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Betterment Cranks up Features and Costs – is it Still Worthwhile?

met-museum

From my 2015 visit to check out Betterment’s operations in NYC (photo: museumhack)

Since 2014, I’ve been using the Betterment investing service for a growing portion of my own savings.  I funded an experimental account with $100,000, and have had a monthly auto-deposit adding in an additional $1000 per month since then. The results have been documented on a page I call The Betterment Experiment.

So far, the experience has been better than I had expected. The company’s behavior – both to me as a customer, and through their relationship with the public and the media has been solid and classy. And their already-good investment system has continued to advance. I joined for the automatic rebalancing of shares, but since then have been impressed by two more obscure features that are surprisingly effective:

  • The tax loss harvesting system, which has sliced several thousand dollars from my income tax bill so far. (Note – this feature is generally most useful only at higher income levels, and I got extra benefit from having other capital gains to offset)
  • Tax Coordinated Portfolio Allocation, which automatically shields more your of dividend-paying index funds in your IRA instead of your taxable account. I just enabled this last month and am enjoying watching the results.

For people actually saving for retirement, there’s also stuff like an impressive retirement guide system and customized advice, but these are less useful to me personally.  Because this blog’s readership includes many technical and DIY-everything people, I wanted the Betterment account to stand on its numbers alone, not just feelgood convenience features.

I calculated that the tax-related features were easily increasing my return by over 1% per year, which easily covered Betterment’s 0.15% annual management fee. I still see many criticisms* popping up around the internet, accusing me of being a “shill” for Betterment and that everyone should just  manually run a Three Fund Portfolio in Vanguard. But so far none of them have correctly accounted for these tax savings in their calculations – they underestimated TLH. It’s an easy oversight to make without holding a Betterment account yourself and watching the results.

As my positive feelings about the company grew, I continued to move more personal investments over to a second, private account at Betterment, including my old work IRA. As a result I now have about $500,000 with Betterment.

Logically, this was still only a partial commitment – the numbers worked out in favor of sending all my future investment dollars to Betterment, but I was still building trust in the company, so I decided to take it slowly. On top of that, my older investments (mostly with Vanguard), have gone way up in value since I made them in the early 2000s, so it would be tax-inefficient to sell them just to buy similar index funds through Betterment.

Then, They Dropped This Bomb

(Update: after writing this post, I had the opportunity to exchange several private emails with Betterment founder Jon Stein and other employees, and they were quite reassuring. He also posted a much better explanation of why they changed prices, here. So I have updated this section to reflect what I learned.)

On January 30th, I got a preliminary note from the company announcing that their fee structure was about to change. The original tiered price structure looked like this:

  • 0.35% on the accounts under $10,000 (with auto-deposit)
  • 0.25% on accounts $10,000 to $99,999
  • 0.15% on accounts over $100,000

They announced an upcoming change to a flat fee, with a cap

  • 0.25% on all accounts up to $2 million
  • Free management on the portion of your balance which exceeds $2 million

In other words, your fee is capped at $5,000 per year.

They also added personal consultation services called Betterment Plus and Betterment Premium for higher rates, and I have heard these are welcome services for many customers. But since I greatly prefer talking to computers rather than people when it comes to the subject of money,  we’re focusing on the robo-advisor service – now called Betterment Digital – here.

In practice, the two fee levels look like this. The first graph shows what happens on balances up to $1 million, while the second graph is just a zoomed out version showing up to $4 million. The new fee structure will cost significantly more for the wealthier readers of this blog – it only starts to save you money at around $3.3 million in investments.

betterment-new-fees

People with under $100,000 in their account will notice no difference. Those of us in the $100k-$2 million band will see a 66% increase in fees (starting on June 1st), then things even back out by $3.3 million.

In my situation (a $500,000 balance), the annual management fees jump from $750 to $1250 per year, an increase of $500.

How do I feel About This?

These days, I try to avoid outrage and instead think about the big picture. The price change brought up some questions:

  1. Why is the company increasing fees? Are they correcting a past mistake, having realized it’s hard to make a profit on 0.15%? Are they being opportunistic? Are they plumping up the company in preparation for sale?
  2. Is the service still a good value at for me 0.25%?
  3. Is there a risk that this will happen again? Investing large chunks of your life savings requires a huge amount of trust. In my opinion, this sudden price change was a violation of my trust – it sets a precedent and I wondered if it could happen at any time. Sure, you can always pull your money out at any time, but this is a hassle with potential tax consequences. Good investors leave money in place for decades and don’t want to be forced to move it around.

Question #1 is a philosophical one. I am rooting for Betterment and I like the people who work there. In general, I try to do business exclusively with companies that pass this test. And this makes me less of a customer and more of a partner.  I want my business partners to make money off of their customers, including me, because that’s what will keep them in business. Being a customer should never be an adversarial relationship.

After talking to Jon, I learned that the price increase was a necessary thing to remain a growing and sustainable business. Doing the math, they manage $6 billion, and at 0.15% they would only collect $9 million in annual income. Far too little to go around in a firm with 100 employees. Sure, they are winning new customers quickly, but that is a very slim margin at this stage. Jon said he would prefer to drop prices as the company grows large enough to allow it, but first we have to get there. He also said their goal is to become an independent, public company.

Question #2 is just a math question, and the answer is Yes. It is overwhelmingly clear that my Betterment account delivers more than 0.25% net annual improvement over trying to manually approximate its performance with Vanguard ETFs. Their software is incredibly good, and just keeps getting better. The talent level of the people there is insane**. 

