Betterment seeks to reflect the returns of the global economy while retaining efficiency and access to your money.
Originally published: April 30, 2010
Financial Blogger Felix Salmon expresses a great wish in his post In Search of an Everything Bagel—that one fund could replicate the returns of the global economy. Such a fund would give investors the hope of capturing the global rate of GDP growth – and being so diverse would reduce the risk of investing in any one sector or country.
It’s the old idea of a “market portfolio,” a conceptually ideal investment, and one that Betterment seeks to reflect while retaining efficiency and access to your money.
The Elusive Everything Bagel
Betterment’s stock market basket is not far off from the everything bagel. It is all US stocks, but US companies’ investments abroad mean that a US stock market index gives investors global exposure. And investing only in larger, more liquid US ETFs means that management fees and transaction costs are lower, which makes investing in Betterment a great way to capture the growth of the global economy.
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Betterment is the largest independent online financial advisor with more than $10 billion in assets under management. The service is designed to help increase customers’ long-term returns and lower taxes for retirement planning, building wealth, and other financial goals. Betterment takes advanced investment strategies and uses technology to deliver them to more than 270,000 customers across its three business lines: direct-to-consumer, Betterment for Advisors, and Betterment for Business. Learn more.
Jon Stein is the CEO and founder of Betterment. Passionate about making life better, and with his experience from his career of advising banks and brokers on risk and products, he founded Betterment in 2008. Jon is a graduate of Harvard University and Columbia Business School, and he holds Series 7, 24, 63, and is a CFA charterholder. His interests lie at the intersection of behavior, psychology, and economics. What excites him most about his work is making everyday activities and products more efficient, accessible, and easy to use.
You can contact Jon via email or follow on Twitter.
Over the years I’ve seen a bunch of clever schemes which use other people’s money to generate fees for advisors with no downside.
My 401k has been decimated by recent events but the so called fund managers are still happily taking their management fees with no downside for the impact on my future – they get reward without the risk.
I love the fact that you’re offering a transparent and predictable flat 0.9% on average balance but are you “invested with the investors” or invested in the fees? What’s the downside to betterment if an investor makes less than a 1% return in a year, or annually over ten?
The upside for you in a time of growth is that average balances will grow so the 0.9% slice will be bigger but is there anything you can do to address the other side of the coin?
I would *love* to pick up my 401k and my current stocks and have them managed by a single, trusted, partner who I know is as vested in me staying above water as I should be (but don’t have the skill, tools or inclimation for) :)
Anthony Schrauth on said:
Hi Offbeatmammal,
The 0.9% Betterment fee is meant to be transparent and fair, and covers all of the trades and transactions that a normal broker would charge you for individually. This system means that our incentives are aligned with yours because, as you’ve indicated, we make more money when you make more money. On the flip side, if the value of your account goes down, we still incur costs for maintaining your account and processing your trades and transactions, but bring in less revenue–thereby sharing in your pain.
Since our incentives are aligned and we want you to get higher returns, we empower you to get the best returns for you and your situation. By focusing you on the important decision of asset allocation, we allow you to dial into your own personal balance of risk and return–and you can change that allocation at any time without a fee if your risk appetite changes. In other words, you can always dial back your allocation if you believe the risk is too high. The key is to make sure you are picking an asset allocation that is aligned with your situation and goals, and not taking a short-term reactionary strategy, because from day-to-day the market moves up and down, but in the long term usually tends to go up.
In terms of you possibly making less than our fee, we have carefully selected ETFs in our portfolios that represent the broad stock market (which has historically returned ~9% annually) and Treasury Bonds (which have historically returned ~5% annually). These ETFs also pay out dividends, so even if the value of the securities themselves goes down, there is still a flow of income that should more than cover Betterment’s low fee. For example, if you had a 50%/50% allocation in Betterment’s portfolios in 2009, the dividend payout would have been ~2.5% post-tax.
Right now we are starting with standard investment accounts for people to invest the extra money that would normally be sitting idle at a bank. In the future we do plan on extending our simple investing platform to IRAs and 401(k)s.
I do agree that it seems like you have the best of all possible models – fair both ways, but also reflects that fact you need to remain in business to offer the service :)
It’s great to see you, Simple-Bank, Mint, CreditKarma and the like taking the established models and opening them up to the light … I can see the way I approach investing and finance in the future changing and I hope I’m not alone
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Over the years I’ve seen a bunch of clever schemes which use other people’s money to generate fees for advisors with no downside.
My 401k has been decimated by recent events but the so called fund managers are still happily taking their management fees with no downside for the impact on my future – they get reward without the risk.
I love the fact that you’re offering a transparent and predictable flat 0.9% on average balance but are you “invested with the investors” or invested in the fees? What’s the downside to betterment if an investor makes less than a 1% return in a year, or annually over ten?
The upside for you in a time of growth is that average balances will grow so the 0.9% slice will be bigger but is there anything you can do to address the other side of the coin?
I would *love* to pick up my 401k and my current stocks and have them managed by a single, trusted, partner who I know is as vested in me staying above water as I should be (but don’t have the skill, tools or inclimation for) :)
Hi Offbeatmammal,
The 0.9% Betterment fee is meant to be transparent and fair, and covers all of the trades and transactions that a normal broker would charge you for individually. This system means that our incentives are aligned with yours because, as you’ve indicated, we make more money when you make more money. On the flip side, if the value of your account goes down, we still incur costs for maintaining your account and processing your trades and transactions, but bring in less revenue–thereby sharing in your pain.
Since our incentives are aligned and we want you to get higher returns, we empower you to get the best returns for you and your situation. By focusing you on the important decision of asset allocation, we allow you to dial into your own personal balance of risk and return–and you can change that allocation at any time without a fee if your risk appetite changes. In other words, you can always dial back your allocation if you believe the risk is too high. The key is to make sure you are picking an asset allocation that is aligned with your situation and goals, and not taking a short-term reactionary strategy, because from day-to-day the market moves up and down, but in the long term usually tends to go up.
In terms of you possibly making less than our fee, we have carefully selected ETFs in our portfolios that represent the broad stock market (which has historically returned ~9% annually) and Treasury Bonds (which have historically returned ~5% annually). These ETFs also pay out dividends, so even if the value of the securities themselves goes down, there is still a flow of income that should more than cover Betterment’s low fee. For example, if you had a 50%/50% allocation in Betterment’s portfolios in 2009, the dividend payout would have been ~2.5% post-tax.
Right now we are starting with standard investment accounts for people to invest the extra money that would normally be sitting idle at a bank. In the future we do plan on extending our simple investing platform to IRAs and 401(k)s.
Thanks for your comments.
– Anthony
thanks Anthony,
I do agree that it seems like you have the best of all possible models – fair both ways, but also reflects that fact you need to remain in business to offer the service :)
It’s great to see you, Simple-Bank, Mint, CreditKarma and the like taking the established models and opening them up to the light … I can see the way I approach investing and finance in the future changing and I hope I’m not alone