Josh Rubin

Use App-Specific Passwords to Sync Accounts More Securely It’s easy to set up app-specific passwords so that you can help safely share your Betterment data with your other financial providers. In the days before everyone’s financial accounts were available online—and even still—you might bring a shoebox full of financial statements to an advisor, who would pore over them and manually input your data into a computer system. Any big changes in your financial life would require hauling in a new shoebox full of statements, and a whole new round of manual inputs. If this sounds inefficient, it is. But like many things in our lives, technology now makes this much, much easier and better. Data aggregation is the general term for the process of streamlining, sharing, and storing financial information among financial institutions and financial applications, as well as the technology that facilitates it. This can be an incredibly powerful tool, allowing you to better organize a financial life that spans multiple accounts at multiple institutions: in addition to your Betterment account, you might have 401(k) accounts at your job, checking and savings accounts at large national banks, as well as student loans and credit card balances. But, sharing data also raises concerns about security, and you may wonder steps you can take to help protect your financial information while taking advantage of all of the benefits of aggregation. This article encourages you to consider using a technology to help protect your data that is widely available but less widely used than it should be: the application-specific password (or “app-specific password” for short). Tools that help sync external accounts offer a more holistic view of your finances but can lead to potential security risks. To help you understand what the app-specific password is, and why we recommend that you use them, it will be helpful to talk briefly about how companies typically use and share financial data within the data aggregation ecosystem. Sharing data between applications raises the competing concerns of 1) making sure that you have the ability to authorize the applications you use to access the information you need while 2) also making sure that your sensitive financial information—for example, the value of your financial accounts, or transaction data about how and where you spend your money—is secure. Betterment takes the security of your information incredibly seriously, both when we receive your data from an aggregator, and when we provide your data to third-party applications. Generally speaking, companies can be classified into three buckets in the data aggregation ecosystem. First, there are financial institutions, such as banks or brokerages, which are sources of financial account data. Next, there are “third-party applications,” which use financial information to provide other services. And third, there are data aggregators, which are the intermediaries that connect financial institutions with third-party applications. In different contexts, Betterment is both a consumer and a producer of financial data. On the data consumer side, Betterment gives you the option of syncing your external accounts to your Betterment goals. Betterment also is a source of account data for other third-party applications. For example, you may use tax preparation software and want to export transactional data from your Betterment account to the tax software. Or, you may use budgeting software and want to sync your Betterment account to it. App-specific passwords offer a middle ground between complete security and complete visibility of your accounts. App-specific passwords offer a middle ground between the highest levels of security and the maximum ease of data sharing. An app-specific password is generated by the financial institution that produces data that you, as a financial consumer, might want to share with a data aggregator or a third-party application. For example, you can generate a Betterment app-specific password for Mint, go to Mint, and enter that password, rather than your actual login credentials. Importantly, this means that third parties won’t have the ability to make changes to your account or withdraw money from your account. Since an app-specific password provides read-only access to your data, if a third-party application is subject to a hack or data breach, you can sleep easily knowing that a hacker who obtained your app-specific password would not be able to gain full access to your account as a result of that breach. App-specific passwords compare favorably with other types of data aggregation technologies. One of these is “screen scraping,” which allows an aggregator or third-party application to log in to a financial account and capture the information that appears on the screen. There are serious downsides to this approach. Every time you share your user credentials, it increases the opportunities for a bad actor to obtain them; a hacker could compromise your account if it breaches the data aggregator or third-party application. And, because screen scraping requires sharing credentials that provide complete access to the underlying account, anyone who obtains those credentials has the potential to steal not only your data, but possibly to transfer money out of your account as well. An alternative is an application-programming interface, or “API.” An API is a protocol or link between two applications that facilitates the exchange of data. There are many different approaches to creating APIs, but they typically allow the customer to exercise control over the data that is shared, including the ability to turn off access to the data whenever the customer wants. APIs have their drawbacks as well. Because they can be technically complex, APIs can be expensive to build. APIs also don’t follow any set technical standard, and unfortunately, many large financial require that data aggregators and third-party applications build to particular technical specifications that apply only to that one institution’s data. The end result is that APIs make sharing data more complex and, as a result, more expensive for you. Although Betterment is certainly supportive of the data aggregation industry moving toward a shared open architecture framework for APIs (meaning that everybody uses the same technical specifications), we’re not there yet. It