Question #3 was the real stumper for me. This price increase came out of nowhere, and nobody asked me for my opinion – as a customer or as a long-time promoter who has sent thousands of other customers to Betterment. When I got the short advance warning, I spent the day emailing with the marketing department and even the founder, trying to talk them out of it, because I feel that it was placing the trust of customers at an incredible risk. From my email to their team:

” the single biggest weakness that Betterment has (which it is gradually overcoming), is trust […]When you raise prices on existing customers (and even on future customers in the middle of the customer acquisition stage) this trust is partially or completely shattered.

Investing millions of dollars over a lifetime requires a much more stable policy that reassures people over a period of multiple decades. The good news is that the profits are still there – one wealthy person may have the investments of one hundred or even one thousand beginner investors. But Betterment is still a brand-new company working on acquiring its first foothold of trust for larger, more conservative investors. Is this worth it?”

This is a human behavioral finance problem straight out of a textbook. As humans, we are subject to the cognitive bias called “Loss Aversion” – we fear and perceive the loss of what we currently have much more than we fear and perceive missed opportunities for much larger amounts of gain.

For example, which of the following two options would you prefer?

  • an anonymous vandal does $1000 of damage to your car in the parking lot at work, or
  • you car-commute uneventfully to work for a few months – but unknowingly miss the opportunity to ride your bike, which would improve your financial picture by much more than $1000?
Complaints on my Twitter feed about Betterment price change - click for larger

Complaints on my Twitter feed about Betterment price change – click for larger

That second option should be much more scary to every office worker, but it’s not. And yet Betterment has walked itself right into the same trap – subjecting the wealthier portion of its 200,000+ customers to loss aversion.

(Related Reading: here’s an earlier article about one of my favorite books of all times, called Predictably Irrational – it  teaches you about more of your own flaws in a very entertaining way.)

I feel that a much better business move for Betterment would have been to spend less money on developing new features, in order to be able to leave the existing price structure in place.

But given the current path, I now think the biggest problem was the way they communicated the price change. It was mentioned in passing as part of a cheerful “Look what’s new at Betterment!” email to customers. It’s the communication style we have come to expect from Verizon or Comcast, but not from a place as genuine and authentic as Betterment.

You could see the pain in the passionate essays that customers immediately sent to my email inbox this week, and in the responses to something I put on Twitter. One guy even started a petition on change.org in an attempt to communicate customer dissatisfaction.

The net result for me will probably be no change. I’ll leave the Betterment Experiment running, and continue to deposit the $1000 per month, because that’s exactly  what an experiment is for – I leave it running so we all get to watch the long-term results.

I still plan to transfer more into my private account over the next year, but I will make a point of reviewing the other robo-advisers and competing services from Wealthfront, Schwab, Vanguard, and WiseBanyan in order for this blog to be less Betterment-specific. My trust was shaken and then mostly reassured in this case, but I don’t want readers in this blog to follow in my footsteps without considering all the options independently.

An investment company making management fee increase is a very small deal in the grand scheme of things. But it is a big deal to me because I really try to keep my recommendations useful.

* To these critics I say “I respect your hardcore Vanguard chops but please try to separate Bogleheads ideology (which holds that anything not Vanguard is automatically Evil)  from the actual numbers. Beating the market is not a viable goal, but reducing account-holder mistakes and reducing taxes is much riper area to harvest. Betterment only has to accomplish this at an 0.25% annual rate to justify their fee. 

** Observe this white paper they published explaining the details of new Tax Coordinated portfolio.  They just operate on a higher technical plane than other companies.

Disclosure: Betterment’s real relationship to MMM – After I invested with them in 2014, I also joined their affiliate program as I do with any product I use and like (see my Affiliate policy). Then I got kicked out, because more recent SEC rules state that you cannot be an affiliate while also having a “testimonial” review.  I felt a review is useless if you can’t report on your own experience, so I decided to leave the program so I could leave my review up. No problem, of course – my goal is to never let affiliation affect my recommendations as there is plenty of money in life either way. Later, Betterment paid to have flat-rate advertising on this site, and that program may or may not continue  – this article might make me a less desirable advertising platform, and I didn’t check with anyone before publishing it.

  • Jeffrey Ryan February 2, 2017, 7:02 am

    My understanding is that if you’ve been with them for any good amount of time, long enough to accumulate $100k or more lets say, then you have been grandfathered in at 0.15%… I have and even got an email from Ben Stein (marketing cloaked though it be) stating this. Betterment is for people who want help pumping gas; self-service people… Well, Vanguard and others are perfect for you! So everyone put down the pitchforks and stop the chatter about boycotts and Change.org campaigns. They’re a business, they can charge what they wish and I, personally, think it’s more than fair given the current and proposed tools lined up from their development team. Keep kicking mustachio’d @$$ Pete and those over at Betterment!

    Reply
  • Mark February 2, 2017, 8:46 am

    Like many here, I also found out about Betterment from MMM. I invested with them in Dec 2015 and have regularly added to the account every month. It’s close to 500k now and the increased fees adds up to about $40 a month on my current balance. Am I pissed? A little, but not to the point where I’d close the account and move it elsewhere. Geez the hassle of that would cost me way more in mental energy. Betterment is clean, simple, easy to understand, and I like how it looks on my iphone. :) Don’t forget, many 401k and mutual funds out there charge astronomically way more fees. 0.25% is still a bargain to me and on par with other robo advisors out there including Wealthfront.

    IMO, our greatest weakness to investing is ourselves. I was an active trader for years (spoiler alert, did not end well) and would say I’m above average with my knowledge of the markets, I can surely do this all by myself. But I don’t. I decided to leave it to Betterment. I know my weakness and I know I will end up trying to time the market if I allocate my money to different low cost Vanguard funds on my own. This way, I control the monster within me, I get to enjoy life, and not worry about the nuances of the markets.

