Earn Rewards: Sign up now and earn a special reward after your first deposit. See offer details

<title>Dismiss</title>

Betterment

Save, invest, retire

GET — On the App Store

View

Introducing Custom Model Portfolios. Learn more

<title>Dismiss</title>

Introducing Income Portfolios from BlackRock

Partnering with BlackRock, you and your clients can access an income portfolio strategy that delivers cash income while preserving capital.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Sep. 13, 2017
Published Sep. 13, 2017
6 min read

Betterment for Advisors has selected an income portfolio strategy from BlackRock to help advisors offer their clients the opportunity to generate cash income while preserving capital.

Nearly a decade of historically low interest rates has forced advisors to take extraordinary measures to help clients reach their investing goals. Meanwhile, one of the longest stock market rallies in history leaves some investors fearing that we’re near a market top, making them too nervous to invest at all.

To help you better serve your clients with a preference for a low risk investment strategy, we’re adding a new income portfolio strategy sourced from BlackRock to add to your arsenal of portfolio strategy options.

If you’re familiar with BlackRock’s income ETFs, you know that the income portfolio strategy is a diversified 100% bond basket that seeks to provide a steady stream of cash income while minimizing potential loss of capital or stock market volatility. In our portfolio strategy arrangement with BlackRock, we offer four risk levels to choose from, each with different expected levels of income yield.

This portfolio strategy will be available to Betterment’s direct retail customers in addition to Betterment for Advisors’ clients. An income portfolio strategy is part of Betterment’s objective for offering customers’ greater personalization to meet their needs and preferences. We see Betterment for Advisors as a critical part of this focus on personalization. You understand your clients’ inclinations and motivations, their beliefs and personal preferences. In order for some investors to use this new income portfolio strategy successfully, they may need guidance from an advisor who understands their situation, and in many cases, we expect Betterment for Advisors to play that role. We are firm in our belief that offering personalized portfolio strategies like this one is a way to grow your business as well as Betterment’s business.

Keep reading to explore two scenarios we see this portfolio being potentially useful for your clients.

Generating Retirement Income

As advisors know well, many retirees value stable income and principal preservation during the later stages of their lives. They also tend to hold most of their wealth in tax-advantaged accounts such as IRAs and 401(k)s. The income portfolio strategy is one way to meet retirees’ preferences. Like with any account you manage through Betterment for Advisors, you can invest a retirees’ entire savings into an income portfolio, or you can use a “bucket approach,” investing a portion of the savings to prioritize income generation, while leaving the rest in stocks for long-term growth.
The chart below shows the expected income yields for each of the four risk levels in the income portfolio strategy and how those levels compare to Betterment’s core portfolio strategy with similar levels of risk.

Expected Income Yields

Betterment Portfolios vs. BlackRock Target Income Portfolios


expected income yield

Disclosure: This chart compares the four BlackRock income portfolios available to Betterment against four allocations of Betterment’s core portfolio strategy with similar relative risk levels. All four of the comparison allocations include both stocks and bonds, while BlackRock’s income portfolios are comprised completely of bonds. The Betterment Portfolio’s income yield is comprised of dividends from equities and coupon income from the underlying bonds in the fixed income ETF. The BlackRock Target Income Portfolios’ income yield is comprised solely of coupon income from the underlying bonds in the fixed income ETF.

The expected income yields are expressed in annual terms and are based on the historical dividend yields over the past 1-year period ending August 30, 2017 for the individual funds in each of the portfolios, as reported by Yahoo Finance. These expected yields correspond to the time period referenced above for the funds in the relevant portfolios and will change over time as economic and market conditions change. When an economy is expanding (contracting), for example, interest rates will tend to rise (fall) and credit markets will tend to strengthen (weaken) as companies become less (more) vulnerable to defaulting on their debt.

These figures do not include the Betterment fee or fund level expenses. The Betterment stock allocations shown here correspond to the Betterment portfolios that have expected volatilities that are closest to the expected volatilities of the four BlackRock income portfolios. The stock-to-bond allocations used for Betterment are: 9% stock to 91% bond, 22% stock to 78% bond, 37% stock to 63% bond and 40% stock to 60% bond. Expected volatilities are estimated based on the historical total returns data for the relevant funds over the past 10 years using the methods of Ledoit and Wolf (2003). This chart is hypothetical and used to illustrate the points discussed in this article. Past performance is not indicative of future results and does not guarantee that any particular result will be achieved.


