Retirement Investing: Is This the Best Option for Almost Everyone?

Not everyone loves the process of researching and investing in stocks as much as we Fools do. In fact, the majority of people probably have a lot of other things on their plate and are simply looking for someone to wade through the confusing world of finance for them.

Sadly, this sometimes leads them to choose advisors who don't have their best interests at heart. And though they may never realize it, this can significantly postpone the day when they are financially independent. That's why I'm always on the lookout for services that help make retirement investing 1) easy to understand, 2) automatic, and 3) able to help people safely reach their financial goals as soon as possible.

Today I want to talk about Betterment, a service I believe meets those criteria as well as anyone else out there today. Read below to find out why.

The growth of Betterment
Having opened to the public for investment in 2010, Betterment was founded -- and is still led by -- CEO Jon Stein. Stein believed that passive investing in total-market funds was the best option for the vast majority of people. He was bewildered that there weren't better options available to him when he became a wage earner, and this prompted him to start the company.

As you can see, Betterment has experienced exponential growth over the past four-and-a-half years.

Source: Betterment.

Currently, the company has over 50,000 clients who have handed over more than $1 billion in assets to be managed by the company. That's still a relatively small number, but the burgeoning popularity of the service is undeniable.

To see whether Betterment is right for you, let's quickly look at the three principles I believe make Betterment compelling.

Diversification
For investors who don't want to spend too much time researching their options, Betterment's investment choices are ideal. That's because they are simple and all-encompassing.

Before you turn your money over, the site works to figure out an ideal balance between stocks and bonds based on your age and financial goals. There are only six choices for stock investing, but they cover just about everything, including companies of all sizes, both international and domestic. Bonds, on the other hand, have just seven choices, but they run the gamut from corporate to international to municipal bonds.

Rather than paralyzing the novice investor with choices, these limited options offer the best possible diversification in a digestible form.

Low fees
This is easily my favorite part of the service. All investments -- whether in stocks or bonds -- are in the form of exchange-traded funds. Furthermore, all of the stock ETFs are run by Vanguard, which easily has the lowest fees in the financial industry. And among the bond ETFs, there's a mix between Vanguard and Blackrock's (BLK 0.10%) iShares -- another ultra-low-cost option.

Of course, on top of these ETFs' fees, Betterment itself needs to make money. But even then, the fees are very low. In the end, it breaks down like this.

Source: Betterment. 

When you add together the fees you'll pay for your ETFs and the sliding scale that Betterment uses, it would be difficult to imagine a scenario in which anyone would ever pay over 0.50% in fees in any given year. For a company that offers full-service investment options, that's a great deal that's tough to beat.

Tax efficiency
Of course, many of you may be thinking, "But I could do all of this myself and not pay Betterment anything!" To that, I have two things to point out. First, as I said, this is for people who don't want to take the time to do this on their own. But secondly, Betterment offers two services that can help boost your performance significantly.

First, the company automatically rebalances your portfolio, which ensures that you aren't taking on more risk than you realize. Furthermore, it does this rebalancing by using cash flows and dividends (as much as possible) instead of selling ETFs. This reduces taxes and transaction costs.

But the second major boon is that, for folks who have at least $10,000 invested in the company, Betterment has a tax-loss harvesting tool that helps reduce the amount you'll owe in taxes. I won't get too far into the weeds trying to explain how this works, but the company claims that using this would have increased the returns of Betterment investors by 0.77% per year over the last 10 years.

Returns that speak for themselves
When you compare the company's data on ETF performance to the returns investors earned using the average advisor's suggestions -- as reported by the ARC Private Client Indices -- the results speak for themselves:

Source: Betterment. 

Over the past 10 years, a Betterment portfolio with a 70-30 split between stocks and bonds would have yielded a 116% return, while the average advised investor saw a gain of 65.6%.

Does that mean Betterment is right for you? Maybe -- much of it depends on whether or not you enjoy doing this type of research, what your investment goals are, and what you're most comfortable with when it comes to your investments.

But at the very least, the service is worth a look for many.