    An extra 40 or so bucks a month which will be capped at $400ish if I ever hit that 2 mil isn’t so bad to me. Now if they increase again…. well…

    Reply
  • TJ February 2, 2017, 9:30 am

    As far as I know, the “tax coordinated portfolio” is a new offering. Is this something you can opt into or out of? if not, Are they going to sell your existing holdings to implement it if you are using them in tax advantaged and taxable accounts? I’d be weary of that. And just one more reason I don’t want to outsource to the robots.

    I had already deemed them to have major flaws, such as not considering tax bracket or state taxation with their choice of bonds in the portfolio.

    Reply
  • ProfPayne February 2, 2017, 10:35 am

    Thanks for this helpful post, MMM. I’m in a high tax bracket, have been with Betterment for just over a year, and was truly furious when I received the email about the fee increase. While I’m curious to see how much money I’ll save with the tax loss harvesting feature come April, I will definitely be moving all funds over to Vanguard (where I have a SEP IRA and a brokerage account already) come June. Does anyone have an easy to follow article describing, step by step, how to do the transfer without tax consequences? I’m a relatively new investor who gets terrified by this kind of move! Thanks!

    Reply
    • Ramparts February 2, 2017, 11:51 am

      Don’t be terrified! Transferring assets in-kind is pretty easy-peasy: https://investor.vanguard.com/account-transfer/how-to-transfer-money

      You can always call them up if you get stuck. I’ve moved 2 401ks over to Vanguard by calling them on the phone and they walked me through it.

      The key to avoid tax consequences is to do an “in-kind” transfer, rather than cash out your Betterment portfolio and transferring the cash.

      Reply
  • Phil February 2, 2017, 10:52 am

    Thanks for this post – it echoes my own sentiments very well.

    I was able to get there to pay 0.15%, but fee increase – without warning and buried in an email about other services – was a real punch in the stomach.

    Like you, I think it’s a great service over – the process and UI are excellent. I have had so many conversations with people trying to get them to understand the value – people are really skeptical of handing over savings to a new, untested company. This action by them really does undermine my trust.

    Also, as you note, there are real costs – tax consequences – to moving accounts, so to some extent we are ‘locked in.’

    Anyway – thanks for the write-up and for communicating this to Betterment.

    Reply
  • Mark February 2, 2017, 11:54 am

    Isn’t that Luna Lovegood on the left? Oo.

    Reply
  • Michael February 2, 2017, 11:57 am

    “but please try to separate Bogleheads ideology (which holds that anything not Vanguard is automatically Evil) ”
    You are completely wrong on this. Bogleheads ideology is not a “Vanguardeans” at all. They follow Jack Bogle way of thinking, and Mr. Bogle is no longer the CEO of Vanguard anyways. You’d be surprise how much of the Bogleheads have fidelity accounts for example and never held a $1 in Vanguard.
    Based on their philosophy (https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy)
    I don’t see anything says the word “Vanguard” mentioned

    Reply
  • RageCage February 2, 2017, 12:18 pm

    Been w/ Betterment for almost 2 years and have high balance. Felt betrayed and responded directly to the email (and surprisingly received a response that just stated the same email in a more apologetic spin). I used them for the TLH but since my 401k is with Vanguard, I am simply going to move the money to their Personal Advisor Service for .30$ and they can make recommendations for all of my stuff. *Funny that Vanguard actually has a “Managed” option for my 401k that costs about $2K per year but the Regular Advisor service should cover both. Anyway I just though I would chime in since I felt pretty angry as I was a big proponent of the FinTech revolution but it appears the Old School houses are winning out and crushing them. Who knows but Betterment lost my trust…

    Reply
  • Dan February 2, 2017, 12:29 pm

    One thing I appreciate about Betterment which doesn’t get mentioned much is that they allow for the purchase of fractional shares. Wealthfront, Schwab, Vanguard & Fidelity robo-services do not offer fractional shares. The benefit is difficult to quantify.

    re: Betterment’s bump from 0.15% to 0.25%. No one likes a price increase but my question is “what are the alternatives?” Wealthfront charges 0.25% . Vanguard & Fidelity charge more without TLH. Schwab has the cash drag problem. If you want the services Betterment offers, they are still cheapest. Wealthfront charges the same fee and offers TLH but no fractional shares which really means there is some cash drag.

    Also, this increase is a minority & “rich man’s” problem. Betterment’s clients with assets less than $100K saw a decrease or no change in their fees. I would imagine that the majority of their clients (number of accounts) welcomed the change or are indifferent.

    Reply
    • John February 8, 2017, 10:40 am

      Great point, Dan. I completely agree. One of the big reasons why I chose to invest with Betterment in the first place was the ability to buy fractional shares. This is huge to me. I initially tried recreating a service like Betterment on my own by DCA’ing into a portfolio in index ETFs through TD (commission-free Vanguard ETFs), but quickly realized the headache that was created by not being able to purchase fractional shares.

      Betterment makes this so simple – a $1 deposit for example gets 100% invested across your diversified portfolio effortlessly. That plus TLH, auto rebalancing, and their easy-to-use interface made it a no brainer.

      Their rebuttal blog post (http://bit.ly/2ks2dpf) to the fee change also touches on how the vast majority of their customers were not impacted by this change as you mention.

      Reply
  • Syed February 2, 2017, 12:32 pm

    I have a Betterment account but have not contributed to it as of yet because I do most of my investing with my 401k and Roth IRA at Vanguard. I’m relatively young so just plugging away with VTSAX. I may consider them once I get to the point of contributing to taxable accounts.

