Betterment is a robo-advisor headquartered in New York City that launched in 2010 and services over 850,000 users thanks to its impressive technology. Since robo-advisors are still a relatively new concept, investors may wonder if Betterment is safe or if there are extra risks compared to using a human investment advisor.
Betterment, being a fiduciary fintech company, is required to act in the best interest of its investors. The company has operated with a track record of making investor security a top priority, and is just as safe, if not more so, than more traditional brokers and advisors. This guide will review the aspects of what makes Betterment safe to help put your mind at ease.
Is Betterment Safe?
Betterment uses a wide variety of security measures to keep investors safe. Here are the ways Betterment protects its users.
- Transparency: Betterment’s robo-advisor tool uses proprietary technology to design your portfolio. But it doesn’t keep your investments a secret. Betterment builds portfolios using verifiable securities from brokers like iShares and Vanguard. You can see your exact holdings and updates whenever the robo-advisor makes trades for you. Betterment applies the same transparency to your dividend reports and tax statements, so you have the information needed to prepare your returns.
- Two-factor authentication: Betterment highly recommends users set up two-factor authentication. This extra step adds another layer of security to protect investors from account breaches. For example, if a hacker cracks the password to your Betterment account, they still can’t access your account because of the two-factor authentication feature. You could set up regular two-factor authentication to send a one-time temporary text message to your phone when you log in. You could also set up authentication using a more secure app like Authy or Google Authenticator.
- No commingling of funds: Brokers should never mix client funds with their own, and that’s true for Betterment as well. It has both digital and human firewalls to prevent client funds from being mixed with Betterment’s operational funds. Betterment also does not lend out client assets, even though other retail brokers might. You know your money and investments are safely in place with Betterment.
- SIPC membership: Betterment provides Securities Investor Protection Corporation (SIPC) insurance, like any investment broker. This insurance covers your portfolio and uninvested cash in case Betterment goes bankrupt. Your portfolio is insured up to $500,000, with up to $250,000 maximum for uninvested cash. But SIPC insurance only reimburses you if Betterment goes bankrupt. It doesn’t cover investment losses.
- FDIC coverage for cash reserve: Betterment Cash Reserve is a high-yield savings account that earns interest on money you aren’t investing. You may wonder if your money is safe in Betterment versus a regular bank. However, Betterment keeps your money with partner banks, which provide FDIC insurance against bankruptcy. Thanks to these connections, Betterment can insure deposits up to $2 million, eight times the $250,000 of FDIC coverage you’d get with a regular bank.
- FINRA registered: The Financial Industry Regulatory Authority (FINRA) sets rules and training requirements for broker-dealers. It also reviews broker-dealers to ensure they are financially secure and correctly following regulations and handling customer information. Betterment is registered with FINRA. It receives monthly reviews from FINRA regulators.
- Subject to the Investment Advisors Act of 1940: As a broker-dealer, Betterment is subject to the Investment Advisors Act of 1940. This sets additional rules and requirements for these companies. For example, Betterment receives a surprise annual exam from an independent public accountant. The accountant checks that Betterment is properly maintaining records of client assets.
- External audits: Betterment is regularly audited by government regulators from FINRA and the U.S. Securities and Exchange Commission (SEC). It also receives three separate audits from independent public accountants who check Betterment’s financial condition, safety of operational controls, and procedures for keeping client assets safe. Betterment publicly releases the results of the government audits to users.
In 2023, Betterment agreed to pay a $9 million fine as a result of one of these SEC audits, though Betterment did not admit any wrongdoing. The SEC charged that Betterment did not properly communicate key facts about its tax-loss harvesting service to clients, preventing them from getting the proper tax benefit from this service.
Are Robo-Advisors Safe in General?
Robo-advisors are safe in general. They follow the same regulations and must meet the same safety standards as a human investment advisor or a traditional broker-dealer investment platform. But like with any investment, robo-advisors risk losing money if your portfolio does not perform well. That’s why it’s important to research which one you use carefully.
When considering robo-advisors, first check the platform’s historical returns for investors. You should also weigh the fees. For example, Betterment charges 0.25% of your portfolio balance per year, which is competitive. You should check what other features the robo-advisor offers, like tax-loss harvesting to improve your returns and goal-planning tools. Finally, test out a platform to see whether you like using it. Betterment scores highly across these categories, which is why it ranks as one of the best robo-advisors, including the best robo-advisor for beginners.
Betterment is not a licensed tax advisor. Tax Loss Harvesting+ (TLH+) is not suitable for all investors and is subject to certain conditions. Read more athttps://www.betterment.com/legal/tax-loss-harvestingand consider your personal circ*mstances before deciding whether to utilize Betterment’s TLH+ feature. Investing involves risk. Performance not guaranteed.
