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Feb 1, 2017 191 comments

Betterment Cranks up Features and Costs – is it Still Worthwhile?

met-museum

From my 2015 visit to check out Betterment’s operations in NYC (photo: museumhack)

Since 2014, I’ve been using the Betterment investing service for a growing portion of my own savings.  I funded an experimental account with $100,000, and have had a monthly auto-deposit adding in an additional $1000 per month since then. The results have been documented on a page I call The Betterment Experiment.

So far, the experience has been better than I had expected. The company’s behavior – both to me as a customer, and through their relationship with the public and the media has been solid and classy. And their already-good investment system has continued to advance. I joined for the automatic rebalancing of shares, but since then have been impressed by two more obscure features that are surprisingly effective:

  • The tax loss harvesting system, which has sliced several thousand dollars from my income tax bill so far. (Note – this feature is generally most useful only at higher income levels, and I got extra benefit from having other capital gains to offset)
  • Tax Coordinated Portfolio Allocation, which automatically shields more your of dividend-paying index funds in your IRA instead of your taxable account. I just enabled this last month and am enjoying watching the results.

For people actually saving for retirement, there’s also stuff like an impressive retirement guide system and customized advice, but these are less useful to me personally.  Because this blog’s readership includes many technical and DIY-everything people, I wanted the Betterment account to stand on its numbers alone, not just feelgood convenience features.

I calculated that the tax-related features were easily increasing my return by over 1% per year, which easily covered Betterment’s 0.15% annual management fee. I still see many criticisms* popping up around the internet, accusing me of being a “shill” for Betterment and that everyone should just  manually run a Three Fund Portfolio in Vanguard. But so far none of them have correctly accounted for these tax savings in their calculations – they underestimated TLH. It’s an easy oversight to make without holding a Betterment account yourself and watching the results.

As my positive feelings about the company grew, I continued to move more personal investments over to a second, private account at Betterment, including my old work IRA. As a result I now have about $500,000 with Betterment.

Logically, this was still only a partial commitment – the numbers worked out in favor of sending all my future investment dollars to Betterment, but I was still building trust in the company, so I decided to take it slowly. On top of that, my older investments (mostly with Vanguard), have gone way up in value since I made them in the early 2000s, so it would be tax-inefficient to sell them just to buy similar index funds through Betterment.

Then, They Dropped This Bomb

(Update: after writing this post, I had the opportunity to exchange several private emails with Betterment founder Jon Stein and other employees, and they were quite reassuring. He also posted a much better explanation of why they changed prices, here. So I have updated this section to reflect what I learned.)

On January 30th, I got a preliminary note from the company announcing that their fee structure was about to change. The original tiered price structure looked like this:

  • 0.35% on the accounts under $10,000 (with auto-deposit)
  • 0.25% on accounts $10,000 to $99,999
  • 0.15% on accounts over $100,000

They announced an upcoming change to a flat fee, with a cap

  • 0.25% on all accounts up to $2 million
  • Free management on the portion of your balance which exceeds $2 million

In other words, your fee is capped at $5,000 per year.

They also added personal consultation services called Betterment Plus and Betterment Premium for higher rates, and I have heard these are welcome services for many customers. But since I greatly prefer talking to computers rather than people when it comes to the subject of money,  we’re focusing on the robo-advisor service – now called Betterment Digital – here.

In practice, the two fee levels look like this. The first graph shows what happens on balances up to $1 million, while the second graph is just a zoomed out version showing up to $4 million. The new fee structure will cost significantly more for the wealthier readers of this blog – it only starts to save you money at around $3.3 million in investments.

betterment-new-fees

People with under $100,000 in their account will notice no difference. Those of us in the $100k-$2 million band will see a 66% increase in fees (starting on June 1st), then things even back out by $3.3 million.

In my situation (a $500,000 balance), the annual management fees jump from $750 to $1250 per year, an increase of $500.

How do I feel About This?

These days, I try to avoid outrage and instead think about the big picture. The price change brought up some questions:

  1. Why is the company increasing fees? Are they correcting a past mistake, having realized it’s hard to make a profit on 0.15%? Are they being opportunistic? Are they plumping up the company in preparation for sale?
  2. Is the service still a good value at for me 0.25%?
  3. Is there a risk that this will happen again? Investing large chunks of your life savings requires a huge amount of trust. In my opinion, this sudden price change was a violation of my trust – it sets a precedent and I wondered if it could happen at any time. Sure, you can always pull your money out at any time, but this is a hassle with potential tax consequences. Good investors leave money in place for decades and don’t want to be forced to move it around.

Question #1 is a philosophical one. I am rooting for Betterment and I like the people who work there. In general, I try to do business exclusively with companies that pass this test. And this makes me less of a customer and more of a partner.  I want my business partners to make money off of their customers, including me, because that’s what will keep them in business. Being a customer should never be an adversarial relationship.

After talking to Jon, I learned that the price increase was a necessary thing to remain a growing and sustainable business. Doing the math, they manage $6 billion, and at 0.15% they would only collect $9 million in annual income. Far too little to go around in a firm with 100 employees. Sure, they are winning new customers quickly, but that is a very slim margin at this stage. Jon said he would prefer to drop prices as the company grows large enough to allow it, but first we have to get there. He also said their goal is to become an independent, public company.

Question #2 is just a math question, and the answer is Yes. It is overwhelmingly clear that my Betterment account delivers more than 0.25% net annual improvement over trying to manually approximate its performance with Vanguard ETFs. Their software is incredibly good, and just keeps getting better. The talent level of the people there is insane**. 

Question #3 was the real stumper for me. This price increase came out of nowhere, and nobody asked me for my opinion – as a customer or as a long-time promoter who has sent thousands of other customers to Betterment. When I got the short advance warning, I spent the day emailing with the marketing department and even the founder, trying to talk them out of it, because I feel that it was placing the trust of customers at an incredible risk. From my email to their team:

” the single biggest weakness that Betterment has (which it is gradually overcoming), is trust […]When you raise prices on existing customers (and even on future customers in the middle of the customer acquisition stage) this trust is partially or completely shattered.

Investing millions of dollars over a lifetime requires a much more stable policy that reassures people over a period of multiple decades. The good news is that the profits are still there – one wealthy person may have the investments of one hundred or even one thousand beginner investors. But Betterment is still a brand-new company working on acquiring its first foothold of trust for larger, more conservative investors. Is this worth it?”

This is a human behavioral finance problem straight out of a textbook. As humans, we are subject to the cognitive bias called “Loss Aversion” – we fear and perceive the loss of what we currently have much more than we fear and perceive missed opportunities for much larger amounts of gain.

For example, which of the following two options would you prefer?