    I did lose a little respect for Betterment when they decided to halt trading after the Brexit vote. It was a knee jerk reaction which is what we try to avoid by signing up with roboadvisors in the first place! You can read about it here:

    http://www.marketwatch.com/story/why-robo-adviser-betterment-halted-trade-amid-brexit-panic-2016-06-30

    Otherwise, not a bad company by any means but not one I’m chomping at the bit to work with.

    Reply
  • Bill M February 2, 2017, 12:49 pm

    I read the Betterment white paper, but I found it lacking in one important way; there’s no mention of the Alternative Minimum Tax. In previous attempts to balance my portfolio with tax efficiency in mind, I’ve always ended up in the same place; The AMT hits offset the tax savings, and I still pay the same amount. I’ve assumed that this is a system designed to make sure regardless of how efficient you are with handling gains, you still end up paying the AMT calculated minimum tax. What am I missing?

    Reply
  • Stephen Paul Weber February 2, 2017, 1:03 pm

    That fee increase is still less than I pay Wealthsimple for equivalent services (though they recently announced my fees will be going down slightly).

    Reply
  • Concerned Reader February 2, 2017, 1:13 pm

    “I calculated that the tax-related features were easily increasing my return by over 1% per year, which easily covered Betterment’s 0.15% annual management fee. I still see many criticisms* popping up around the internet, accusing me of being a “shill” for Betterment and that everyone should just manually run a Three Fund Portfolio in Vanguard. But so far none of them have correctly accounted for these tax savings in their calculations – they underestimated TLH.”
    ————–

    Since this seems to be the crux of your argument favoring the totally automated Betterment (0.41% total fee (including underlying funds)) vs any of the following:

    1. The totally automated Vanguard LifeStrategy/TargetRetirement: 0.15% total fee.
    2. The totally automated WiseBanyan: 0.12% total fee + max $20 a month if you want TaxLossHarvesting.
    3. A 3 Fund Portfolio you look at once every 5 years (0.07% total fee).

    Please provide your source/numbers.

    So it has sliced $7,000 off your income tax bill so far. That’s great. I think many of your readers would be surprised to hear that if you sold your holdings today, you’d owe $7,000 more in taxes than you would have otherwise. It’s the equivalent of getting an interest-free loan from the Federal government, which again, is great. But (even if you’re in a lower tax-bracket when you sell) the fees you’re paying to Betterment are higher than the benefit of this loan.

    Every analysis, when the numbers are included, I’ve seen so far shows that paying a percentage fee for TLH is a guaranteed loser. This is inevitable, for the simple reason that the fees are both *percentage based* (so they get higher as your account grows), and *forever* (each and every year, for the rest of your life), while the tax loss harvesting benefit is *temporary*.

    The math shows that after a few years (between 1 and 3 typically), any particular deposit will pay more in fees, than it gains in Tax Loss Harvesting. If you’re investing with the expectation that your money will grow, you must also acknowledge that Tax Loss Harvesting on any one particular deposit will eventually not be possible (there will be no losses to harvest). On average all TLH activity stops on any particular deposit after about a year.

    After a few years, the cost from the higher fee will negate the early benefit from TLH, and it’s all downhill from there. This has been the case for every single year that the ETFs in Betterment’s portfolio have been around. This is inevitable. You can mask this, by continuing to deposit higher and higher amounts, to capture a bigger and bigger first-year benefit, but you’re really just doubling down on higher and higher fees. Sooner or later, it will catch up with you.

    Reply
    • Dale February 2, 2017, 9:46 pm

      Great articulation of why the cost of Betterment is difficult, if not impossible, to justify over the long term.

      Oddly, your last paragraph made me think of my experience with Lending Club (which I invested in after MMM’s write up). Initial results looked great, and resulted in subsequent additional deposits. But those additional deposits disguised the disappointing longer term returns that became apparent as the portfolio aged.

      Reply
      • Tad March 7, 2017, 12:25 am

        I had the same experiment with Lending Club. I always felt the “average” return number was misleading, because it seemed to be for a mid-point of loan, rather than life-of-loan. So, I turned off reinvesting and stopped adding new capital, and returns dropped to just shy of 6%. Not terrible, but not worth it for me when you consider illiquidity and uncertainty about losses in a recession.

        Reply
  • Tabitha February 2, 2017, 1:14 pm

    I received this message from Betterment: “We’re announcing today that we’ve adjusted the structure of our fees for most customers, but these adjustments won’t affect your current pricing. As one of our first customers, you will continue to receive preferred pricing at 0.15% per year of your average balance.” I guess I inadvertently lucked out!

    Reply
    • Dan February 2, 2017, 3:08 pm

      May I ask when you opened your account with Betterment?

      Reply
    • Alex February 3, 2017, 12:47 pm

      I asked customer service about this, since I was a bit miffed to read that they were secretly offering to grandfather some customers and not others. They said that nobody is going to pay .15% forever. They use the term “grandfather” to mean that your fees won’t go up until June 1 (a bit misleading, IMHO). If what you put in quotes is literally what they told you, then they lied to me. If not, you might want to ask for some clarification.

      P.S. Here’s the email I got from customer service when I asked about what you said:

      “This is not correct information, we are grandfathering in existing customers until June 1st as mentioned in the first email, however after this date (June 2nd) ALL customers will be in the 0.25% price point. We are not offering the 0.15% to any customers regardless of when they signed up for the account.”

      Reply
  • Mike Earl February 2, 2017, 1:27 pm

    MMM, I’m genuinely curious how you reconcile the ethics of tax-loss harvesting with your openly progressive political beliefs.

