The Nickel Conundrum
A nickel is 75% copper and 25% nickel – raw materials that are worth approximately six cents. What’s more, the total manufacturing cost of a nickel is 11.2 cents. Crazy, right? The U.S. Treasury is paying more to produce a nickel than the nickel is actually worth.
On the other hand – at 92% copper, 8% nickel, and a small efficient size, a dime is manufactured for much less than the ten cents it is worth. Now that’s smart product design.
We recently had our own nickel conundrum at Betterment. We asked ourselves: how can we continue to build a product that works in the best interest of our customers? How can we design our business like the dime – while simultaneously avoiding nickeling our customers or getting nickeled ourselves?
In case you haven’t heard, we came up with a solution, and launched new pricing plans last week. We had a few key objectives in mind, and in the spirit of transparency (a guiding principle at Betterment), we want to share the thoughts and objectives of our new pricing structure with you:
1) Stay Accessible
We are committed to providing the best investing solution to the mass market, including the millions of Americans who don’t meet the minimums of a personal financial advisor, and the millions more who are outraged by the high fees they are handing over to their brokers.
At the same time, we have a fiduciary responsibility to ensure our customers are suitable, smart investors – taking on an appropriate level of risk, and able to manage the cost of investing with other financial commitments.
We designed our price structure so that Betterment would be the “No Brainer” solution for an investor with $5,000, $50,000, or $500,000. Each plan has been tailored to fit the needs of customers who would fall under these categories.
For example, customers with a portfolio over $100,000 may require some personal advice. While we believe that the Betterment portfolio is the most efficient portfolio for 95% of investors, we know that there are investors who should have less international exposure, or, more REIT, etc. The Best plan allows us to deliver this.
Similarly, customers just starting out need to be able to make a commitment to growth. Small balance account holders who can’t commit to invest $100 per month (about 3% of a $40,000 salary) may not be at a place where they can afford to invest. Paying off credit card debt, setting up an emergency fund, and living with a “balanced budget” are all “musts” before joining the investing arena.
2) Encourage Good Behavior
We tend to be our own worst enemy when managing our finances. It’s one reason Americans are not saving enough for retirement. Betterment is designed with behavioral biases in mind, and this includes helping our customers put saving on the radar.
Sometimes, we need pressure to do good things – and the $100 monthly automatic deposit requirement is designed to encourage good behavior for beginner investors. Over the coming months, we’ll be launching more tools and features to encourage good behavior and reward good behavior for all Betterment investors.
3) Win on price
Cost is incredibly important in investing, as high cost will only eat up your returns. A study by Morningstar found that low-cost funds outperformed high-cost funds in every single time period and data point tested. The difference is substantial. The Department of Labor found that for every 1% in additional fees, 28% of an account’s return is eroded over the long term. It’s simple: keeping costs low is the smart way to invest.
Our fee plans are as low as they come, while staying clear and simple. It’s why there’s no extra charge for trades and transfers. All the complexities and time-consuming tasks of a well-managed investment account – such as selecting a diversified portfolio, re-balancing, tax optimization, auto-deposit, and dollar cost averaging – are included. This suite of online services is unavailable anywhere else, and would cost significantly more at traditional investment firms.
4) Say No to Getting Nickled
Like any individual investor, Betterment has bills to pay, too… in the form of salaries, servers, office space, and marketing costs. Our new fee structure will enable us to grow, as we become the best investing solution for more and more (and more!) people.
We are creating a sustainable business and look forward to growing rapidly alongside our customers. With the lowest annual management fee in the managed account market, and zero charges on transfers and trades, you can be sure your investment won’t be nickled and dimed. And – I just can’t resist – an offering like that is no dime-a-dozen.
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