Webinar Recording: How Custom Portfolios for Advisors Can Help Scale Your Business
Custom portfolios for advisors can help growing firms set a new standard for business ...Webinar Recording: How Custom Portfolios for Advisors Can Help Scale Your Business Custom portfolios for advisors can help growing firms set a new standard for business efficiency. Introducing custom portfolios for advisors: the latest tooling from Betterment for Advisors that can help growing firms set a new standard for business efficiency. Betterment for Advisors’ powerful automation tools make it simple to onboard and service your clients. With custom portfolios, you can leverage automation for back-office tasks and personalize client portfolios to showcase your investment philosophy—all in one unified tech solution. Watch experts from Betterment for Advisors discuss the advantages of using custom portfolios, from tax-loss harvesting to streamlined account transfers and more. Ready to learn more about using custom portfolios at your firm? Get in touch today.
Introducing our Socially Responsible Investing (SRI) Portfolio
Betterment is moving the category forward for socially responsible investors by offering an ...Introducing our Socially Responsible Investing (SRI) Portfolio Betterment is moving the category forward for socially responsible investors by offering an SRI portfolio that is fully diversified and keeps costs low. It makes sense that some clients you advise try to align their investments with the values and social ideals that shape their world view. The way they live, the career they choose, and the people they care about align with their personal values; shouldn't their investments do the same? Today, we’re proud to introduce Betterment’s first socially responsible investing (SRI) portfolio. This portfolio enables you to align your sound financial advice to your clients’ personal values. To learn more about how and why we’ve built the Betterment SRI portfolio, read on to the following sections. Our full approach to our SRI portfolio can be found in the technical whitepaper here. Why Is Betterment Developing an SRI Portfolio? Betterment is dedicated to offering a personalized experience for you and your clients. We decided to develop an SRI portfolio because, currently, there are three major ways that most investment managers attempt to execute an SRI strategy, and none meets an investor’s full needs: Some advisors offer SRI mutual funds, which tend to have higher fees compared to performance and often lose out on important tax and cost optimization opportunities. There are also several SRI-specific investment managers whose SRI portfolios may fulfill investors’ desire for SRI screening but do not always provide proper diversification against risk. Still other advisors pick their own basket of SRI investments—a challenging and time-intensive approach. We set out to do better for SRI investors. As advisors, you should not have to choose between offering an SRI portfolio and offering a cost-controlled, fully-diversified investment strategy with tax optimization. The Betterment SRI portfolio is designed to achieve this balance. It allows you to help your socially conscious clients express a preference for SRI in their portfolios without sacrificing critical advice principles that protect their returns the most: proper diversification, tax optimization, and cost control. What Is Betterment’s Approach to SRI? If you’ve been watching SRI products evolve over the past two decades, you probably know that the majority of the market consists of actively-managed mutual funds with high fees. Only recently have lower cost options, like SRI-oriented ETFs, emerged. As we developed the SRI Portfolio for Betterment for Advisors, we analyzed all low-cost SRI funds available, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio. We found that the only asset class (i.e., portfolio component) that we could confidently replace with an SRI alternative today is the U.S. large-capitalization stock allocation. Other asset classes, such as value, small-cap, and international stocks and bonds are not replaced with an SRI alternative in our portfolio either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity make for a prohibitively high cost to your clients. While just one asset class is affected in our SRI portfolio compared to our core portfolio, that change has an outsized impact on the social responsibility of the portfolio we’ve developed. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our SRI portfolio, companies like Exxon, Chevron, Philip Morris, Wells Fargo, Walmart, and Pfizer may be excluded because they are deemed not to meet social responsibility criteria. Other companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for Betterment’s core portfolio. In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. If your clients are enthusiastic about electing the SRI portfolio, they’ll be signaling to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes. If you’re interested in a more quantitative understanding of how the Betterment SRI portfolio compares to our core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI (see below). MSCI’s ratings for the SRI funds used in Betterment’s SRI portfolio are higher than the ratings for the funds used in Betterment’s core portfolio. For more information on what the numbers mean, click here for our full whitepaper. MSCI ESG Quality Scores: US Large Cap Equity Holdings in the Betterment Portfolio vs. ETF tickers in the Betterment SRI Portfolio Betterment Portfolio - US Large Cap DSI KLD 5.039 6.34 8.01 Let’s Make Investing More Socially Responsible Currently, most accessible SRI approaches make investors choose between a well diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds. Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. With your expertise and partnership, we believe we can create a future that does not ask SRI investors to choose. Today, our SRI portfolio reflects a 42% improvement to social responsibility scores for our U.S. large-cap holdings when compared to our core portfolio. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available. You and your clients can get started with our approach to SRI today, and join us as we work to expand our SRI approach together.