    In life, I find that progressives/liberals clamor for higher taxation of the rich, but when it comes to their own money, they love crafty ways of lessening their tax bill (as we all do, of course).

    When it’s President Trump taking advantage of capital loss carry-forwards (admittedly on a larger scale than the typical Betterment account), progressives are apoplectic. But when it’s their own money we’re talking about, they love crafty ways of sticking it to the IRS.

    Reply
  • Dave F. February 2, 2017, 1:32 pm

    Can I buy a comma please? Hate to complain about chartmansship but I almost ruined my eyes figuring out if it was 4 mill or 40 mill. Commas help a lot. And why the $50k offset?

    50000 1050000 2050000 3050000 4050000 (???)
    50,000 1,050,000 2,050,000 3,050,000 4,050,000 (better)
    0.05 1.05 2.05 3.05 4.05 millions (better)

    Reply
  • Sammy February 2, 2017, 1:52 pm

    I just opened a taxable betterment account a week ago with 10k. So this fee change hasn’t affected me yet. Can someone please explain to me how I can use the TLH feature if I also hold VTSAX (betterment’s portfolio holds VTI) in my vanguard 401k and IRA?

    Reply
    • Mr. Money Mustache February 2, 2017, 2:07 pm

      Hi Sammy,

      The TLH feature would be a bit less automated for you, if you decided to use it at all. You would have to manually avoid deducting any wash sales.

      Option 1 (simple): turn off dividend reinvestment in your 401k/IRA, and have those dividends go into something else.
      Option 2 (advanced): Whenever Betterment notifies you of a TLH activity, log in and look at the transaction detail to see exactly what they sold. If one of the securities was VTI, THEN avoid buying any more VTSAX for 30 days.
      Option 3 (even harder): Allow the purchases to continue, but in the rare situations where you did buy VTSAX within 30 days of a VTI tax loss, make a note of the capital loss Betterment generated for the VTI portion of the sale. Keep that in a spreadsheet, and when doing taxes at the end of the year, manually deduct that particular wash sale from the tally of TLH that Betterment nicely provides.

      Option 1 is probably the best: you still collect the dividends, and they slowly build up. You can either have them flow into an unrelated asset like your favorite REIT, or you can log in and reinvest them at any time when you haven’t had a TLH for at least 30 days. Which is most of the time.

      Reply
  • Kim DeVilbiss February 2, 2017, 2:45 pm

    Sorry, MMM, but in 2017 it is hard to believe that anyone would still think that investment companies care whatsoever about ordinary investors. Customer service? Trust? Fair returns? Reasonable fees? These things are gone forever in banking and investing, unless you have a billionaire’s portfolio. Alas, this is not 1995….

    Reply
  • Rob N February 2, 2017, 3:58 pm

    I also began an experiment account with Betterment a few months ago. I reviewed fees with Wealth front and Betterment. Wish I had held off and just stuck with Vanguard. The TLH I can manage myself. They have defiantly lost some trust with me. I did send a letter to customer service to complain, hopefully many others will do the same. Perhaps with many voices we can help them to reconsider. MMM keep doing what your doing, we appreciate you!!!!

    Reply
  • Dave February 2, 2017, 4:34 pm

    MMM – You wrote, “They also added personal consultation services called Betterment Plus and Betterment Premium for higher rates, but since I greatly prefer talking to computers rather than people when it comes to the subject of money, we’re focusing on the robo-advisor service – now called Betterment Digital – here.”

    You may not be the type of customer (preferring to talk with computers rather than people) Betterment apparently wants to (needs to) attract going forward. On the other hand, 25 bbs might pay for itself in terms of tax harvesting for you and others.

    For another perspective on what Betterment is trying to achieve, please consider the following from Michael Kitces:

    https://www.kitces.com/blog/betterment-digital-raises-fees-adds-plus-premium-and-advisor-network/?utm_source=rss&utm_medium=rss&utm_campaign=betterment-digital-raises-fees-adds-plus-premium-and-advisor-network&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=949a85c3d2-NEV_MAILCHIMP_LIST&utm_medium=email&utm_term=0_4c81298299-949a85c3d2-57030721

    Reply
  • Gold Medal Finance February 2, 2017, 5:08 pm

    I just wish Betterment Andy other equivalent services were available in my country.

    Outside of the US it is much harder to invest in these kind of low cost fund services

    Reply
  • Kristin February 2, 2017, 5:09 pm

    Thank you. I totally agree about the biggest issue being trust and I have have many back and forths with their customer service departments since this was announced as well. It is such a new service that I think they really under-estimated betraying the people who decided to go out on a limb and “experiment” with them. I appreciate you taking the time to blog about it. :)

    Reply
  • Jefferson R. February 2, 2017, 5:35 pm

    MMM, love your blog! Below is are two articles that can help explain why Betterment is raising their fees. Basically, it comes down profitability, or the lack of I should say:

    https://www.kitces.com/blog/betterment-digital-raises-fees-adds-plus-premium-and-advisor-network/
    https://www.kitces.com/blog/robo-advisor-growth-rates-and-valuations-crashing-from-high-client-acquisition-costs/

    Reply
  • snowcanyon February 2, 2017, 5:51 pm

    Betterment is a for-profit entity. Vanguard is owned by its clients. Personally, despite all the “great minds” and tax loss harvesting at Betterment, I prefer to be an owner, not a client, and this recent change shows why.

    Sticking with Vanguard, which has no other interests besides its clients. Glad I wasn’t tempted…

    Reply
  • Sue February 2, 2017, 6:06 pm

    66% is an unconscionable price increase. Since it sounds like there are reasonable and proven alternatives to Betterment, I say let your money do the talking and you do the walking.