  • an anonymous vandal does $1000 of damage to your car in the parking lot at work, or
  • you car-commute uneventfully to work for a few months – but unknowingly miss the opportunity to ride your bike, which would improve your financial picture by much more than $1000?
Complaints on my Twitter feed about Betterment price change - click for larger

Complaints on my Twitter feed about Betterment price change – click for larger

That second option should be much more scary to every office worker, but it’s not. And yet Betterment has walked itself right into the same trap – subjecting the wealthier portion of its 200,000+ customers to loss aversion.

(Related Reading: here’s an earlier article about one of my favorite books of all times, called Predictably Irrational – it  teaches you about more of your own flaws in a very entertaining way.)

I feel that a much better business move for Betterment would have been to spend less money on developing new features, in order to be able to leave the existing price structure in place.

But given the current path, I now think the biggest problem was the way they communicated the price change. It was mentioned in passing as part of a cheerful “Look what’s new at Betterment!” email to customers. It’s the communication style we have come to expect from Verizon or Comcast, but not from a place as genuine and authentic as Betterment.

You could see the pain in the passionate essays that customers immediately sent to my email inbox this week, and in the responses to something I put on Twitter. One guy even started a petition on change.org in an attempt to communicate customer dissatisfaction.

The net result for me will probably be no change. I’ll leave the Betterment Experiment running, and continue to deposit the $1000 per month, because that’s exactly  what an experiment is for – I leave it running so we all get to watch the long-term results.

I still plan to transfer more into my private account over the next year, but I will make a point of reviewing the other robo-advisers and competing services from Wealthfront, Schwab, Vanguard, and WiseBanyan in order for this blog to be less Betterment-specific. My trust was shaken and then mostly reassured in this case, but I don’t want readers in this blog to follow in my footsteps without considering all the options independently.

An investment company making management fee increase is a very small deal in the grand scheme of things. But it is a big deal to me because I really try to keep my recommendations useful.

—

* To these critics I say “I respect your hardcore Vanguard chops but please try to separate Bogleheads ideology (which holds that anything not Vanguard is automatically Evil)  from the actual numbers. Beating the market is not a viable goal, but reducing account-holder mistakes and reducing taxes is much riper area to harvest. Betterment only has to accomplish this at an 0.25% annual rate to justify their fee. 

** Observe this white paper they published explaining the details of new Tax Coordinated portfolio.  They just operate on a higher technical plane than other companies.

Disclosure: Betterment’s real relationship to MMM – After I invested with them in 2014, I also joined their affiliate program as I do with any product I use and like (see my Affiliate policy). Then I got kicked out, because more recent SEC rules state that you cannot be an affiliate while also having a “testimonial” review.  I felt a review is useless if you can’t report on your own experience, so I decided to leave the program so I could leave my review up. No problem, of course – my goal is to never let affiliation affect my recommendations as there is plenty of money in life either way. Later, Betterment paid to have flat-rate advertising on this site, and that program may or may not continue  – this article might make me a less desirable advertising platform, and I didn’t check with anyone before publishing it.

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  • Fulltimefinance February 1, 2017, 11:54 am

    I don’t personally use betterment nor would I recommend them to someone that is really investment savvy. However for those who don’t really know what they are doing and need a guiding hand that fee can’t be beat. There is a break even point where the fee and tax write off cross so your experience in net dollars is not universal. Also in theory you can roll your own tax loss harvesting to offset. But those two items are contingent on you really being a stellar investor and willing to devote your time. For all else I’d say it’s a great service.

    Reply

    • Fiscally Free February 1, 2017, 12:32 pm

      I tend to agree. I only recommend the robo-investors for people who are very hands-off when it comes to investing. It also seems like the main benefit, tax loss harvesting, loses most of it’s appeal if you have little to no tax obligation, like most early retirees.

      Reply

    • Frugal Professor February 1, 2017, 6:21 pm

      Agreed entirely. As many of us know, the name of the game with investing is keeping costs low. 0.25% is a non-trivial expense which are added onto the underlying fund fees. My current portfolio’s cost is 0.058% in total fees through a combination of simple index funds. Tax lost harvesting was heralded as the big value-add by Betterment, but it’s so easy that a monkey can do it. Plus the benefits to doing so are capped at $3k/year (unless you have capital gains to offset). I honestly see no value added by Betterment. A 30 minute perusal of any personal finance blog makes their service completely irrelevant.

      Reply

      • American Fool February 8, 2017, 9:23 am

        I think the 30 minute perusal comment is only true if you are already financially savvy. There are far too many ratholes that a beginner can go down before they figure out what they are doing to recommend that approach for everyone. However, I agree that .25% is non-trivial.

        Reply

        • Frugal Professor February 9, 2017, 8:21 am

          You bring up a good point. However, let’s do the math really to quantify the maximum gains of TLH and compare them to the management fees charged by Betterment:

          Max tax loss harvesting amount per year: $3k.
          Assumed marginal tax rate (fed + state): 33.3%.
          Max annual benefit from TLH: $3k*33.3% = $1k.

          Fees incurred by 0.25% management fee: X*0.25%.

          Solve for X to break even on TLH benefit. X*0.25%=$1k.
          X = $400k.

          North of $400k in assets, any TLH benefit you would have gained is subsumed by the asset management penalty. It’s far better to do it yourself, and it’s simple. Step 0.) max out tax-deferred accounts before messing with taxable. Step 1.) Dollar cost average over time in taxable brokerages (buy at regular intervals over time). Step 2.) Occasionally sell losers and either: a.) sit on cash for 30 days and rebuy the losers to avoid the “wash sale” rule, or b.) use the cash to buy another fund that’s “not substantially equivalent’ (i.e. sell total US stock & buy total international). Step 3.) If your harvested loss exceeds $3k in a given year, you get to carry these losses forward indefinitely. That’s it. No magic there.

          There’s also no magic in Betterment’s algorithms for optimal portfolio management. It’s not difficult to buy the underlying index funds directly from Vanguard/Fidelity. It takes about 30 minutes per year to manage one’s portfolio manually. The existence of much of the financial services industry depends on perpetuating the myths that it’s too hard for a normal person to do. This is hogwash. If people don’t believe me, they can enjoy pissing away 2% in fees per year to their Edward Jones financial adviser.

          The benefits of TLH are actually overstated in the example above. All you’re doing in the process of selling an rebuying is essentially decreasing your cost-basis (what you paid for the stock). If I buy VTSAX at $100 on Jan 1 2017, sell VTSAX for $90 on Jun 1 2017, then rebuy VTSAX at $90 31 days after this, you still hold the same VTSAX fund. All you’ve done is achieved a tax break today (=min($10/share*#shares,$3,000)*Marginal tax rate) in exchange for higher taxes down the road when you go to sell VTSAX again. Higher taxes occur down the road because the capital gain is higher. Your cost basis is now $90, so the capital gain is (future price – $90) rather than (future price – $100).