The Betterment Portfolio Strategy: What Every Advisor Should Know
Betterment’s core portfolio strategy is based on Nobel Prize-winning research and is ...The Betterment Portfolio Strategy: What Every Advisor Should Know Betterment’s core portfolio strategy is based on Nobel Prize-winning research and is continually improved. One of the great strengths of Betterment for Advisors is how you, our advisors, are so naturally aligned to Betterment’s investing approach. More often than not, we find that advisors join Betterment for Advisors not just for the digital tools we offer, but because they believe in our investment philosophy: that investing advice is based on real-world evidence and formulated by unbiased decision-making. In this article, we’ll provide an overview of how we continuously improve the Betterment Portfolio Strategy in line with our philosophy of ongoing research. Just as we’ve introduced new, improved portfolio strategies to the platform over time, we also continue to analyze and improve Betterment’s core portfolio strategy. Whenever our Investment Committee decides on modifications to our portfolio strategies, we notify you prior to the start of trading execution. In order to ensure we achieve best execution of trades, the lead time and level of detail can vary based on the type of change. How We Develop the Betterment Portfolio Strategy Planning in Diversification At its foundation, Betterment’s portfolio strategy is based on Modern Portfolio Theory. Betterment selects asset classes that represent the total investable global market—excluding commodities and private equity, which have unusually high costs in products accessible for retail investors, e.g., ETFs. In traditional total market portfolio strategies, the “total market” was assumed to be the U.S., so only U.S. stocks and bonds were included. However, since 2011, Betterment has included equities from both developed and emerging markets. International developed market stocks, in particular, have been shown to outperform bonds on a risk-adjusted basis. Emerging market stocks have higher volatility but also higher expected returns. The portfolio strategy has held a diverse array of bonds since 2013, when we added granularity to the bond basket by including ultra short-term treasury bonds, inflation protected bonds, investment-grade corporate bonds, international developed market bonds, and emerging market bonds. In 2014, we improved the tax profile of the portfolio strategy by including municipal bonds in taxable accounts. Increasing the Value of Portfolios through Optimization The involved process above encapsulates the Betterment Portfolio Strategy’s basic asset allocation, which represent the total market. We then optimize the portfolio strategy by mathematically maximizing each portfolios’ forward-looking return given the correlated risk. In other words, we try to develop portfolio combinations with realistic alignment with the efficient frontier. While there are plenty of practical constraints involved with portfolio optimization, our process results in 101 different portfolios within the strategy. In 2017, we updated our portfolio optimization techniques and updated the world market capitalization data which is a key input. This results in improved diversification in each individualized portfolio and better expression of portfolio tilts toward value and small capitalization. The main objective of these changes are higher expected returns. The tilts of the Betterment Portfolio Strategy—toward value and small capitalization—arise of the landmark research of Fama-French, which demonstrate how the returns of equity securities are driven by three factors: market, value, and size. The underlying structure of the Betterment Portfolio Strategy ensures the market factor is incorporated, but to gain higher returns from value and size, we tilt the portfolios, using a framework known as Black Litterman. The final weights of each portfolio are also influenced by constraints imposed by the liquidity of the underlying fund and are controlled by our level of confidence in the views for each factor. We’ll continue to improve the Betterment Portfolio Strategy Our investment philosophy is to use rules-based decision-making whenever we see evidence that Betterment for Advisors’ available investment strategies can be improved. We’re committed to always improving the strategies you offer your clients. Over time, we continue to stay up on new portfolio construction research and carry out our own research. You and your clients will continue to benefit from this investment as we roll out future improvements to our strategies. With any change to a portfolio strategy, we’ll notify you as we implement the changes. For more information about the Betterment Portfolio Strategy, check out our full paper here.