will take time, money, and coordination between financial institutions, data aggregators, third-party applications, and regulators to ultimately make that vision a reality. In the meantime, we highly recommend that you take advantage of app-specific passwords, where available, to help protect the data that you share through aggregation. When you use Betterment, we make it easy for you to set up app-specific passwords. Here is a step-by-step guide for setting up an app-specific password to use when sharing your Betterment data. First, go to "Security" within Settings when you log in; scroll down to the section called “App passwords.” This is what you’ll see: When you are asked to generate a new app password, Betterment’s interface will then generate credentials for you to use to input into the third-party application, such as Mint or TurboTax. By entering this password, the application will get access to the data it needs in a read-only format, without providing full access to your Betterment account. And, just like with an API, you have total control over how long the third-party application has access to your data. To end that access at any time, all you need to do is navigate back to the “App passwords” section on "Security" and click “Revoke,” which will terminate the permission associated with the app-specific password to access your data. Use Betterment’s app-specific passwords, and encourage your other providers to adopt them. We hope that you will consider using app-specific passwords where they are available, and that you will push your other financial service providers to make them available if they aren’t already. Using them may be a very small hassle now, but could save you major headaches down the road.

Managed Account or Self-Directed Brokerage Account? Let’s explore the key differences between two types of common investment accounts: managed accounts and self-directed brokerage accounts. You’ve decided that you want to open an investment account to help achieve your financial goals—great start. What kind of account are you going to open? Two types of investment accounts to consider are managed accounts and self-directed brokerage accounts. There are also other types of accounts, but for simplicity, we’ll focus on just these two common types. Neither is the universally better option for every investor in every situation, so it’s important to understand the differences. Managed Accounts With a managed account, you give your investment advisor (or portfolio manager) discretionary authority over the account—you give up control over which securities to buy and sell in the account and instead give full control to the advisor. By contrast, non-discretionary investment advisory services provided by an advisor require you to be the one to take action. They save you time and offer convenience... A managed account advisor receives high-level direction from you about your financial goals, risk tolerance, investing timeline, and other factors, and then chooses: Which securities to invest in When to buy and sell assets How dividends are reinvested When to rebalance the portfolio When to tax loss harvest Because of this, managed accounts are convenient—you don’t have to research investments, follow the market, or worry about any of the other actions listed above (although it always make sense to review your account periodically to protect against fraud, as well as to ensure that the account continues to be appropriate for your needs). ...but not a lot of control. The tradeoff for convenience is that you give up day-to-day control over the investments in the account. This includes the timing of each trade. If you are the type of investor who follows the market closely and wants to dictate the precise moment at which your assets are bought and sold, a managed account may not be the right option for you. This level of convenience can also sometimes come at a higher price. The advisor will charge a fee, which is typically charged against a percentage of the assets that the advisor manages. The fee covers account monitoring on an ongoing basis to help ensure that the investments in the portfolio are appropriate to your financial goals and situation. For a buy-and-hold investor who does not make a significant number of trades, a managed account could be more expensive than a self-directed brokerage account, where fees are typically charged based on transactions. Self-Directed Brokerage Accounts With a self-directed brokerage account, you control the buying and selling of securities. You also assume responsibility for all other aspects of managing the account. The brokerage’s role is simply to execute the trades that you request. Additionally, this type of account typically does not come with holistic advice or continuous monitoring of your investments. They can be less expensive... Because you’re taking on all of the account management responsibilities, a self-directed brokerage account can often be a cheaper way to access investing capabilities than a managed account. Self-directed brokerage accounts usually charge commissions on a transaction-by-transaction basis. If you don’t trade often (or, if you have access to commission-free financial products through your account), this may be a cheaper option. ...but with more control comes more responsibility. A self-directed brokerage account gives you the benefit of exercising far more control over the timing and pricing of trades. You can place market orders to buy or sell at the current market price—orders which most modern brokerages typically are able to execute very soon after the order is placed. Or, you can even limit orders to buy or sell only at particular price points. This ability to time the market comes at a potential price beyond just taking up more of your time: our research shows that it is often time in the market, and not market timing, that helps investors build returns. Managed Accounts at Betterment Betterment offers only managed accounts, which we believe are appropriate for long-term investors looking to buy and hold securities to achieve their financial goals. For one low fee, we fully manage the account by choosing investments, reinvesting dividends, rebalancing when needed, harvesting losses, and more. Open a managed account and let us worry about the management details so that you can save time and live better—all for a low fee.