          Reply

          • Dan February 9, 2017, 10:12 am

            “Step 1.) Dollar cost average over time in taxable brokerages (buy at regular intervals over time). Step 2.) Occasionally sell losers and either: a.) sit on cash for 30 days and rebuy the losers to avoid the “wash sale” rule…”

            Your comment points out how easy it is to trip up on the wash sale rule. The rule is you cannot buy for 30 days before & 30 days after a sale for a loss. If you are DCA’ing automatically, you have to be careful. Let’s say you have monthly autoinvest, you have to turn off November, December & January’s autoinvests and sell in December to be 100% sure that you are clear of the wash sale rule. If you are trying to harvest losses a couple times per year, you can see how it is not amenable to DCA’ing at regular intervals. Dividend reinvestments can also invoke the wash sale rule.

            I think people just assume they won’t make a mistake w.r.t. the wash sale rule but it has caught me twice in the past 26 years. In my industry, we call that operational risk meaning in theory it should work but in practice, the human element may screw things up. That’s one of the selling points with Betterment’s TLH algorithm.

            Reply

            • Frugal Professor February 9, 2017, 11:58 am

              Agreed Dan. Fair point. DCA at >2-month intervals would solve the problem, but I agree.

              But the economics of TLH are simply not that impressive at the end of the day. All you’re doing is getting a somewhat lower tax bill today (say $1k) in exchange for a higher tax bill in the future. Under the best case scenario the tax bill in the future is $0 (thanks to 0% taxes on LTCG), but the real limitation of TLH is the $3k cap. I agree it makes sense to do it if you have TLH opportunities, but it’s not going to make that big of a difference in wealth at the end of the day. What will make a big difference is lowering one’s investing costs and being tax savvy (maxing out 401k + employing a low turnover strategy in one’s taxable account where the ideal holding period is decades long).

            • Dan February 9, 2017, 12:34 pm

              The thing with DCA & TLH is you don’t know the future. You deposit your regularly scheduled investment on February 1 and the market tanks on February 2. You have to wait until March 3 until you can sell & avoid wash sale rule. By then the market may have recovered. Betterment should be able to take advantage of these situations.

              I agree, $3000 of TLH is not $3000 of tax savings. My plan was to let Betterment rack up TLH while I am working. Then transfer the account to Vanguard when I retire. As I sell off the ETFs to fund my retirement, the TLH offsets the capital gains and I’m essentially getting “tax free” capital gains in retirement. The general plan was to carryover the TLH until I start selling off assets..

    • Stockbeard February 2, 2017, 12:41 pm

      I’m surprised at how low the fees actually are. Having talked to one of their competitors, Personal Capital, the fee was much closer to 1%. o.25% is more expensive than low cost ETFs at Schwab or Vanguard, but it’s still a very reasonable price. How comes Personal Capital is that much more expensive than Betterment for a similar service?

      Reply

      • Inga Chira, PhD, CFP February 5, 2017, 7:19 pm

        Personal Capital and Betterment do not have the same investment philosophy. For full disclosure, I did go through the Personal Capital “financial plan” about 2 years ago and it was a complete joke (I am a financial planner and am comparing their plan to the ones I prepare for my clients). The culmination of the plan was “give us your money to manage for 1% and we are going to split them evenly among 10 sectors.”
        I also use Betterment Institutional for some of my clients and for my own investments and I am a big fan for many reasons. The institutional side has always been 0.25% regardless of account size. Maybe between those fees and the Wealthfront fees, the change in Betterment pricing became nothing else but a fee alignment…. but I am only speculating on that. I have no idea.

        Reply

    • High Fees February 2, 2017, 1:33 pm

      Total Fees (including underlying funds):

      Totally automated Betterment: 0.41% fee
      Totally automated Vanguard LifeStrategy/TargetRetirement: 0.15% fee.
      Totally automated WiseBanyan: 0.12% fee + max $20 a month if you want TaxLossHarvesting.

      A 3 Fund Portfolio you look at once every 5 years: 0.07% fee.

      Reply

      • Cynthia Rose February 2, 2017, 2:37 pm

        I just moved a chunk of money to Betterment which I chose over Wealthfront because of the reduced fees over $100K. Now the fees are the same. Maybe this entered into their decision to raise the fees.

        Reply

        • TaxProfMom February 2, 2017, 4:01 pm

          Cynthia, why do you have someone else manage your long-term investments? If you are saving for a financial goal within the next five years, that money should not be in equities, period. If not, then you’re looking at a long-run investment. Given that you can buy a highly diversified index-based ETF at any budget brokerage like Merrill Edge, ETrade, and the like – why are you paying an addition quarter point?

          You mentioned fees for over $100k. I ran an easy excel scenario – an inexpensive broad based ETF costs about .12% on average with minimal capital gains and interest flowing through as taxable income. $100k initial payment, $1000/month contribution. Then I added the quarter point you’re paying for a nice website, app, and call center (that said, I have an eTrade account, they have a nice website, app, and call center, and I don’t pay them a thing beyond an initial $10 commission on the buy and $10 when I sell. Guess how much under that scenario (10 years, 12% return, 3% inflation, $1000/month, $100,000 start, .12% fee, .25% betterment on top of that)? $8,627. 2% of your ending balance of around $434k (inflation adjusted). Why don’t you pay me, or your best friend, or just take $8,627 out of the bank and throw it in Times Square? It might not seem much, but that’s 80% of the average housing cost for a family in the US. , or 75% of the average annual food bill for a family of 4. With $8k, I could take my entire family to Europe, or spend 2 weeks in a beautiful house in Maui.

          People are generally afraid to manage their own money. Tax loss harvesting? Not necessary when you invest in a good index ETF. Targeted fund for retirement? If you want, spend $25 for the latest version of Random Walk Down Wall Street and I can tell you, saving for retirement is easy. There’s no need for the cap gains or interest generated by an age-managed fund.

          Better yet, spend $1k-2k now for a good, fee-based financial planner who will show you how. I can guarantee that you will feel more confident, more in control, and more knowledgeable if you take control of your money. Don’t pay someone else to do what you can – pay someone to show you how to do it.

          I’m a tax accounting & financial planning professor at a top-25 public university, and it is surprising to me that people who take my graduate class – even those who are getting their masters in accounting! – are afraid to take the reins. Start by taking 10% of your investment and monthly contributions, and plop it in to a low cost ETF. Morningstar will show you many.

