Betterment Significantly Lowers Fees & Adds IRA’s: Are You a Believer?

 

 

 

By G.E. Miller

I’ve had a number of friends rave about Betterment.com, suggesting that I should do a review of the online investment broker here on 20somethingfinance.com for their ease of use and simplicity for beginning and even experienced investors.

I’ve also seen a number of other personal finance bloggers jump on the Betterment fan club pretty early on.

Their claims to fandom have typically revolved around:

  1. Betterment makes investing for common folk easy. Just add your funds, choose your risk level, and voila!
  2. You don’t have to re-balance, they do it for you. This is a good benefit – how many of us strictly re-balance our portfolios?
  3. There are no additional trading fees for re-balancing or adding or subtracting from your balance.
  4. It has a very easy to use interface, much easier than traditional brokers.

So, I decided to take a look.

What is Betterment?

Before I go on, I should first explain what Betterment is. Betterment is an investment broker and registered investment adviser.

Much like other investment firms, Betterment has a $500,000 SIPC insurance guarantee on each individual’s balance (in the event of fraud or their business going under, not on investment returns).

Betterment differentiates itself from other online brokers in the following ways:

  1. They have an easy to use interface where you choose your risk level and they allocate the funds for you.
  2. The have no trading fees and re-allocate (re-balance) your investments for you.
  3. They only invest in low-cost ETF’s.

I wasn’t Feeling the Betterment Love

To be honest though, I just wasn’t feeling it. Betterment was not appealing to me for three big reasons:

#1: You couldn’t open an IRA with them as a new investor.

A lot of my savings funds are in retirement accounts and I like to to focus on high dividend investments in my taxable accounts.

Without IRA’s, I didn’t have much reason to start an account with Betterment.

#2: Their fees were high.

Fees ranged from 0.3% to 0.9% depending on investment level. Not bad if you compare that to expense ratios of mutual fund alternatives.

What my friends and I think a lot of the fans failed to see was that these expenses were on top of the expense ratios of the ETF’s (which are low with an average under 0.2%) that Betterment invests in as part of their portfolios.

Betterment’s fee structure was:

  • Balances under $25,000 = 0.9% annually
  • Balances over $25,000 = 0.7% annually
  • Balances over $100,000 = 0.5% annually
  • Balances over $500,000 = 0.3% annually

Those ETF’s could be traded in and out of for free with a commission-free ETF online broker. For an experienced and disciplined investor, most folks were paying 0.9% extra on top of something you could do for free with a decent amount of effort and determination.

#3: Their foreign stock allocation was ZERO.

100% of the ETF’s Betterment chose to invest in were domestic stock ETF’s. There was ZERO international exposure. This mean’s you had no choice but to put all of your eggs in the U.S. basket. If you’ve paid any attention to our economy over the last four years, you’d probably be a little concerned about this lack of diversification.

How Betterment has Improved & Can Improve Further

Each of the above three complaints were a deal killer for me. But all three paired together? I ripped in to my friends for even suggesting it.

Betterment has since gone on to address each of their biggest downsides:

#1: They now offer IRA’s for new customers.

New Betterment customers can sign up immediately for IRA’s now. I have a few IRA accounts just sitting around with low balances that I don’t actively manage and re-balance that I could easily move over.

Feedback to Betterment: A number of online brokers offer to cover the account transfer fees if you close out of another account and move your funds over to them. I would love to see Betterment do this as well. If I were to move my TradeKing balance over, for example, it would cost me $100 to do so. Props to you for not having your own account closing fee (keep it that way!). Since you target low balance users, perhaps this could be offered to higher balance users (i.e. those in your new “better” and “best” categories).

Note: Betterment is offering $25 to new customers.

#2: Betterment SIGNIFICANTLY lowered their fees.

Whereas the Betterment fee structure use to be:

  • Balances under $25,000 = 0.9% annually
  • Balances over $25,000 = 0.7% annually
  • Balances over $100,000 = 0.5% annually
  • Balances over $500,000 = 0.3% annually

They have now lowered their fees from 0.15% to 0.35% maximum with three different fee classes:

Betterment Fees

So, if I hypothetically invested $15,000 with Betterment in a year:

  • Previously, my annual expense would have been $135.
  • Presently, my annual expense would be $37.50, which is comparable to about 4-5 trades at most online brokers.

For automatic re-balancing and new buys/sells with no trading fees? I can stomach that. This is cheaper than target date mutual funds that do something similar without you having to add funds.

Feedback to Betterment: How does the new “customized” plan work? I don’t see anything on your site around details.

#3: Their foreign stock allocation is up to 35%.

I give credit to Betterment for increasing their foreign stock allocation from 0% to 35% (almost twice the stodgy old financial institution 20% recommendation)!

Here is the breakdown of Betterment investment allocations:

  • 25% VTI: Vanguard Total Stock Market
  • 25% IVE: iShares S&P 500 Value Index
  • 25% VEA: Vanguard Europe Pacific
  • 10% VWO: Vanguard Emerging Markets
  • 8% IWS: iShares Russell Midcap Value Index
  • 7% IWN: iShares Russell 2000 Value Index

Feedback to Betterment: I think this is actually a pretty darn good breakdown of ETF’s, however, I’d love to see a real-estate option (VNQ has a 0.12% expense ratio) and possibly even a metals (gold/silver) ETF to add further diversification. Much like with your stock vs. bonds sliding scale, I’d also love to see a international vs. domestic sliding scale on stocks.

With your bond offerings, I’d like to see some higher yield junk bonds mixed in.

Betterment Review Discussion:

Given these changes, I am going to pull the trigger on giving Betterment a try with one of my lower value IRA’s. If I’m impressed with the service, I may potentially move more over. Look for more on my experiences in an upcoming post.

  • What do you love about Betterment?
  • What is your Betterment wish list?

Read the Original Article

This article originally published February 28th, 2012 on 20 Something Finance.