    Reply
  • Pradeep February 2, 2017, 7:52 pm

    Betterment is no longer a Disruptor in the financial industry. It had a good start with smart analysts, robust allocations, and add-ons like TLH and TCA. And then… they dropped the price gouge bomb. The whole approach stunk of greed. They are not disruptors… just disruptive. Keeping my eye out for alternatives. But don’t want to make the same mistake twice.

    Reply
  • Justin February 2, 2017, 7:59 pm

    I was bothered less by the rate increase than by the way that Betterment announced it. The letter I got from them was framed as an expansion in personal contact options. Then they snuck in mention of the rate change as a simplification. It does not come across and forthright and honest to try to frame a rate increase as a benefit to me. I wrote them to express that I wish they would have handled it differently. They were very respectful and nice in their response. Still I have decided to move my IRAs to Vanguard. I am still deciding on my taxable accounts. The Tax Loss Harvesting is nice while I am earning and paying a higher tax rate. However, it does not help with retirement accounts. Also, it is rather easy to keep your bond funds in your retirement accounts on your own (this minimize taxes because bond interest payments get taxed at higher rates than capital gains).

    Reply
  • Tina Shang February 3, 2017, 8:23 am

    Just wanted to say this is a great and timely post. Have been thinking about this since I’ve recommended Betterment to quite a few people. You’re right that the worst thing about the sudden change is loss of trust. Especially if the whole point of joining Betterment is set and forget. I don’t feel comfortable leaving something long term like my retirement fund with Betterment if they think it’s okay to significantly raise fees with no notice. I liked the excessively simple interface but may grow up a bit and simply switch to Vanguard now.

    Reply
  • Laura Church February 3, 2017, 1:19 pm

    Hey MMM, regarding your comment: “…affiliation doesn’t affect my recommendations as there is plenty of money in life either way.” Be careful about underestimating how much affect even small financial benefits can have on a person’s judgment. As nicely explained in this article http://www.ethicaldoctor.org/news-and-media/health-industry-practices-that-create-conflicts-of-interest/ even something seemingly minor like a free pen does affect physician behavior (and no less so if the physician is wealthy).

    Kudos to you for your transparency, but do not deceive yourself about the inevitable effects of those financial benefits. It’s just human nature!

    Reply
    • Mr. Money Mustache February 4, 2017, 12:04 pm

      You’re probably right Laura, even though I am always questioning my own behavior and decisions to try to catch the irrational stuff. I will change that sentence so it sounds a bit less confident.

      On the positive side, the amount of lucrative deals that I continually do NOT accept make me feel at least somewhat good. You can really be a spokesman for anything these days, doing stuff like sponsored posts, paid guest posts, giveaways – even paid Twitter conversations.

      I am really glad I stumbled into this online world late and after financial independence, because I can imagine the 20-year-old version of me, accustomed to making $10 per hour, getting sucked in to paid endorsements pretty easily.

      Reply
  • rich February 3, 2017, 4:26 pm

    This was the first web site I found in searching for “Betterment fee increase?” since it wasn’t clear from the Betterment email whether I would be paying more or the same (I didn’t think I would be paying less…). Thanks for the article and clear discussion MMM.
    Going to the trust issue/loss aversion issue feels real to me – after years of contributing and transferring accounts in order to get the lower and lower rate, now that’s being taken away with what feels like a slimy “marketspeak” email blast. I’m glad my son who I also introduced to Betterment won’t get burned on this since his balance is low enough. Time to investigate the other options raised by forum members…

    Reply
  • Thiago February 3, 2017, 5:34 pm

    The leading Canadian equivalent, wealthsimple, just announced they are entering the American market. Might be worth comparing too. Their fees in Canada are larger than betterment’s, but I don’t know if they will adjust those in the US.

    Reply
  • Kim Devilbiss February 4, 2017, 1:32 am

    Reply
  • Matt February 4, 2017, 9:46 pm

    If you restrict investments to tIRA, t401(k), HSA, and taxable 401(k) converted to Roth IRA, would there even be any benefit to tax loss harvesting et al since everything is kept in tax sheltered accounts? You can invest $62900 (single, more for married) per year in these tax sheltered options, plenty to reach FIRE as fast as most people can possibly hope to get there.

    Reply
  • AnnieG February 5, 2017, 7:18 am

    I had made that decision that .15% was worth having a portion of our investments (Roths in our case) that I didn’t have to actively manage. .25% absolutely changes the equation and our money (about $250,000 total) is leaving Betterment. Personally, I was especially offended that our rates went up while accounts over $2M got capped. That makes me feel like our business wasn’t appreciated.
    It probably didn’t help them that our 401k was changed as of January 1st to be both more expensive and more work to manage (lost our Vanguard funds) so I was already feeling frustrated and overwhelmed about retirement planning.

    Reply
  • RubeRad February 5, 2017, 5:24 pm

    So MMM, for a new investor who wants to move $10K or so out of do-nothing savings into something low/no-maintenance, what would you recommend? Vanguard? Betterment? Lending Club?

    Reply
  • German Expat February 6, 2017, 7:12 am

    First thanks for your great blog and also taking a stand on things you are passionate about. I partially disagree on your statement because Betterment is not always a better solution. The 0.25% will take a bite out of your returns every year while you can get most of the tax loss harvesting benefits with a little bit of work yourself.

    I have about 6 years of tax loss (approx. 20k) available (still in the accumulation phase) from a couple simple sell transactions. I look at our portfolio at least once a month anyway and then it is not a lot of work to tax loss harvest. I will not get the full benefit Betterment or similar robo advisors will give me but there is no additional gain for me anyway since I have no capital gains any time soon (used up a lot we generated in the 2008 crash when selling our rental condo).