          Happy at year end? Then change it to 30%. Then 70%. Then get rid of the crud that they are feeding you at this site and others. I’m not a Boglehead, I’m not an anything head. My mom did not go to college, she had no training, and there were no ETFs in her day. But she saved, and she invested. And now my father (she died 20+ years ago) is worth over $2m. He traveled, he toured, he spent absurd amounts of money on his hobbies and now I can have in-home care for him around the clock and pay $24,000 a month for his care. Because his investments, tiny pension, and social security cover nearly all of it. He took control. She took control. They read a little, but they weren’t active investors. They put money in, added every month, saved when they could, and went from extraordinary poverty to incredible wealth.

          You do not need a computer to tell you what you already know! Save. Invest and if you don’t know how, ask someone to teach you. But don’t give anyone a % of your money. No way, no how. You have the knowledge – just take back the power!

          Betterment, Vanguard LifeStrategy, WiseBanyan, Wealthfront are all crap. Take a class at a good university (heck, take mine) and pay $2500. Buy a few books (or audio books) for $100. Ask your accountant for a good, conservative, fee-based financial planner and pay about $1000 (be wary of cheap financial planners or those who have their Series 7 – they’re trying to sell you their stuff). But do it, take control – it isn’t hard, it doesn’t take more than an ANNUAL review, and I don’t rebalance crap. And yes, on average, I see a 9% ROR after inflation. Long-term, that is. Short term, buy some munis or a CD.

          Reply

          • Ebeard February 7, 2017, 6:04 am

            +1 TaxProfMom. Be careful of your increased risk without rebalancing.

            Reply

          • ronald February 15, 2017, 4:33 am

            I think you proved why people go for robo advisors with your post. The average person can’t deal with this amount of numbers and detail. And the average person isn’t dealing with 100K initial investment nor does that person trust a financial advisor or have a friend he can easily pass of management of his money to. The average person doesn’t assume a 12% return (“10 years, 12% return, 3% inflation, $1000/month, $100,000 start …”).

            Betterment is for people to get initiated into putting money into investments that grow over time rather than keeping money sitting in bank accounts. IMHO.

            If someone has $100,000 and ends up with over $400,000 I don’t think they’re going to worry about the betterment fee. I think they’re going to say betterment made it easy for me to get into the market and not worry about all the details. Even if those details are supposedly only 15 minutes a year.

            Reply

        • Dividend Growth Investor February 3, 2017, 10:09 am

          I personally do not expect to use a roboadvisor. I build my own diversified dividend paying portfolios from scratch. My only expenses are the one-time small brokerage commissions I pay. After that, I pay nothing,as long as I hold. As a buy and hold investor, my holing period is in the decades.

          For people who are not comfortable investing on their however, a Robo Advisor may be a decent option.

          Reply

      • James Fenley February 16, 2017, 4:15 pm

        Crazy to see all the new comments on this post! Discussions happening on MMM! Thanks for breaking it down into those three. Makes me feel pretty good about my choice with WiseBanyan! TBH I was looking at WiseBanyan vs Vanguard beforehand. Like I said, I’m not going to post my own referral link, but would encourage everyone who’s thinking about the fees to look at https://wisebanyan.com

        Reply

  • Jeff February 1, 2017, 11:55 am

    I think your transparency is awesome. I would be in the $5,000 a year in payments with my portfolio and it is hard to know if I would be making an extra $10,000 or more that would make up for the fees.

    Reply

    • Jackson February 1, 2017, 12:56 pm

      I agree. You have to compute your return net of fees. Which you obviously know, but I wish I’d known more sbout fees – sooner- when I was getting up to speed on investment basics.

      Reply

    • sig606 February 1, 2017, 1:17 pm

      I second your comment on MMM’s transparency. His disclosure of affiliation at the end of the article just reinforces his point about building trust in a company. Kudos to him for the dog food.

      Reply

  • Mr FOB February 1, 2017, 11:57 am

    It would have been fair to give an option to get more features at a higher rate next to keeping the current service available at an unchanged rate; it is indeed a shame to almost double fees for accounts >$100.000 without really adding extra value.

    Reply

  • David February 1, 2017, 11:59 am

    I still haven’t pulled the trigger on going with Betterment. I had a large sum of money come in recently and decided with Vanguard because I was going into the very low income stage where TLH I felt would be useless, unless I end up making more money than expected.

    I enjoy the honesty that MMM gives, and the insights into how it is working out, and his transparency. Perhaps in the future I may come around to them, but for now I’m sticking with my original approach.

    Reply

  • PoF February 1, 2017, 12:02 pm

    It smells like a bait and switch, although that would imply that the rate increase was planned all along, which I would doubt.

    To me, the fees weren’t worth it before the increase, and I am curious as to how you were able to save $7,000 on your 2015 taxes. You can only deduct $3,000 per year in ordinary income from tax loss harvesting, and you cannot use the losses to offset dividends. Unless you sold funds with big gains (~30,000 in gains) and offset them completely with tax loss harvesting, it would be tough to get to $7,000 in savings.

    Without the aid of a robo-advisor, I took nearly $40,000 in losses last year by tax loss harvesting, but I only expect to save about $1,400 on my 2016 taxes as a result, and will carry over $37,000 in losses for future years. Perhaps the $7,000 is accounting for future ordinary income deductions.

    The good news for Betterment customers that want out is that the ETFs can be transferred “in kind” to a Vanguard account, and do not have to be sold, so those who choose to leave can do so without tax consequences.

    Cheers! and thank you for an honest assessment,
    -PoF

    Reply

    • The Wealthy Accountant February 1, 2017, 1:10 pm

      I will publish how this happened for MMM’s approval before publishing. I will also include other issues to consider. It will take me a day to get this done. Stay tuned.

      Reply

      • PoF February 1, 2017, 1:40 pm

        Thank you, TWA. I am genuinely curious. If there’s a way to get more for my TLH efforts, I’m all ears.

        Reply

    • Mr. Money Mustache February 1, 2017, 2:18 pm

      Also, remember that even without my own 2015 tax situation (lots of capital gains because I sold off a rental house), $3000 per year is WAY more than I was paying in Betterment fees ($750).

      Reply

      • PoF February 1, 2017, 6:16 pm

        Aaaahhh, yes. Selling a rental house — that makes sense. I didn’t think you’d be selling mutual funds to take capital gains in 2015.

        In 2015, I sold a rental house, which was once our dream house that we had built and lived in for several years. Took a huge loss, but the loss offset quite a large chunk of ordinary income. The house was worth quite a bit less than it was when we started renting it out, as the only hospital in town went bankrupt months laater. The “ordinary loss,” while actually quite extraordinary, was our silver lining.

