A common question we hear is, “You guys are great—but what’s the difference between Betterment and other investment managers?” When we delve into the answer—whether on the back of a napkin or in conversation—we list the values that set us apart: we are smarter and more efficient, which should result in better net investor returns.
To help you compare, we selected four management types and their cost structures and features. In the table below, you can see Betterment costs a fraction of other kinds of investment managers while offering more automated features. The same $500,000 investment at Betterment costs around 1/10th of what it would cost to manage with a traditional manager, according to published fee data.
Our assumptions are detailed at the bottom of the table.
Our comparison of the total costs and benefits to manage a $500,000 investment:
|Management type:||Automated||DIY ETFs||Mutual Funds||Traditional Manager|
|Example services||TD Ameritrade, Scottrade, E*Trade, Vanguard, Fidelity||Vanguard, Fidelity, Schwab, State Street, T. Rowe Price||Manually managed portfolios|
|Annual trading fees¹||None||$408||None||Varies|
|Average fund expense ratio²||0.12%||0.63%||1.16%||1.16%|
|Internal fund trading cost³||0.005%||Varies||1.44%||Varies|
|Management fee4||0.25% or 0.40% depending on the plan you choose||None||None||0.99%|
|Cost per year||$1,350||$3,558||$5,800||$10,750|
|Automated tax loss harvesting||%||X||X||X|
|Automated dividend reinvestment||%||X||%||%|
|Automatic tax-optimized lot selection||%||X||X||X|
|Personalized allocation advice||%||X||X||%|
|Goal-based investment accounts||%||X||X||X|
Our philosophy starts with passive investing and we only use index-tracking ETFs in our portfolio, hand-selecting every fund based on cost, correlation, and liquidity. With our algorithm-based advice, every customer receives personalized allocation adapted for his or her investment goals.
¹Assumes quarterly rebalancing across a 12-fund portfolio for a total of 48 trades annually for DIY investors with an average fee of $8.50 per trade; ETF trading fees can typically range from $0 to $20 for DIY investors, according to Wall Street Journal. Trading fees for mutual funds can vary widely and may not always be disclosed. For RIAs, pricing plans vary and some advisors may pass on trading costs to their clients. Costs may vary by provider.
²More information about Betterment fund expenses can be viewed here. For other columns, we used the fund weighted average total expense ratio of ETFs (0.63%) and average for open-ended actively and passively managed funds (1.16%) found in the 2013 Lipper Quick Guide to OE Fund Expenses. The overwhelming majority of assets in the United States are invested in mutual funds, including funds under management with an advisor, which is why we used this expense ratio. With the exception of Betterment, all fund expenses are illustrative and are not specific to any of the listed companies Traditional Manager column.
³For Betterment ETFs, internal fund trading costs are calculated as the average tracking error of our portfolio, which would reflect decreases in NAV due to trading costs. For mutual fund fees, we used a study of funds’ annual expenditures of 1,758 domestic equity funds over 1995-2006 from Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance, by Roger Edelen, Richard Evans and Gregory Kadlec, Pg. 2.
4We used Betterment’s stated management fee of 0.25%, 0.40%, or 0.50%, depending on the plan you choose. We used a 0.99% management fee for advised portfolios, based on average fee provided in the PriceMetrix 2014 The State of Wealth Management 4th Annual Report, Pg. 5. Costs may vary by provider.