    I don’t think my case is that special, most people with some DIY skills can get 80-90% of the tax loss harvesting benefits themselves by looking once every quarter at their investments. For investments you can DIY a simple 3 fund portfolio.

    With our current level of investments we are getting closer towards FIRE and I am getting more interested in cutting ofl the long tail risks. What is Betterment doing in that regard?

    Reply
  • Michael Cole February 6, 2017, 8:00 am

    “But so far none of them have correctly accounted for these tax savings in their calculations”

    You can do any of those – fairly simple – tax optimisation actions yourself. Betterment is basically charging a service fee for some pretty basic portfolio setup. Is this worthwhile for some people? Probably – people who aren’t smart or knowledgeable enough to do that management for themselves. Is it worthwhile for you? Absolutely not and that makes me think your use and advocacy of it is a little disingenuous. If you said, “I don’t benefit from this, but maybe you will if you are not too good with maths and legal documents”, it would be easier to take at face value.

    Reply
    • Mr. Money Mustache February 6, 2017, 4:27 pm

      Michael I still disagree with this alleged lack of value, addressed in some of my other comments. It’s the intra-day speed of their TLH that makes it worthwhile, plus the coordinated allocation, plus the better rebalancing and ongoing upgrade of ETFs as they find examples with lower expense ratios, bid/ask spreads, etc.

      But it’s also a personality issue. At this stage, I have the ability but very little interest in managing my investments. Paying someone else to do it is worthwhile, while I can invest that time into something physical instead.

      Reply
  • Barry February 6, 2017, 9:24 pm

    “Bogleheads ideology (which holds that anything not Vanguard is automatically Evil) ”

    That’s a strawman. Fidelity and other competitors with low cost index funds are used by that community.

    Reply
  • Chris A February 7, 2017, 11:09 am

    I think Jeremy at GCC offers an excellent analysis of Betterment ‘value’ in this post: http://www.gocurrycracker.com/why-betterment-has-zero-of-our-dollars/

    Worthwhile for anyone contemplating using Betterment to read. And note that it was written before the fee increase.

    Reply
  • Frugal Simple February 8, 2017, 10:38 pm

    I think Charles Schwab is better than Vanguard, Black Rocks or Betterment.
    They have a plenty of ETFs at lowest fees in the world.

    Betterment goes with their bait, take a lot of customers and after this raise all prices. Not good.

    Reply
  • Ryan Thomas February 10, 2017, 12:44 pm

    “Then I got kicked out, because more recent SEC rules state that you cannot be an affiliate while also having a “testimonial” review.” Which SEC ruling was this and what was their reasoning??

    I like to understand the logic behind litigation, but this seems like a very backwards stance to me..

    Reply
  • Jamie February 10, 2017, 4:16 pm

    In all the Betterment hate, let us PLEASE for the love of God remember that the vaaaaast majority of Americans have not a single clue about any of this shit. I actually think that Betterment would do better to market its benefit as ease and convenience and simplicity, rather than saying they’ll make you more money through their services.

    I am a college-educated person who is quite interested in personal finance. I opened a Vanguard account not long ago after reading all of the people saying it’s so EEEEEZY to do the same thing on your own. And guess what? I can’t stand to so much as lay an eye on Vanguard’s website. It’s ugly, not intuitive, and I spent more days than I’m willing to admit wondering why my money hadn’t gone into the ETF fund I had clicked on. Who knew, you had to open a brokerage account and then put money into the account and THEN choose which fund you wanted to invest in and then put money in THAT account.

    Guys, I’m sorry to tell you that most people are incredibly confused by all this. And if Betterment can make investing easy and fun and SIMPLE and convenient enough that I set aside more of my money than I otherwise would have because I like the look of their website or what-the-hell-ever, (and I think we HIGHLY discount that possibility for the majority of humans, then the small fee pays for itself, and then some.

    Reply
  • Krista February 10, 2017, 9:58 pm

    I’d like to see what your Betterment Experiment graph would look like if you replaced the .15% fee that you had been charged with a .25% fee and compare THAT to the 2 Vanguard funds.

    Reply
    • Mr. Money Mustache February 15, 2017, 12:43 pm

      It would be an invisible difference at the current scale of the graph, but noticeable after a few more years. However, to be fair I’d also have to add the benefits of tax loss harvesting, etc., which are larger (already noted in that “betterment experiment” article).

      Reply
  • Ralph February 11, 2017, 6:30 pm

    Has anyone considered the possibility that they will be paying a higher tax rate in retirement? I was sucked into a high fee mutual fund IRA 30 years ago when I didn’t know anything about investing. My post-retirement tax bracket is far higher now. (I did a Roth conversion perhaps 15 yr ago though.) I feel a major issue is that the federal deficit may force tax increases to balance the budget. Think about what Germany forced onto Greece to bail them. out. If and when our deficit reaches say 80 trillion, will China force such austerity measures on us? Since I started voting around 1968, I have observed that the American electorate largely believes anyone who promises to “lower taxes, increase defense spending and balance the budget.” It hasn’t happened in about 50 yr, but greedy voters keep believing it. I have concluded that this “stealing from our grandkids” will continue until austerity is forced upon us. So, if someone defers taxes for a decade or two, might it “just come back to bite them?” They may look back with nostalgia at our 2017 tax rates as “the good ‘ol days.”