        Cheers!
        -PoF

        Reply

      • Jibba February 1, 2017, 7:52 pm

        Isn’t the $3,000 capital loss a “deduction” rather than a credit? Meaning $3,000 of losses reduces income by that amount, and therefore the tax benefit is your marginal tax rate’s worth of the deduction. $3,000 at 25% tax rate for instance is exactly $750.

        Reply

        • Brian February 1, 2017, 11:02 pm

          That’s an excellent point. You really do need to be in higher tax brackets to make TLH work in a really positive way.

          GoCurryCracker has my favorite article arguing against Betterment:

          http://www.gocurrycracker.com/why-betterment-has-zero-of-our-dollars/

          Reply

          • The Wealthy Accountant February 2, 2017, 5:42 am

            You are correct, Jibba. A deduction’s value is based on the tax rate applied to that income. A credit is a dollar for dollar value.

            Brian, I agree 100%. The GoCurryCracker article is spot on and I highly recommend it. There are a few things they didn’t touch on I will in my blog post out shortly.

            Reply

          • Kainne February 3, 2017, 8:29 am

            Except now GoCurryCracker has an update because they are an affiliate marketer. “GCC now has an affiliate relationship with Betterment. If you sign up for their services with this link, we will receive a commission. Thank you.” They don’t recommend it but you can sign up here .

            Reply

        • Concerned Reader February 2, 2017, 1:39 pm

          That’s right. And the Betterment fees will continue every year (forever), rising with the account balance, while the Tax Loss Harvesting is a temporary benefit. On average all TLH activity stops on any particular deposit after about a year, and if he sold right now, he’d owe an extra $7,000 in taxes.

          Reply

    • Bob R February 2, 2017, 12:47 am

      “I am curious as to how you were able to save $7,000 on your 2015 taxes.” That’s the very first thing that struck me when reading the review. Thanks for asking, and I look forward to TWA’s, or maybe even MMM’s reply. I have 250K accounts in both Betterment and Schwab IP, both taxable and both created to run a comparison, with funds deposited at the same time and with the same asset allocation, except of course that Schwab keeps some in cash. SIP has outperformed Betterment, since inception, by nearly 2%, and of course no fees, though their fundamentals weighted ETF’s have higher ER’s. The bulk of my assets are self-managed, in taxable, traditional IRA and Roth accounts, all using passive indexing and all achieved better results than either robo. I was waiting for a reason to withdraw from Betterment, and this fee hike seems as good a reason as any.

      Reply

    • The Wealthy Accountant February 2, 2017, 8:09 am

      A few disclosures before I comment. First, I am Pete’s tax accountant. My comments have been reviewed by Pete before posting and cut for brevity – more detail on my Wealthy Accountant blog.

      First off, the early version of this article had an incorrect estimate of saving $7,000 on his 2015 taxes due to tax-loss harvesting. It was an overestimate due to tax brackets and the fact that some of those savings were in 2014 and 2016. He has since fixed this in the post.

      Many investors will see the same thing: the long-term capital gain rate is 15%, so if you use Betterment TLH losses to offset this type of gain, your benefits are not as great as when offsetting short-term losses or ordinary income.

      The results in the early years at Betterment and similar tax-loss harvesting programs are similar to Pete’s experience. Once the basis declines (and depending on market conditions) the tax-loss benefits also decline.

      Outside other capital gains to offset, you are only allowed a deduction of up to $3,000 per year against other income. This $3,000 offsets income at ordinary rates, as high as 39.6%, without considering ACA taxes of up to 3.8%. With tax-loss harvesting you are getting an ordinary income tax rate deduction and when you sell pay the lower (usually) LTCG rate. This is why I frequently recommend Betterment.

      Once you retire, tax loss harvesting is less valuable. In a high tax bracket the losses have value. In retirement you probably have less taxable income as you only get taxed for what you withdraw from retirement accounts and index fund distributions. This approximates your spending, which Mustachians keep low. Tax-losses are worthless in these low tax brackets. You want to gain harvest in these low brackets as the LTCG rate is zero! All those harvested losses now tend to hurt you.

      Finally, if you are using Betterment and have a retirement account outside Betterment and are adding funds to, you might have a wash sale and not even know it. In an audit you can lose the entire value of the wash sale without any chance of recovery; you, in effect, get double taxed.

      This is why I do not have an account at Betterment. I do recommend Betterment to high tax bracket clients, but in the back of my mind always consider the endgame when they retire early. More in my blog post Friday or this weekend.

      Reply

      • Brian February 2, 2017, 9:21 am

        Thanks for that thorough explanation, especially the key point about tax-loss harvesting having to apply to capital gains first. That important bit doesn’t always work its way into reviews of Betterment.

        Reply

      • Rich Schmidt February 2, 2017, 9:46 am

        The wash sale rule is why I don’t use TLH at Betterment. We have Roth IRAs and a taxable account at Vanguard that we contribute to monthly. So TLH isn’t an option for us.

        I don’t use Betterment for retirement or major savings/investing. I use it for targeted short/mid-term savings for specific things like a future car purchase or vacation or home renovation. I used to use ING Direct / CapitalOne 360 for these, because it was simple to have several named accounts that earned a little interest, to have money transferred from our main checking account monthly, etc. Now I do the same with Betterment, with a 50/50 stock/bond mix, figuring that the odds are good that I’ll end up with higher returns than I would leaving them in a savings account. So far, so good. And I haven’t seen a better option for it.

        (I’d be willing to throw these into Vanguard if they made it simpler to have separate accounts for specific savings goals. But I haven’t found that yet, if it exists.)

        Reply

    • Scrapper July 26, 2018, 12:49 pm

      For any current or prospective Betterment customers, I suggest you review the following post in the MMM forums:
      https://forum.mrmoneymustache.com/investor-alley/in-kind-asset-transfer-out-of-betterment-nightmare/

      Betterment is holding their customers hostage by making it very difficult to transfer assets in-kind to another broker. By comparison, Wealthfront, their direct competitor, makes it EASY to move assets out in-kind. Please do not support Betterment’s business practices.

      Please read and comment on the forum post if you disagree with any of the above.

      Reply

  • James Fenley February 1, 2017, 12:04 pm

    Thanks for the update MMM! I’ve been using WiseBanyan for the last year and am a big fan of what they’re doing. Similar, but it’s free and I think their app is great. How does WiseBanyan free model now compare to Betterement especially with Betterment’s price increase?

    I won’t include my referral code, but here’s their website if anyone wants to compare themselves: https://wisebanyan.com

    Reply

  • Jones February 1, 2017, 12:06 pm

    I am using both Betterment and a personal financial adviser. My adviser has cautioned me that most of the ETFs only have a limited amount of actual stock backing them up – he said about 20%. The rest is held in some form of a derivative structure. Do you know if this is correct?