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Betterment for Advisors Now Offers Dimensional FundsBetterment for Advisors Now Offers Dimensional Funds Advisors who have access to Dimensional funds will be able to design and manage Dimensional fund-based portfolios directly on Betterment for Advisors. Betterment for Advisors announced the addition of a new fund family that advisors can use to manage their clients’ investments, Dimensional Fund Advisors (Dimensional). Advisors who have access to Dimensional funds are able to design and manage Dimensional fund-based portfolios directly on the Betterment for Advisors platform. With a 37-year track record and $576 billion in firm-wide assets under management, Dimensional is a leading global investment firm that translates academic research into practical investing solutions that are widely recognized in the financial services industry. “We’ve long been admirers of the strong community that Dimensional has built among financial advisors,” said Jon Stein, Founder & CEO of Betterment. “Dimensional has been on the wish list since the early days of our advisor platform. We’re excited to deliver Dimensional funds in an efficient and low-cost way.” With this new launch, advisors with access to Dimensional funds can leverage Betterment’s core technology around integrated, automated portfolio management with Dimensional funds, saving advisors time and greatly improving the experience for their clients. Dimensional funds are available on the Betterment for Advisors platform with no additional per transaction trading fees. “We are constantly looking to help the advisors we work with deliver outstanding client experiences by providing them with solutions and access to value-added services,” Dimensional Co-CEO Dave Butler said. “We believe Betterment for Advisors has a strong track record of delivering innovative tools and technology. We’re excited to work with Betterment to help advisors advance their businesses.” Since its launch, Betterment for Advisors has continuously evolved its platform based on the feedback of advisors. The introduction of Dimensional funds follows a series of improvements and enhancements made to enable advisors to tailor investments for their clients on the Betterment for Advisors platform. These enhancements include improvements to its allocation advice, access to additional portfolio strategies including Flexible Portfolios, SRI Portfolio, BlackRock Target Income Portfolio, Goldman Sachs' Smart Beta Portfolio, and the Vanguard model portfolios. More broadly, other developments include a new robust advisor dashboard experience, access to commodities, a trust account opening feature, an ACATS tool, and much more. About Betterment for Advisors Betterment for Advisors is a leading digital-first wealth management platform. By combining our technology with an advisor's personal touch, we are reimagining what's possible in wealth management. Our automated, tax-efficient portfolio management, paperless back office, and intuitive user experience empower advisors to grow their businesses and build deeper client relationships. Hundreds of firms trust Betterment for Advisors to custody and manage client assets. For more information visit www.betterment.com/advisors. About Dimensional Fund Advisors Dimensional Fund Advisors is a leading global investment firm that has been translating academic research into practical investment solutions since 1981. Guided by a strong belief in markets, they help investors pursue higher expected returns through advanced portfolio design and careful implementation. With clients around the world, Dimensional has 13 offices in nine countries and global assets under management of US$576 billion as of March 31, 2019. Learn more at us.dimensional.com. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Determination of largest independent robo-advisor reflects Betterment LLC's distinction of having the highest number of assets under management, based on Betterment's review of assets self-reported in the SEC's Form ADV, across Betterment's survey of independent robo-advisor investing services as of August 20, 2018. As used here, "independent" means that a robo-advisor has no affiliation with the financial products it recommends to its clients. If you also have a 401(k) account through Betterment For Business, that account is subject to a separate fee schedule and is not included in your balance for determining eligibility for the fee tiers or subject to the fee cap mentioned above.
