Online Investment Adviser Betterment.com is Cutting Its Fees and Adding IRAs to Its Options

 

 

By Phyllis Furman

An online investment adviser for the less-than-wealthy crowd is about to make some big changes to broaden its audience.

SoHo-based Betterment.com is lowering its fees while forging into the retirement business, Betterment CEO Jon Stein told the Daily News.

The online broker that puts investing on autopilot without using flesh and blood money managers will take its management fees down to a range of 0.15% to 0.35% per year depending on a customer’s balance.

The bigger the account, the lower the price.

Previously, Betterment’s fees ranged from 0.3% to 0.9%.

The savings can be sizeable: under the old fee structure, someone with a $100,000 account would pay an annual fee of 0.5% or $500. Now, he would pay 0.15% or $150 a year.

“While our fees were always low, we wanted to make the difference so stark that it became a no-brainer,” Stein said.

Even so, Betterment’s management fees for some accounts are still pricier than a new rival, online investment adviser Wealthfront.

Wealthfront, which launched in December of last year and whose target customers are the young geniuses of the tech world, charges nothing for accounts under $25,000 and .25% on anything above. You can get an additional $10,000 managed for free for every person you refer who becomes a client.

“We are taking a different approach. Our focus is on offering online financial advice for the tech community,” said Wealthfront CEO Andy Rachleff.

“We have more than 60 people from Facebook already as clients. We have signed up a lot of people with a lot of money.”

Wealthfront customers do pay small brokers’ fees on transactions and Betterment customers do not. Wealthfront requires a minimum balance of $5,000. Betterment has no minimum balance requirements.

On top of chopping its management fees, Betterment will now offer both Traditional and Roth IRAs. Customers can open a new IRA on the site or rollover an existing IRA or 401(k) into a Betterment account. The new, lower fees will apply to the IRAs as well.

In the past, critics had faulted Betterment for not including an IRA option — Wealthfront already offers retirement accounts. Now, customers will be able to invest for their retirement on top of saving for other goals like buying a house or purchasing a boat.

“We looked at who are customers are: lawyers, engineers, doctors, teachers. Many of them are changing jobs,” Stein said. “The No. 1 question we were hearing was: ‘Can I rollover my 401(k)?,’” Stein said.

Launched in May, 2010, SoHo-based Betterment aims to serve people who want to invest, but don’t have the time to manage their money.

Hiring an investment adviser may not be an option because of the high annual fees — between 1% and 2%. On top of that, money pros often require a minimum investment of at least $100,000.

Betterment provides a simple, less expensive alternative. An account can be set up in a matter of minutes. Customers provide a few key facts about themselves, including their goals and risk tolerance. Based on that, Betterment makes investment recommendations.

Accounts are invested into two types of low cost exchange-traded-funds: stock ETFs, which have a higher growth potential, but are risky — and slower growth, lower risk bond ETFs.

Customers can set up automatic monthly investments. Rebalancing is done automatically, for free. The idea: Set it and forget it.

The concept is catching on. Betterment now manages more than $25 million for 10,000 customers. The average age is 33.

The average Betterment customer return since its launch is 11.7%, based on the average customer allocation of 77% stocks and 23% bonds.

“Our assets are growing at 23% a month,” Stein said. “We are the 95% solution. We are not for the active trader or for the gambler. But for the vast majority, it is just a smart way to invest their money.”

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This article originally published February 21st, 2012 on New York Daily News.