    Reply

    • LuckyPennyAcres February 2, 2017, 8:41 am

      Some ETFs are primarily “synthetic ETFs” meaning they use swaps and other derivatives as their primary investments. Most ETFs in the US are actually “physical ETFs” meaning they actually purchase the underlying stock.

      Here is a link to a Vanguard site with a brief explanation of the difference:
      https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcenter/article/ETF_PhysicalSynthetic

      I believe the specifics for each ETF should be disclosed in its prospectus and other public reports.

      Reply

    • DickJones February 3, 2017, 5:16 pm

      Your financial advisor fears Betterment, and rightly so. He needs you to fear it too, otherwise you might start to scrutinize his fat commissions that allow him to live the sweet life on your dime.

      Reply

  • Andrew February 1, 2017, 12:09 pm

    MMM I too was annoyed and running my Betterment account as an experiment and has turned into a tax loss harvesting machine. I emailed the founder Jon as well because a 67% increase is ridiculous. You should tell them you will tell everybody who invested with them to redeem. Thanks for the post.

    Reply

  • Max Your Freedom February 1, 2017, 12:10 pm

    I opened an account with Betterment last year but haven’t funded it yet. I can confirm that a change like this makes me think twice about funding it. I agree the .25% fee may stil be justifiable but at this point it’s more about being potentially held hostage in the future.

    Reply

  • Andrew Jackedson February 1, 2017, 12:13 pm

    Taxes should not be a consideration when moving accounts, as you should be able to move them “in-kind”, thus not having to sell them before a transfer to a different institution. In taxable accounts, Betterment will transfer out “in-kind” (according to their website).

    Reply

    • TexasCPA February 1, 2017, 2:35 pm

      This is true, please update the article so folks aren’t unduly scared to move their money from place to place. No need to sell and trigger gains/losses to move your investments.

      Reply

    • Mr. Money Mustache February 1, 2017, 4:08 pm

      Thanks Andrew, that was a mistake on my part – I corrected the article to explain that detail (which makes me feel better about future withdrawals as well).

      Reply

      • ANH February 27, 2017, 8:06 am

        Word of warning for everyone. I was in the middle of moving my money from Vanguard to Betterment when the new pricing structure came out. I was originally excited to take advantage of the lowest tier of pricing as well as getting some in person support that would be offered at that level. Once the announcement came out I tried to stop the transfer to no avail. I then initiated an in-kind transfer from Betterment to Vanguard. First, you have to get Medallion signature guarantees at a brick and mortar bank, annoying, but only an hour lost. Then you have to snail mail the forms to Vanguard for them to kick off the transfer. Weeks later Betterment liquidated my funds, rejected Vanguard’s in-kind transfer, and I’m now waiting for Betterment to snail mail the funds to Vanguard. Might be my error, Vanguard’s error or Betterment being difficult, but my assets have been out of the market for 2 weeks with probably another 1-2 before Vanguard gets them. Lesson learned, stay with Vanguard.

        Reply

  • jon February 1, 2017, 12:15 pm

    I’ve actually switched from Betterment to Wisebanyan many many months ago. They don’t charge any fees, unless you want customized portfolio management solutions (surely this can change at any time like betterment). The only fees you pay are the ETF fees, which are mostly cheap vanguard funds.

    So far I’m pretty happy with the service. You still get portfolio rebalancing and TLH but who knows how if this biz model is sustainable. Maybe they will change like Betterment did.

    Reply

    • Lala February 5, 2017, 5:28 pm

      Unfortunately there’s no way for WiseBanyan to make money under the current pricing structure. They’ll either raise prices or shut down when their VC money runs out.

      Reply

    • Michael March 24, 2017, 7:04 pm

      Jon,

      I am thinking about transferring my funds from Betterment to Wisebanyan. Were you able to transfer in kind? I have a mix of Vanguard, Schwab, iShares, etc… currently in my Betterment account.

      Reply

  • afox February 1, 2017, 12:16 pm

    No doubt betterment won’t like this story just as our president doesn’t like “the media” . As the quiet rollout of the increase was probably designed to fly below the radar of unsuspecting customers MMM is doing a service to his readers by highlighting these changes. What one does with this information is upto them. Thank you MMM for your continued coverage of low fee options for investing.

    Reply

  • Ryan Langewisch February 1, 2017, 12:19 pm

    I think that if they were going to do the price increase, they would have been a whole lot better off waiting and releasing some of the new features simultaneously so it at least felt like the increase was justified. It is definitely disappointing when you are basing long-term projections off of the current fee structure, but I still feel that I will keep my money there for the time being. I do wish they had delivered the news a little better… burying it inside an email that sounded like good news and attributing the main factor for the change to simplifying an already simple pricing model was really not cool.

    Reply

  • Jackson February 1, 2017, 12:26 pm

    Betterment’s timimg seems particularly unfortunate and ll advised, , coming in the wake of an unusually stressful election year, as well as an extremely turbulent time after Election Day .. Many people I know, whether wealthy or not, are already so jittery about the market that they are reacting emotionally and retreating from their usual investment plan, – even if they’ve stayed the course for years.

    So their trust was probably already being greater tested even before the fee change. How will Betterment’s decision further erode trust? I do know something about this because a pre-tax employer retirement plan, one that that we have had for many years and with a relatively high guaranteed return, suddenly raised fees while lowering the guaranteed return.

    To say reaction was extreme would a great understatement. Even though Betterment does not guarantee returns, I think it is fair to say that their customers judge the company based on returns, especially if those returns are below comparable benchmarks..

    I assume you agree that staying the course, sticking to a solid and historically solid plan when investing has- so far- gotten better returns over time than buying and selling based on emotions. Also, timing the market is extremely difficult, even for professional advisors. .

    Even those with plenty of money to imvest want to save as much as possible on fees. While also ( hopefully ) getting a good return . Books like The Millionaire Next Door stress this point.

    Finally ( and this analoghy may be a stretch) look what happened when Netfix raised their fees. Customer reactions were so negative that they were forced to reverse the decision.

    Reply

    • Kien Han February 1, 2017, 2:15 pm

      I am actually okay with Netflix increasing $1 now and then since it does not scale with my wealth like an investment service does.

      Reply

      • Jackson February 3, 2017, 2:21 pm

        Yeah, it want the best analogy on my part

        Reply

  • Fiscally Free February 1, 2017, 12:27 pm

    I can definitely appreciate the simplification of their pricing structure, but they should have made sure none of their existing customers would have their fees increased. They should also implement a policy that promises no customer will ever have their fees increased.

    Do they not understand the concept of being “grandfathered in?”

