If this whole thing makes you wonder what your money manager has been up to, it might be time to ask them some questions. Here's how we would answer.
What services are you providing to me?
Account types, risk level, amount to invest, funds, personalized allocation
Daily tax optimization
Tax loss harvesting, asset location, tax-optimized lot selection
Who makes money from my account—and how much?
We make money from the fee you pay us, and that's it. The fee varies depending on the plan you choose. See more about our pricing.
Do you make more money recommending some investments over others?
No. We don't have any of our own funds, and we don't get paid to recommend any funds to you.
Are you committed to acting in my best interests for all my accounts?
Yes. The DOL only requires us to act in your best interest for your retirement accounts, but we act in your best interest for all accounts.
The DOL's new rule will treat anyone who provides retirement investment advice as a fiduciary, which means that they must act in the best interests of their customers.
That's correct. Many investors are unaware that their retirement account managers are currently under no obligation to act in their best interest. As a result, these firms can act based on their own financial interests, rather than your own.
Investors are also often unaware of the fees they are charged, because those fees may be hidden in the fine print. Once the rule goes into effect on April 10, 2017, investors will receive additional disclosures regarding fees and conflicts of interest.
There's one caveat. The rule only requires money managers to act in the best interests of their customers for retirement accounts; that means that they can continue to favor their own interests when they give advice for non-retirement brokerage accounts.
The new rule will take effect on April 10, 2017.
If you're with an advisor like Betterment, which already acts in the best interests of its customers, then you'll continue receiving that same advice for all your accounts.
If you're with a financial institution that makes money by putting your retirement money into specific investments, then the DOL rule will make it so there are fewer conflicts of interest, but your relationship with your firm could change. Here are a few different scenarios that could play out (we've named them to make it easier):
1. The Farewell Model: The firm may no longer want to serve your account because it can't look out for your best interest and make the economics work for their business.
2. The Tightrope Model: The firm will continue to get commissions for recommending certain investments, but it will promise that it will look out for your best interests despite the conflict.
3. The Meet-Us-Halfway Model: The firm will ask you to make changes to your account. You can either (a) receive no advice at all, and manage your investments on your own in a brokerage account, or (b) switch your brokerage account to an advisory account that only charges a flat fee.
If you received a letter from your financial institution, it means you may have been receiving advice with conflicts of interest. Your letter likely fit into one of the three scenarios listed in the FAQ "How will the DOL rule impact me?" If you haven't received a letter yet, you may receive one soon.
Betterment has long been a supporter of the DOL fiduciary rule (see our official comment to the DOL last year). We believe it's a step toward improving retirement outcomes for millions of Americans because it will help eliminate problematic practices in the retirement advice industry. The rule is part of the industry's shift toward ensuring that all Americans receive advice they can actually trust. You can read more about what we believe on our Resource Center here and here.
There are a few ways financial institutions are reacting:
Merrill Lynch1 and J.P.Morgan2 seem to be taking the "Meet-Us-Halfway" approach, saying some customers can't receive advice on their retirement brokerage accounts anymore. Customers can choose to either receive no advice at all and manage their investments on their own, or they can move to a flat-fee advisory account.
Morgan Stanley,3 Wells Fargo,4 and Ameriprise5 seem to be choosing the "Tightrope Model", which means they will continue to get commissions for recommending certain investments, but they will promise to only recommend what's truly best for you. (To see our full descriptions of the possible scenarios, see this FAQ: How will the DOL rule impact me?)
Take a look at the fine print, though—many firms are only committing to acting in your best interests for retirement accounts.
Large financial firms and broker-dealers opposed the rule. Their main argument seemed to be that being forced to act in customers’ best interests would make servicing lower-balance accounts economically unappealing. In other words, to make any money, they needed to look out for their own financial interests when they provided advice. Otherwise, they claimed that lower-balance investors would have no access to advice at all. (Of course, we believe it was never really worthy of being called "advice" to begin with, given the conflicts of interest.) Read more about what we believe on our Resource Center.
We're transforming the investment industry. We're taking sophisticated investment strategies that have worked for decades, and using cutting-edge technology to make them more accessible to you and more aligned with your best interests. We don't get paid to recommend any funds and there are no hidden fees. We only choose investments and make recommendations that we determine are best for you and your goals.
We make recommendations from how much money to invest to the type of account that’s right for you. Then, we do it for you. We invest your money in a portfolio we've built for you, and manage it over time so that you don't have to.