Introducing Income Portfolios from BlackRockIntroducing Income Portfolios from BlackRock Partnering with BlackRock, you and your clients can access an income portfolio strategy that delivers cash income while preserving capital. Betterment for Advisors has selected an income portfolio strategy from BlackRock to help advisors offer their clients the opportunity to generate cash income while preserving capital. Nearly a decade of historically low interest rates has forced advisors to take extraordinary measures to help clients reach their investing goals. Meanwhile, one of the longest stock market rallies in history leaves some investors fearing that we’re near a market top, making them too nervous to invest at all. To help you better serve your clients with a preference for a low risk investment strategy, we’re adding a new income portfolio strategy sourced from BlackRock to add to your arsenal of portfolio strategy options. If you’re familiar with BlackRock’s income ETFs, you know that the income portfolio strategy is a diversified 100% bond basket that seeks to provide a steady stream of cash income while minimizing potential loss of capital or stock market volatility. In our portfolio strategy arrangement with BlackRock, we offer four risk levels to choose from, each with different expected levels of income yield. This portfolio strategy will be available to Betterment’s direct retail customers in addition to Betterment for Advisors’ clients. An income portfolio strategy is part of Betterment’s objective for offering customers’ greater personalization to meet their needs and preferences. We see Betterment for Advisors as a critical part of this focus on personalization. You understand your clients’ inclinations and motivations, their beliefs and personal preferences. In order for some investors to use this new income portfolio strategy successfully, they may need guidance from an advisor who understands their situation, and in many cases, we expect Betterment for Advisors to play that role. We are firm in our belief that offering personalized portfolio strategies like this one is a way to grow your business as well as Betterment’s business. Keep reading to explore two scenarios we see this portfolio being potentially useful for your clients. Generating Retirement Income As advisors know well, many retirees value stable income and principal preservation during the later stages of their lives. They also tend to hold most of their wealth in tax-advantaged accounts such as IRAs and 401(k)s. The income portfolio strategy is one way to meet retirees’ preferences. Like with any account you manage through Betterment for Advisors, you can invest a retirees’ entire savings into an income portfolio, or you can use a “bucket approach,” investing a portion of the savings to prioritize income generation, while leaving the rest in stocks for long-term growth. The chart below shows the expected income yields for each of the four risk levels in the income portfolio strategy and how those levels compare to Betterment’s core portfolio strategy with similar levels of risk. Expected Income Yields Betterment Portfolios vs. BlackRock Target Income Portfolios Disclosure: This chart compares the four BlackRock income portfolios available to Betterment against four allocations of Betterment’s core portfolio strategy with similar relative risk levels. All four of the comparison allocations include both stocks and bonds, while BlackRock’s income portfolios are comprised completely of bonds. The Betterment Portfolio’s income yield is comprised of dividends from equities and coupon income from the underlying bonds in the fixed income ETF. The BlackRock Target Income Portfolios’ income yield is comprised solely of coupon income from the underlying bonds in the fixed income ETF. The expected income yields are expressed in annual terms and are based on the historical dividend yields over the past 1-year period ending August 30, 2017 for the individual funds in each of the portfolios, as reported by Yahoo Finance. These expected yields correspond to the time period referenced above for the funds in the relevant portfolios and will change over time as economic and market conditions change. When an economy is expanding (contracting), for example, interest rates will tend to rise (fall) and credit markets will tend to strengthen (weaken) as companies become less (more) vulnerable to defaulting on their debt. These figures do not include the Betterment fee or fund level expenses. The Betterment stock allocations shown here correspond to the Betterment portfolios that have expected volatilities that are closest to the expected volatilities of the four BlackRock income portfolios. The stock-to-bond allocations used for Betterment are: 9% stock to 91% bond, 22% stock to 78% bond, 37% stock to 63% bond and 40% stock to 60% bond. Expected volatilities are estimated based on the historical total returns data for the relevant funds over the