    Reply

    • Lala February 5, 2017, 5:52 pm

      My speculation is that they simply couldn’t afford to grandfather existing accounts. By MMM’s estimates, their current revenue is only $9m, not enough to pay 100 employees. They also have very high cost of customer acquisition (expensive podcast ads, etc).
      They don’t have the scale and existing customer base that Schwab and Vanguard has. Honestly they should just merge with WealthFront to better compete with the big boys.

      Reply

  • Blake February 1, 2017, 12:27 pm

    A few thoughts:

    -Wealthfront use to offer 25k managed for free and now does 10k. But they grandfathered those that invested with them initially. I worked a bank in college and saw accounts that had been grandfathered from the 80s. The win-win scenario would be for Betterment to grandfather those of us that entrusted our money with them early. Many of their 100k+ investors have probably also referred friends (I have).

    -Betterment has mentioned on Twitter (which may not be company’s official stance) that fees went up because all prices go up with inflation. But investment fees that are % based don’t get basis points increases with inflation since inflation increases the current market value of any portfolio, with that increase resulting in more fees for Betterment.

    -For those who decide to move to Wealthfront, they also do everything possible to minimize tax consequences of moving a taxable account: https://blog.wealthfront.com/introducing-tax-minimized-brokerage-account-transfers/. Betterment does not do this for new customers.

    -MMM, I’d love to see how you compare Wealthfront to Betterment now. WF is technically more affordable than Betterment where they manage the first 10K. For those of us that have been advocating to friends/fam, they manage 5k additionally for free indefinitely when you refer someone. They also rebalance and harvest losses. Plus one feature I see that gives them a leg up is Direct Indexing, which I have read mixed takes on. It’d be great to get your thoughts on the differences between the two companies now.

    -MMM, finally thank you for writing this up. We know that you have influence with the folks at Betterment, and while your response was measured (as it should be), I hope you’ll continue to be a strong voice for your readers, publicy and privately. Many of us are not the type to protest too much, and perhaps companies like Betterment (or any other) can quickly discount our singular opinions and deem us collateral damage on their hunt to greater profits…so your help in being a voice is not only needed but appreciated.

    Reply

    • MrWoW February 1, 2017, 7:02 pm

      I use wealthfront. I like it. I’ve toyed with doing it on my own vs staying vs betterment. The direct indexing is nice as you lose the fund fees for a substantial portion of your portfolio. But really they’re pretty much the same. You could do it on your own fairly easily. But like MMM said, I’d rather spend my time doing something other than tax loss harvesting. The .25% isn’t awful especially with a couple referrals under my belt. And I think the savings from losses more than make up for it at my account level. Once it grows, I’ll have to reassess.

      Reply

    • Mr. Money Mustache February 2, 2017, 1:58 pm

      Hey Blake,

      I searched for that alleged Twitter comment about fees and inflation, but I couldn’t find it.

      It would be laughably wrong, of course, because the underlying value of the index funds would more than cover Betterment for inflation. Plus, the price of technology-driven services goes down over time, not up. Plus, as a software-driven company grows, the price they need to charge each user drops, because the same software can serve more people.

      If it was part of a tweet at one point, it was probably made by a junior person not well-versed in that bit of economics, just trying to do damage control. And if it did exist, hopefully it is rightfully deleted at this point.

      Reply

      • Blake February 2, 2017, 8:45 pm

        Agreed that it was probably a mistaken tweet and tried to be fair to the company overall in my original post that it may not be official position.

        I’ve run customer-facing teams and it’s tough to communicate and ensure good messaging makes all the way down.

        I did find this interesting though today from their post on the fee increases:

        “Our business is built on delivering high-value services at a low cost. The pricing model we’ve had to date has supported the new features we’ve built over the years: Tax-Coordinated Portfolio™, Tax Loss Harvesting+™, RetireGuide™, better advice through external accounts, automated rebalancing, and more. ”

        So they say that the old pricing actually supported all the features that we all want. In the next paragraph they go on to say that it’s not enough:

        “All of these features are designed to get you higher expected returns, but they also increase our trading and maintenance costs. In order to cover these costs, we made the decision to update our pricing to a flat rate of 0.25% for the Digital plan. ”

        Not trying to be too nit-picky, but there is definitely a vibe of doublespeak going on. It’s hard to explain why you are going to charge customers more, but for some reason with the announcement and now this, they bury direct communication and bad news later instead of owning it earlier.

        Reply

  • Jane February 1, 2017, 12:28 pm

    After I learned about robo investments last year I did research on bettrement, wealth front, and wisebanyan. I used to use mint. Some of my research was reading your blog so thank you. I endes up choosing wisebanyan because I liked that they were mission driven. I think they all are doing good things. Also my friend had heard of wisebanyan and betterment. Now betterment raised their prices by so much! Thank you for writing about it so quickly and keeping us updated. I’m glad I went with wisebanyan. I’d encourage anyone looking to start now to check them out instead too.

    Reply

  • Kevin February 1, 2017, 12:32 pm

    Betterment lost all of my goodwill yesterday. It feels like a bait and switch, and now I have to do some backtracking with all the people who I’ve recommended this service to and who trust my judgement. They have a great product but I think they are overestimating their lead. Others will catch up, and then fees will be a race to the bottom.

    I transferred all of my accounts over a year ago and have scheduled deposits on. After 1 year of having TLH+ on, I’ve harvested 0 losses. My hope was that TLH would offset the difference between just buying Vanguard and afford me some extra convenience. For whatever reason, it just didn’t work out for me.

    Betterment opened a pretty massive door and I’m going to be actively looking to see who steps up. I have until June to decide where my money goes.

    Reply

  • Divingforcoins February 1, 2017, 12:35 pm

    If they foresee massive growth, and they know the economics don’t work with the current fee structure, it makes sense to act now. Ammending the pricing when AuM is 100x larger would be much more difficult

    Reply

  • Graeme Falco February 1, 2017, 12:37 pm

    MMM, you realize you can do TLH yourself right?

    For someone to speaks a lot about DIY home repair, biking, etc, it seems REALLY odd that you are against DIY tax-loss harvesting.

    Reply

    • Mr. Money Mustache February 1, 2017, 1:10 pm

      Yes! You are right in theory.. but the way Betterment does TLH algorithmically is several times more efficient than what I could do with some buy/sell orders, even in a brokerage account with Vanguard ETFs. They do stuff rapidly on an intra-day basis, and you KNOW I am not looking at the stock market every day.

      Equally important is what you enjoy doing: managing investments is necessarily an indoor, sedentary activity. I already have a surplus of those in my life, so I’d rather outsource it in order to do the other physical/body-based activities. Even though they pay less on a dollars-per-hour basis, they pay more in life-enjoyment-per-hour.