As you can see in the chart above, Betterment’s income portfolios have a higher expected income yield than allocations in Betterment’s core portfolio strategy with comparable risk levels.

For example, if a client had a $1,000,000 retirement portfolio, you could invest it in the 40% stock Betterment Portfolio, and the income portion of your client’s return would be about $24,000 per year in gross investment income. (Note that the income portion composes only part of the total potential return generated by a Betterment portfolio allocation.) However, if the client invested in the income portfolio strategy with the same level of expected risk, your client could potentially receive an expected $43,000 per year in investment income.

It’s also important to note that any income-focused strategy will be inherently less tax-efficient than a strategy that balances income and growth because bond interest is taxed at a higher rate than long-term capital gains.

Low Risk Investment Alternative

In addition to the retirement use case, we believe the income portfolio strategy could also be useful for clients who show considerable anxiety about the stock market. If your client strongly prefers not to invest in stocks, the income portfolio strategy can be an effective, personalized approach. It’s one way to make sure their money doesn’t sit idly in cash without taking on more risk than they are comfortable with.

According to Gallup, 48% of Americans have no money invested in the stock market. And with the best savings accounts paying only slightly above 1% in interest, choosing bonds over cash products can be a nice middle ground that better balances risk and return.

The chart below shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large US companies.

Comparing Risk

risk comparison income

The chart shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large U.S. companies. Click respective categories for data on short-term bonds, intermediate-term bonds, long-term bonds, high-yield bonds and large cap stocks.

Short-term bonds were almost six times less risky than US large company stocks. Even high-yield bonds, the most risky type of bonds, were almost two times less risky than stocks.

It’s worth noting that investing in bonds is generally more costly than investing in stocks, so your clients will pay a higher expense ratio on income portfolio funds compared to funds invested in the core Betterment portfolio. The Betterment portfolio strategy, which contains a mix of stocks and bonds, has annual ETF fees of only 0.07% – 0.16%, depending on the portfolio’s allocation. The income portfolio strategy, while still far lower cost than the industry average, has slightly higher ETF fees of 0.21% – 0.38%, depending on the portfolio’s target income level.

Different Income Targets to Meet Clients’ Needs

As with the other portfolio strategies we’ve made available to Betterment for Advisors, all of our portfolio strategies can adjust to your clients’ risk tolerance. The income portfolio strategy is no different.

The income portfolio strategy includes four different risk levels to choose from, each with different targeted levels of income. The income portfolio strategy is actively managed, so the exact allocations of the underlying bonds is subject to change approximately once per quarter (and up to 6 times per year depending on market volatility). With each rebalance, we allocate to the asset classes that are designed to help your clients maximize their income return while limiting overall volatility.

The income portfolio increases projected income by taking on more risk in two main ways:

Investing in longer-term bonds: Long-term bonds are more sensitive to changes in interest rates, and thus carry more risk. To compensate for this risk, long-term bonds pay more interest.
Investing in lower-quality bonds: When you lend money from less-established companies, the chances of the company defaulting and not paying you back are higher. To compensate for this risk, low quality bonds pay more interest.

With this additional strategy to offer your clients, you can personalize your financial planning to match a client’s specific goals, risk tolerances, and viewpoints. Whether you have a retiree who wants to focus on income rather than growth or a nervous investor who would feel better with bonds rather than stocks, we hope this new portfolio offering will help every advisor further personalize their services and offer investors more added value.

You can explore the new income portfolio strategy by BlackRock alongside the other portfolio strategies within your advisor portal. Please contact our team with in-depth questions about this new offering and any other features of Betterment for Advisors.

This article is part of
Original content by Betterment

How would you like to get started?

Manage spending with Checking

Checking with a Visa® debit card for your daily spending.

Save cash and earn interest

Grow your cash savings for general use for upcoming expenses.

Invest for a long-term goal

Build wealth or plan for your next big purchase.

Invest for retirement

Set up traditional, Roth, or SEP IRAs to save for the golden years.