How Betterment Does It Differently
I recently blogged about the “whispering Wall Streeters”- people who work on Wall Street who, like the rest of us, don’t like predatory practices either. They may not be as highly publicized - but hopefully this group is growing in prevalence. One such individual posted about his experience in the financial industry and was candid about the injustices he sees.
I want to take this opportunity to look at the points he raises on the hedge fund industry and discuss how Betterment, the new generation of investing, is addressing them. Bear in mind that the figures he names are relevant to the hedge fund industry, which is only accessible to an elite few. Exact numbers will vary for other investment services, but in many cases the general approach to cost (fees and risk) will be the same.
“First, you are paying exorbitant fees. Commissions on every stock trade. Mutual fund managers take a cut – an annual % cut, as well as a % per profit cut. You’re down 2% the minute you invest your money.”
Betterment does not charge commission or upfront fees, so you keep what’s yours. You pay a reasonable management fee only for as long as you are a customer with Betterment. All of our advice is free, as it should be.
“You have no idea what is going on in the market besides what you see on the news – while hedge funds have analysts working around the clock and a bunch of service providers who give minute-by-minute analysis of their portfolio opportunities and weaknesses in all markets with exposures to nearly everything.”
The internet age offers consumers more information than ever before, but does it help individuals make better investment choices? For the most part, no. Even if we had access to minute-by-minute analysis, who has time to make sense of it? The best approach for individuals is to seek long term growth by setting a smart investment and forgetting about it – the exact approach that Betterment provides.
“Next, if you’re doing the investing yourself, you’re paying ridiculous spreads. The bid/ask spread of a stock will cause you to be down another 2-3% the minute you buy the stock.”
Spread with Betterment is low, because we only invest in liquid funds that trade within a fraction of a penny.
Return V Risk
“Their sole purpose is to earn money, not to mitigate risk.”
Betterment investments are broadly diversified. Every user is invested in over 3,500 companies through a variety of American and international funds (no matter how small your balance). This means your account is diversified and not dependent on any single company or sector of the economy. This exposure provides the best return for the least risk.
“The government is in bed with the financial industry. Tax loopholes give hedge funds and other top players the ability to write off losses and not pay taxes on gains for years at a time.”
It’s our gripe too… for now, there’s nothing we can do about the tax advantage given to hedge fund managers, or the insider deals that they get – that requires legislation. What we can do is get you a good return using the best tools out there today – ETFs, modern portfolio theory, and efficient, technology-based solutions.
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Based on our estimation, using Betterment’s retirement recommendations could earn you 38.8% more after-tax money in retirement compared to investing on your own.
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