What Is a Tax Advisor? Attributes to Look For Since Betterment isn't a tax advisor, we often suggest that customers see a tax advisor regarding certain issues or decisions. Who exactly is a tax advisor and how should you think about picking one? Tax season is now upon us. Now that you’ve probably received all of your tax forms, you may be facing a choice for how to proceed with filing: do it yourself with tax software or hire a professional tax advisor? Although it certainly will be more expensive than using tax software, hiring a tax advisor makes sense for certain individuals, depending on their financial circumstances. Here are two important factors to consider when deciding if a tax advisor is right for you: Time: Even with tax software guiding you, filing your taxes yourself can be time consuming. You’ll need to make sure that you’ve entered or imported the data from your tax forms correctly, which often takes at least several hours. We’ve written before about valuing your time here. Complexity: The more complicated your financial situation, the more a tax advisor may be able to help you. Have partnership income, or income from an S corporation? Been subject to alternative minimum tax in past years? Received or exercised stock options this year? Tax software can handle these issues, but it will take time, and the risk of mistakes (and even an audit) increases. If you decide that your situation warrants professional assistance, some further questions are worth exploring: what exactly is a tax advisor and how should you think about picking one? Who counts as a tax advisor? Anyone with an IRS Prepare Tax Identification number (a “PTIN” for short) can be paid to file tax returns on behalf of others. But merely having a PTIN doesn’t tell you much about the tax preparer; tax preparers have different experience, skills, and expertise. What you really want is a tax advisor, a professional with a certification and experience level that qualifies her not only to prepare your return, but to use her knowledge of the tax code to provide advice on your financial situation. There are three different professional certifications to consider, each of which qualifies a tax advisor to practice with unlimited representation rights before the IRS. This means that in addition to preparing returns, they also are licensed to represent their clients on audits, payments and collection issues, and appeals. Certified Public Accountants (CPAs) CPAs have completed coursework in accounting, passed the Uniform CPA Examination, and are licensed by state boards of accountancy (which require that they meet experience and good character standards). Some, but not all, CPAs specialize in tax preparation and planning. You can find complaints about CPAs either by searching records with state boards of accountancy and at Better Business Bureaus. Enrolled Agents Enrolled agents are licensed by the Internal Revenue Service after they have passed a three-part examination and a background check. The IRS maintains complaints about enrolled agents on the website of its office for enrollment, and you can also find complaints on the National Association of Enrolled Agents website. Licensed Tax Attorneys Licensed attorneys have graduated from law school, passed a state bar exam, and are admitted to the bar in at least one state. Some, but not all, attorneys specialize in tax preparation and planning. Many tax attorneys have completed an additional year of law school study in a master’s program in tax (called a Tax LL.M. degree). Disciplinary actions against attorneys can be found by searching the state bar associations with which the attorney is registered. How to Select a Tax Advisor or Tax Consultant No tax advisor with one of the certifications described above is necessarily better than any of the others in all situations. Rather, what matters most is: How the advisor approaches the tax preparation process, including the specific experience the tax advisor has with issues relevant to your particular financial situation. Whether you feel comfortable with the tax advisor. How the advisor structures her fees. You may be able to screen potential advisors along several of these dimensions based on information you can find about them online; for others, an initial meeting will be critical to determine if the advisor is right for you. 1. Here is a general approach for evaluating tax advisors. You should feel comfortable with and confident in a tax advisor’s approach to providing tax advice. Here are a few specific factors to consider carefully. First, you should try to identify a tax advisor who will act ethically and with integrity. Before scheduling a meeting with a potential tax advisor, check to see if the advisor has been subject to any complaints, disciplinary actions, or other ethical infractions. When meeting with the advisor, be on the lookout for outlandish promises: if an advisor guarantees you a certain refund without having first looked at your returns, you should be wary (any promise that sounds too good to be true probably is). If the advisor suggests taking a position on a tax return that strikes you as overly aggressive (because it is not grounded in your actual financial situation) or if you simply