    Reply
  • David February 11, 2017, 7:00 pm

    Here is why I worry about Betterment:

    “Doing the math, they manage $6 billion, and at 0.15% they would only collect $9 million in annual income. Far too little to go around in a firm with 100 employees. Sure, they are winning new customers quickly, but that is a very slim margin at this stage. Jon said he would prefer to drop prices as the company grows large enough to allow it, but first we have to get there. He also said their goal is to become an independent, public company.”

    There is nothing wrong with these goals, but in order to become an independent, public company their revenue growth must be explosive, realistically at least 10 times what they currently bring in per the back of the envelope math. I can understand the rationale to go public, but the path there is going to be long and ultimately costly. I wish them well and hope that this does not hurt their brand.

    Reply
  • grlaeris February 17, 2017, 2:31 pm

    Mr. MMM – I want to call your attention to another case of how another one of your well-intentioned recommendation resulted in me feeling like a victim of bait and switch. After reading your article last year on maximizing on tax benefits, I asked Keith from Tax Prep USA to do my 2015 taxes. Although he delivered my tax returns late and there was some communication issues (I completely understand the delay as he was literally acquired thousands of new clients after your article/endorsement), he did pull through in the end and I have generally been very happy with his service. I also feel that his fees are fair relative to his service. At that time, I had assumed that his fee came with tax advice, which is a reasonable deduction if one were to read your article.

    However, I recently found out that his “consultant fee” is now $225/hour. I believe this is a new fee and one that I am very displeased with. I have some basic questions that I would have liked to asked Keith but I will refrain from doing that now as I can’t justify paying $225/hour. Also, now that I have invested a lot of time and energy working with Keith on my taxes last year (and having him understand my specific situation), I feel like it would be inefficient to now start looking for another accountant.

    I do want to thank you for recommending Keith, but on the other hand, I also want to let you know of his new fee structure as I’m sure that thanks to you, Keith’s business has expanded by leaps and bounds.

    Reply
  • Jones February 18, 2017, 12:00 pm

    I use Betterment because its a ‘single’ fund to me (ie, I am not buying 4-7 etfs individually). There are many comments here on not using Betterment due to fees, but instead buying a 3 fund etf portfolio on vanguard. But no one says which 3 funds to buy that would approximately have the same risk profile as a Betterment portfolio (assume 60/40 on betterment). My specific question is this: If not betterment, then which 3 etfs should I buy on Vanguard?

    Reply
    • Steven W February 18, 2017, 3:39 pm

      I’d suggest looking at the mutual funds in the LifeStrategy funds and using the four individual holdings to “convert” to equivalent ETFs. The 60/40 Lifestrategy fund is VSMGX. You can find it on Vanguard’s site:
      https://personal.vanguard.com/us/funds/snapshot?FundId=0914&FundIntExt=INT#tab=2

      VSMGXs fees are 0.16%, which is already half of betterment’s fees (when you include Betterment’s fees and the funds fees). If you wanted to take it further and purchase ETFs, I’d suggest looking up the equivalent ETFs. For example:
      VTSMX -> VTI (35.7%)
      VBMFX-> BND (28.7%)

      Reply
  • The Rhino February 24, 2017, 6:26 am

    Betterment may be compromised by Cloudbleed. If you have an account it may be worth further investigation, particularly if you have a lot of capital in there.

    Reply
  • Mike Beaubien February 24, 2017, 11:42 am

    The only reason to use a robo advisor is for taxable accounts. Especially for MMM readers who are savvy and know how to research things on the internet, its a pretty simple to research asset allocations (hint just copy whatever Wealthfront or Betterment is doing) and set that up in your ira, then just forget about it and rebalance once per year.

    That being said, Wealthfront has always been the better choice for taxable accounts then betterment and now that the fees are the same it’s even more the case. Wealthfront does direct indexing, which means that at the MMM level of 500K investment they directly buy shares in 500 US companies instead of a single stock market ETF like betterment. Not only are the costs less by doing it this way, but there are far more opportunities to tax loss harvest.

    Other posters have pointed out that it’s fairly simple to tax loss harvest yourself. I agree, assuming that you have a simple portfolio with a few etfs and are willing to spend an hour a month rebalancing. Not a huge deal and certainly something a true MMM reader should be willing to do to save .25% of a large portfolio.

    However there’s no way you could do what Wealthfront does yourself. I just got my 1099 from them and it’s 187 pages of fine print trades they made for me over the past year. The tax lost harvesting they did completely offset my dividends and also because they are very tax efficient in how they trade, I will pay more taxes on my Ally savings account then my Wealthfront, even though it obviously increased far more in value.

    This is the kind of stuff robo advisors should be doing, hard tedious stuff only a robot is going to be able to figure out. What Betterment and all the other robo advisors do is just offer a service you could do yourself then scare you in to paying for advisors you don’t need. Wealthfront doesn’t even have an advisor option, which is honest for a company that believes that low cost automated investing is best. Also all the Nobel prize winning authors that came up the idea of low cost index investing founded Wealthfront. Was really disappointed when MMM recommended Betterment because I know he only did it because their fees were lower at the time. He really didn’t analyze if you were getting what you paid for.

    Reply
    • Michael March 25, 2017, 2:59 pm

      Question,

      If you want to transfer brokerage out of Wealthfront and you do so ‘In Kind’, and you have all these hundreds of individual stocks using Direct Indexing, then good luck taking managing those hundreds of stocks in a Vanguard portfolio.

      Reply
  • red March 1, 2017, 3:13 pm

    As someone who is brand new to the world of investing (I’m one of those people that hoarded a few grand in their savings and didn’t realize it was actually bad for my money) what would you recommend for someone with a small chunk of money who is just getting started? It seems like Betterment and Vanguard are good choices, although after this article my trust in Betterment is lessened. Thanks MMM!

    Reply

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