past 10 years using the methods of Ledoit and Wolf (2003). This chart is hypothetical and used to illustrate the points discussed in this article. Past performance is not indicative of future results and does not guarantee that any particular result will be achieved. As you can see in the chart above, Betterment’s income portfolios have a higher expected income yield than allocations in Betterment’s core portfolio strategy with comparable risk levels. For example, if a client had a $1,000,000 retirement portfolio, you could invest it in the 40% stock Betterment Portfolio, and the income portion of your client's return would be about $24,000 per year in gross investment income. (Note that the income portion composes only part of the total potential return generated by a Betterment portfolio allocation.) However, if the client invested in the income portfolio strategy with the same level of expected risk, your client could potentially receive an expected $43,000 per year in investment income. It’s also important to note that any income-focused strategy will be inherently less tax-efficient than a strategy that balances income and growth because bond interest is taxed at a higher rate than long-term capital gains. Low Risk Investment Alternative In addition to the retirement use case, we believe the income portfolio strategy could also be useful for clients who show considerable anxiety about the stock market. If your client strongly prefers not to invest in stocks, the income portfolio strategy can be an effective, personalized approach. It’s one way to make sure their money doesn’t sit idly in cash without taking on more risk than they are comfortable with. According to Gallup, 48% of Americans have no money invested in the stock market. And with the best savings accounts paying only slightly above 1% in interest, choosing bonds over cash products can be a nice middle ground that better balances risk and return. The chart below shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large US companies. Comparing Risk The chart shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large U.S. companies. Click respective categories for data on short-term bonds, intermediate-term bonds, long-term bonds, high-yield bonds and large cap stocks. Short-term bonds were almost six times less risky than US large company stocks. Even high-yield bonds, the most risky type of bonds, were almost two times less risky than stocks. It’s worth noting that investing in bonds is generally more costly than investing in stocks, so your clients will pay a higher expense ratio on income portfolio funds compared to funds invested in the core Betterment portfolio. The Betterment portfolio strategy, which contains a mix of stocks and bonds, has annual ETF fees of only 0.07% - 0.16%, depending on the portfolio’s allocation. The income portfolio strategy, while still far lower cost than the industry average, has slightly higher ETF fees of 0.21% - 0.38%, depending on the portfolio’s target income level. Different Income Targets to Meet Clients’ Needs As with the other portfolio strategies we’ve made available to Betterment for Advisors, all of our portfolio strategies can adjust to your clients’ risk tolerance. The income portfolio strategy is no different. The income portfolio strategy includes four different risk levels to choose from, each with different targeted levels of income. The income portfolio strategy is actively managed, so the exact allocations of the underlying bonds is subject to change approximately once per quarter (and up to 6 times per year depending on market volatility). With each rebalance, we allocate to the asset classes that are designed to help your clients maximize their income return while limiting overall volatility. The income portfolio increases projected income by taking on more risk in two main ways: Investing in longer-term bonds: Long-term bonds are more sensitive to changes in interest rates, and thus carry more risk. To compensate for this risk, long-term bonds pay more interest. Investing in lower-quality bonds: When you lend money from less-established companies, the chances of the company defaulting and not paying you back are higher. To compensate for this risk, low quality bonds pay more interest. With this additional strategy to offer your clients, you can personalize your financial planning to match a client’s specific goals, risk tolerances, and viewpoints. Whether you have a retiree who wants to focus on income rather than growth or a nervous investor who would feel better with bonds rather than stocks, we hope this new portfolio offering will help every advisor further personalize their services and offer investors more added value. You can explore the new income portfolio strategy by BlackRock alongside the other portfolio strategies within your advisor portal. Please contact our team with in-depth questions about this new offering and any other features of Betterment for Advisors.