How to Open an Account With Betterment
If you feel comfortable that Betterment will keep your money safe and think it might be the place for your investments, you’ll need to open an account next. Betterment is designed for beginners and makes it easy to test the platform and get started.
As a robo-advisor, Betterment uses technology to plan and manage your investments automatically. The main platform is automated, but you can sign up for human support for an extra fee. As far as robo-advisors go, Betterment is one of the most popular. You could try testing the platform out before signing up. For more information, read our in-depth Betterment review.
If Betterment is the right fit for your investing needs, you should expect to follow these steps when getting started:
- Begin the setup process: You can set up a free Betterment account simply by providing your email and phone number to log in. That way, you can see the platform. If you’d like to invest, you’ll need to verify your identity with a form of government ID. You’ll also need to link a checking account to transfer funds.
- Select your goals: Once you have money in your account, you can set up the automated investment portfolio. The platform will ask about your investing goals, such as retirement or an emergency fund. It will also ask about your time horizon for needing the money and your risk tolerance (whether you’re comfortable taking short-term losses for higher long-term gains). If you’re investing at least $20,000, you can schedule a free call with a human financial advisor at Betterment to help set up your portfolio.
- Review your goal selection: Betterment will use your selected goals to develop a portfolio of stocks, bonds, and cash using exchange-traded funds (ETFs) for the investments. It will also show the expected returns and how it predicts your money will grow over time. However, it won’t launch the investment right away. You can change your goals and assumptions to redesign the portfolio. For example, you could request a higher risk tolerance for a portfolio with more stocks and higher future growth.
- Finish the account setup process: If you’re happy with the portfolio recommendation, you can approve it to start investing. Betterment will automatically set up the investments and manage the portfolio. You can then set up additional contributions over time to keep saving more. You are also able to set up multiple portfolios for different goals—for example, one long-term portfolio for retirement and one short-term portfolio to save money for a home down payment.
Benefits of Investing With Betterment
Investing with Betterment has several valuable benefits. The robo-advisor tool actively builds and manages your portfolio like an investment advisor but at a fraction of the cost. Betterment charges 0.25% per year of your portfolio. A human advisor might charge 1% or more. Betterment built its robo-advisors using a team of investment experts and economists who use strategies such as modern portfolio theory (MPT).
Betterment provides a range of investment options. Not only can you customize your portfolio based on your goals, risk tolerance, and timeline, but you can also pick among specialty portfolios for different goals. For example, Betterment offers an Innovative Technology portfolio focused on investing in tech leaders and a Climate Impact portfolio that prioritizes companies with low carbon emissions. Even though the robo-advisor tool manages your portfolio, you have some ability to customize it. For example, you could shift the amount of your portfolio in international stocks beyond the original recommendation.
Betterment accepts new customers with no minimum opening deposit. If you don’t want to invest all your money, you can earn a high 4.75% APY interest rate on your cash using the Betterment savings account. Finally, the technology is well-designed and user-friendly. Betterment makes it easy and safe to start investing.
The Bottom Line
Betterment wouldn’t be in its current position if it didn’t properly care for its users. It has shown a strong commitment to keeping customers safe through security measures like SIPC insurance, external audits, firewalls to prevent the commingling of funds, and two-factor authentication.
When you use Betterment’s robo-advisor, you still accept the risk of investment losses. It’s not like keeping cash in a bank account. Still, you can feel secure knowing that your money is protected against any operational or bankruptcy risk from Betterment due to its security measures.
What Is Betterment?
Betterment is an online financial advisor platform. It runs a robo-advisor, automatically building and managing user investment portfolios without human assistance. Betterment also provides virtual access to human financial advisors and a cash management account, which earns interest on your uninvested money.
How Does Betterment Make Money?
Betterment makes money by charging an annual asset under management fee, a percentage of the money you invest with them. Betterment charges 0.25% per year if you only use the robo-advisor (or $4 per month for accounts below $20,000). Betterment charges 0.40% per year for its premium service if you also want access to human financial advisors to ask questions. However, you need to invest at least $100,000 for the option to work with human advisors.
Is Betterment Worth It?
Betterment can be worth it if you want to help build and manage your investment portfolio without paying the full cost of a human financial advisor. A human advisor could charge 1% or more per year, roughly four times Betterment’s robo-advisor fee. On the other hand, if you’re comfortable investing on your own, you could build your own portfolio without paying the annual Betterment fees.
Is Betterment Legit?
Yes, Betterment is legit. It is registered and regulated by the SEC and FINRA, like traditional investment advisors and brokers. Betterment also invests in considerable safety measures for its users. Betterment has over 850,000 users and $45 billion in assets under management.
