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How to Invest $10 Million with a Robo-Advisor

While everyone seems to know how to get started with Betterment, some might wonder, how are the wealthiest customers using a robo-advisor?

Articles by Jon
By Jon Stein Founder, Betterment Published Aug. 19, 2015
Published Aug. 19, 2015
7 min read
  • Betterment’s high net worth customers can use automated portfolios as the tax- and cost-efficient core to their portfolio, while also holding appreciated and concentrated positions externally.

  • Betterment has multiple goal types and services designed to provide a sophisticated, tax-efficient strategy for investors with varied needs.

When people ask me who uses Betterment, I always have the same answer: We have customers with millions of dollars invested with us, as well as customers just starting out.

While everyone seems to know how to get started with Betterment, some might wonder, how are the wealthiest customers using a robo-advisor?

Investors with more than $100,000 invested at Betterment account for more than half of Betterment’s assets under management. One way for our highest net worth customers to use Betterment is for it to function as the tax- and cost-efficient “core” to their portfolio, or their long-term and goal-based investments. These customers may also have legacy or concentrated holdings, or “satellite” investments, outside the core, but these represent a much smaller portion of their overall net worth.

To be sure, our wealthiest customers may be likely to use both our services as well as those of a financial advisor. It’s been my experience that when people accumulate significant net worth, say $10 million or more, their finances tend to become more complex, and it makes sense to work with a financial advisor for strategic tax and intergenerational planning, as well.

At Betterment, it’s possible to have the best of both worlds—Betterment is available directly to investors who want to oversee their own funds, while Betterment for Advisors is a platform for advisors in our network.

A Transparent, Tax-Efficient Core for Your Portfolio

Everyone—no matter her net worth—desires the best expected returns, net of all costs and taxes, from the index-tracking, tax-efficient core of a portfolio. Betterment can manage a $10 million, or even a $50 million portfolio, more efficiently and precisely than many high-cost separately managed account providers.

With Betterment as their core, investors access a globally diversified portfolio of index-tracking ETFs, designed to be optimized for the best possible risk-adjusted returns and automatically managed to mimic the best possible investment behavior.

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A core-satellite strategy is a general wealth management technique that places the bulk of an individual’s investable assets in a long-term passive investing strategy in order to minimize costs, tax liability, and volatility.

The additional satellite investments can be used around the core, but represent much smaller pieces of the investor’s overall wealth. These may include actively managed funds, hedge funds, structured instruments, or even concentrated single stock positions.

Of course, those investments likely can and will experience more risk and volatility for the investor—as well as higher management fees and potentially a higher tax burden.

Our retirement planning tool is especially useful for a core-satellite strategy, as it can pull together information from both groups of investments to help provide a clearer picture of future retirement spending from aggregated information.

Every Investor’s Wealth Is Unique

Our customer team is always available to high net worth customers to help them invest their core with Betterment. The team can help design the most efficient way to transfer funds. As we do with all our customers, our specialists are available to work one-on-one with people to help make the transfer and rollovers of investments as seamless as possible.

Many times, those with a high net worth—especially earlier in their lives—have it through inheritance or through concentrated liquidity events, such as stock windfalls (like an IPO), a major sale (a business or property), or other big equity wins in the market.

With events related to stock, it’s often the case that realizing the money will come with a substantial tax bill related to the embedded capital gains. As an example, we recommend as a first step to move out of a concentrated position and into a diversified portfolio by selling positions in a consistent way.

Whether your cash has resulted from a stock sale or you have cash in savings ready to invest, our advice is guided by your timeline and goals. Our rollover specialists can assist in transferring tax-advantaged accounts seamlessly.

Building the Core Investments with Betterment

Retirement Income Goal: We designed this goal for retired investors of all ages who want to create regular income from an investment. The advice is designed to ensure an initial investment provides income for an established time horizon, while also earning returns.

If an investor would like to create a monthly income stream from a $5 million investment for the next 25 years, for example, Betterment’s advice dynamically accounts for multiple variables to provide an amount that can be safely withdrawn on a monthly basis (or other time period) and help ensure the money lasts over the duration of the timeline.

General Wealth Goal: This is the goal investors may use for capital growth or preservation, based on desired risk and time horizon. Betterment’s smarter technology manages the portfolio automatically—continuously overseeing the portfolio for tax efficiency, rebalancing, and dividend reinvestment.

Safety Net Goal: A Safety Net fund can provide a lower-risk investment to set aside must-have money for potential costs at any point down the road. One example is to use the goal as a way to self-insure. For example, if you can comfortably invest up to $1 million without needing to tap those funds for another purpose, you might consider self-insuring for elder care rather than paying potentially high premiums for long-term care insurance.

