t get a dedicated person but a team. However, in my experience even if you get assigned a dedicated person, they’ve often moved onto another job within a year. The wording also suggests that the pool of advisors are not all CFPs.

This move signifies both the good and bad about the current robo-advisor environment. The good is that they keep evolving and looking for ways to improve (i.e. index replication, tax-sensitive asset location, tax loss harvesting). The bad is that these can involve big changes with little notice (i.e. portfolio tweaks, fee changes). This time, the good is now you have the option to pay more for human advice. The bad is that if you already had a lot of money with Betterment, your fees got hiked by 10 basis points. This is why I prefer to DIY, because I enjoy being in control.

That said, if I had to switch I would prefer human access for estate-planning purposes (Mrs. MMB doesn’t want to manage our portfolio). Betterment says they have an advantage because they are independent. For comparison, I would look into Vanguard Personal Advisor Services (VPAS) which costs 0.30% annually and includes a team of human advisors. Possible drawbacks of VPAS include no automated tax-loss harvesting and you’ll be confined to Vanguard products.