do not understand something the advisor is saying, make sure to ask, and keep asking until you are satisfied with the answer. Having a tax advisor prepare your returns does not take away your responsibility for the accuracy of your tax return. Of course, an advisor who knowingly takes an improper position on a tax return will face consequences, but it is your return, and you can too. A good tax advisor also should provide more value than simply filling out your returns. She should help you to structure your finances in an optimal way from a tax perspective. Not every tax advisor has expertise with every nuance of the tax code, and so you’ll want to make sure that the advisor you select has significant experience with the particular issues for which you’re seeking expert advice. Of course, there are certain common issues that every good advisor should know: for example, how to maximize the value and efficacy of your charitable contributions, how to weigh the tax tradeoffs between renting and owning a home, or how to save money for or gift money to family members. For other less common situations, however, you’ll want an advisor with specific experience. If you own a business or are self-employed, if you work for a startup and own a significant number of stock options, or if some portion of your income is reported on a K-1 (because you are a partner in a business or own shares in an S corporation), you likely will be best served by finding an advisor who has worked with a significant number of clients with these tax issues. Finally, maintaining the security of your personal information is more important than ever these days, and the inputs for your taxes is some of the most sensitive information you have. There will always be some risk of data breaches, but a good tax advisor will take steps to safeguard your information. Make sure that you ask about how the tax advisor stores your personal information and what methods she uses to communicate with you regarding sensitive topics. You also should ask about whether the advisor has ever been subject to a data breach and what steps the advisor is taking to protect against future ones. 2. Assess your comfort level with the consultant. You want to make sure you have a good rapport with your tax advisor, and that you feel like you understand each other. At your first meeting, make sure to bring three years’ worth of old tax returns for your advisor to review. Ask if you missed any deductions, and if your old returns raise any audit flags. Consider the advisor’s responses. Does the advisor seem willing to spend time with you to ask thorough questions to fully understand your situation? Or does she rush through in a way that makes you feel like she might be missing certain issues or nuances? Does the advisor explain herself in a way that is understandable to you, even though you don’t have a tax background? Or does the advisor leave you confused? A tax advisor may work by herself or be a member of a larger organization or practice. Each approach has its benefits and drawbacks. You can be sure that a solo practitioner will be the one who actually prepares your returns, but it may be harder to reach the advisor during the height of tax season, and the advisor may find it difficult to get a second opinion on tricky issues or issues outside her core areas of expertise. On the other hand, although the collective expertise of a larger practice may exceed that of even a very talented advisor practicing on her own, it may be more difficult to ensure that your return is prepared personally by your advisor. Finally, think about whether you want to work with a tax advisor who is already part of your social network, or who has been referred by a trusted family member or friend. On the one hand, having the seal of approval of someone you know and trust may help to assure you that the advisor is right for you. On the other hand, consider whether it will be harder to part ways with the advisor down the road if she fails to meet your standards. 3. Evaluate the cost of the tax advice. The final issue you’ll want to think about is cost. Tax preparation services are a low margin business (particularly with the competition that tax preparers face from low cost software), but you can expect to pay more for tax planning services or advice. The best cost structure is one where the tax advisor charges for her time or for the specific forms that the advisor completes and files. By paying for the advice itself and not a particular outcome, this cost arrangement properly aligns the incentives between your tax advisor and you. Be wary of compensation structures that create the potential for conflicts of interest between you and and your tax advisor. For example, some tax advisors may try to earn additional revenue from you by selling other services or financial products along with tax preparation. Ultimately, when it comes to cost, your goal should not be solely to minimize your combined out of pocket cost to the IRS and your advisor for this year’s tax return. Rather, you should take a longer term view, recognizing that good, personalized tax advice can help you to structure your financial life in a tax-efficient way that can pay dividends for years to come.