Trust Account: Betterment offers trust accounts that can be managed by one or more trustees. Speaking with a trust specialist or tax professional will help determine ways to use trusts for a maximum tax advantages for both the grantor and beneficiary. One common structure for those with high net worth is to establish and build savings for a child by gifting him or her the maximum tax-free gift ($14,000 per donor to each recipient in 2015).

Control Your Costs: Be Tax-Efficient

If you’re in the highest-earning income bracket, achieving tax alpha with an investment strategy is key to maximizing returns. Unlike market returns, tax liability is an area where you can actively control outcomes.

Betterment automatically provides a variety of tax efficiencies in its automated portfolios that seek to add to net investor results with zero increase in portfolio risk. These are some of the efficiencies every investor can experience with a Betterment portfolio:

  • Tax-Efficient Securities: We only invest in exchange-traded funds (ETFs), which are generally more tax efficient compared to most other options such as mutual funds. Investors pay, on average, 0.35% more for an index-tracking mutual fund than for an index-tracking ETF, based on the expense ratio.1
  • Tax Loss Harvesting+: This automated feature can be used to neutralize the taxes on realized gains by selling positions that are down and replacing them with appropriate proxies. In an example featured in Betterment’s white paper on tax loss harvesting, an investor could add 0.77% to an after-tax return.2 You should read and understand the white paper and discuss your specific situation with your tax professional to determine if TLH+ is right for you.
  • Asset Location: Betterment employs tax-smart allocation and municipal securities when appropriate. Our portfolios are designed to put the right securities in the right buckets to help minimize taxes.
  • Smarter Cost-Basis Accounting: When choosing which lots of a security to sell, our technology factors in both cost basis as well as duration held. That way, we seek to minimize the tax impact as a result of any allocation changes or withdrawals.
  • Smarter Rebalancing: Betterment uses every cash flow and dividend to rebalance a portfolio, which reduces the need to sell shares to rebalance. This may lower capital gains tax over time, and maintains the risk and return of the portfolio. Plus, our sophisticated infrastructure is designed to avoid short-term capital gains when rebalancing.

When Should You Use a Financial Advisor?

Of course, wealth planning is complex—and you may need expertise beyond core investments. Professional financial advising for issues like estate planning or other long-term tax planning is essential. We built software for advisors under our Betterment for Advisors platform, so they can augment their expertise while still using Betterment.

If you do feel that having an advisor is the right decision, whether through Betterment for Advisors or elsewhere, consider these questions as you go through the selection process:

  • What are the advisor’s incentives? It can strongly influence what advice she gives.
  • How is an advisor paid? It should align with the value they add. If she isn’t adding return value to your accounts on an ongoing basis, you likely shouldn’t be paying an annual management fee.
  • Is the advisor fee-based, rather than asset-based? Monthly retainers or fee-only may be the best deal and keep an advisor focused on you.

Every Betterment customer—at every level of wealth—experiences the same benefits of automation, transparency, and tax efficiency. Whether you have $100,000 or $100,000,000, Betterment’s portfolio and investing strategy are designed to help investors take home more of their returns.

This is why I often say we are “democratizing” smarter investing; smarter technology allows us to take sophisticated investing strategies and scale and improve them so that they’re available to everyone.

1 http://www.betterment.com/resources/investment-strategy/etfs/the-hidden-costs-inside-mutual-funds/

2 The potential after-tax benefit of TLH+ was calculated through historical backtesting of the strategy as applied to the Betterment model portfolio and is not based on actual client trading history, with all relevant assumptions stated within the text. Actual Betterment clients may experience different results. Factors which will determine the actual benefit of TLH+ include, but are not limited to, market performance, the size of the portfolio, the stock exposure of the portfolio, the frequency and size of deposits into the portfolio, the availability of capital gains and income which can be offset by losses harvested, the tax rates applicable to the investor in a given tax year and in future years, the extent to which relevant assets in the portfolio are donated to charity or bequeathed to heirs, and the time elapsed before liquidation of any assets that are not disposed of in this manner.

The backtesting analysis that produced this estimate was done over the 13-year period from 2000 to 2013. No reliable data was available prior to 2000 that could adequately represent the performance of the full Betterment portfolio. The years in question featured a number of exceptional periods of market activity, and past performance is no guarantee of future results. The information used as the foundation for historical backtesting was compiled from third-party sources, and while we believe the information provided here is reliable, we do not warrant its accuracy or completeness. Read more on how we backtest against historical data.

Tax loss harvesting is not suitable for all investors. Nothing herein should be interpreted as tax advice, and Betterment does not represent in any manner that the tax consequences described herein will be obtained, or that any Betterment product will result in any particular tax consequence. Please consult your personal tax advisor as to whether TLH+ is a suitable strategy for you, given your particular circumstances. The tax consequences of tax loss harvesting are complex and uncertain and may be challenged by the IRS. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. Betterment assumes no responsibility for the tax consequences to any client of any transaction.

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