      Reply

      • Graeme Falco February 1, 2017, 2:37 pm

        “but the way Betterment does TLH algorithmically is several times more efficient than what I could do with some buy/sell orders”

        Perhaps. It would be good to see it quantified. I got several thousand in tax losses last year by only doing a few hours of TLH. Worth it… I probably got like 80% of the tax losses that betterment would get for only a few hours of work.

        Reply

        • Jeremy February 2, 2017, 9:13 am

          Can you elaborate on how to do this? I’m intrigued on how this could be down on a daily basis with a handful of ETF funds (stocks, bonds, emerging markets, dividends, etc.) in an automated fashion

          Reply

      • seattlecyclone February 1, 2017, 8:44 pm

        Sure, Betterment looks into tax-loss harvesting opportunities several times more frequently than a human would, but that doesn’t make the performance several times better. You’ll do almost as well if you just happen to check for unrealized losses to harvest once or twice a year when your friends are freaking out about the stock market. There are diminishing returns to checking more frequently. You might harvest a bit closer to the bottom this way, but this difference isn’t going to make up for the 0.25% fee all on its own, especially if you have enough invested that your Betterment fees are more than the maximum benefit from harvesting losses ($3,000 * your tax rate).

        Paying 0.25% of your money each year to do a few maneuvers that you can do almost as well yourself doesn’t exactly strike me as the epitome of badassity. But when you’re retired and your money has grown to much more than you need, you can certainly afford a little luxury once in a while if that’s what makes you happiest.

        Reply

      • earlyretirementnow February 6, 2017, 9:20 pm

        “but the way Betterment does TLH algorithmically is several times more efficient than what I could do with some buy/sell orders”

        That’s a myth. In fact, you could do much better than Betterment because they have only exactly 2 ETFs per asset class that they use to do the TLH.
        I can (theoretically) do the TLH much more frequently because for most major asset classes I have more than 2 ETFs (usually 4-5) that I can rotate in and out. Betterment has to wait 30 days before switching back between the 2 ETFs to avoid the wash sales.

        Reply

  • Pablo February 1, 2017, 12:40 pm

    My co-worker just told me about this post becaues he knows I read MMM too. I also use Vanguard. And I also use a robo-adivsor. I also put money away every chance I get, so I might be a pretty aggressive saver. I’ve been reading this blog for a little while now, and love that you’re always posting timely info. Like this post that I didn’t even know about! But I have noticed that you only post about Betterment. I know you have the disclaimer at the bottom – which I really appreciate, but I feel like even this post is a little biased. Betterment just raised it’s prices by a lot and you’re saying it’s still worth it. Your arguments make sense, about judging it on whether it’s still good value for yourself. But now there are two companies that do the same and charge less! WiseBanyan and Wealthfront (and maybe even more).

    I will disclose that I’m a very happy WiseBanyan member! I’ve also tried Robinhood for trading for fun (I know, I know!). Maybe my comment is a little biased for what I used, but I don’t see you bringing up the lower fees for WiseBanyan (cmon they’re FREE compared to this price increase) and Wealthfront (unfortunately cannot add commentary from experience) and I think that would be useful too. Thanks!

    Reply

  • Rain February 1, 2017, 12:56 pm

    Just a note for the non-FIRE, still needs hand-holding people (like me!). Betterment has NOT indicated that they would change their policy for the $0 subscribers. I have an “account” with Betterment with $0 in it. I am free to use the RetireGuide and other planning features (including external account sync) free-of-charge. Obviously, not MMM’s target audience for this post, but I know there’s some of us poking around here too.

    Reply

  • The Long Haul Investor February 1, 2017, 1:18 pm

    Interesting development to say the least. Thanks for the informative charts and analysis. I’m sure it helped a lot of people visualize what you were talking about. I don’t use Betterment, but I’ve looked at them before. Your results from tax loss harvesting and other features still show it could be worthwhile to investors. I don’t think people should all just abandon ship. Take some time to analyze your specific financial situation, decide how you feel about the company’s decision, and then make a choice. No sense in making a rash decision when you need your money for life.

    Trust is a hard thing to curate in all forms of business. The bigger the trust, the more business you generate. Warren Buffet once said something about honesty. Not completely related, but it comes to mind with this discussion

    “Honesty is a very expensive gift. Don’t expect it from cheap people”

    Reply

  • Paul February 1, 2017, 1:19 pm

    You sound like you’re going against your gut. Your gut is always right. Five figures would be an experiment. Six figures is real money, even for you. You’re not that rich.

    Reply

    • Mr. Money Mustache February 1, 2017, 2:01 pm

      I disagree with the statement that “your gut is always right”. Much more likely to be right is your spreadsheet, combined with some good thorough study of your own cognitive biases. Hey! That reminds me that I should add a link to my old article about the amazing book “Predictably Irrational”.

      Reply

    • Michael February 2, 2017, 2:59 pm

      Carl Sagan, when refusing to commit to an answer about life on other planets, was asked for a gut feeling…
      “But I try not to think with my gut. Really, it’s okay to reserve judgment until the evidence is in.”

      Reply

  • Michael February 1, 2017, 1:44 pm

    I’ve also thought about being “locked-in” to Betterment if its service were to degrade or its fees increase (e.g., if they get bought by Bank of America), but ended up NOT being too worried about it because, contra your statement that “you can always pull your money out at any time, but this is a hassle with large tax consequences,” Betterment allows an in-kind transfer of your ETFs to another brokerage account for no fee, should you close your account: https://support.betterment.com/customer/portal/articles/2164220-how-do-i-transfer-my-account-out-of-betterment-

    Reply

    • Mr. Money Mustache February 1, 2017, 1:56 pm

      Thanks Michael, that is a good point that could eliminate most of the tax consequences. I’ll update the post with your link right now.

      Reply

      • Blake Ballard February 1, 2017, 5:30 pm

        That’s true. But the value of THL (at Betterment or anywhere else) comes when all of your substantially similar investments are w the same broker. Otherwise you could be breaking harvest rules.

        Reply

  • Peter Stock February 1, 2017, 2:00 pm

    25 basis points still seems crazy cheap, even for an ETF portfolio. But is really that it? No custodial fees? No trading costs?
    Speaking of custodians… Does Betterment park the assets at arm’s length or do you risk a Madoff Moment?

    Reply

  • Smart Provisions February 1, 2017, 2:08 pm

    I don’t use Betterment, but the fee increases seemed to happen overnight without a warning. Most of the things Betterment does can be done manually by ourselves, such as tax harvesting and portfolio re-balancing. It’d definitely be more work, but I think it would be helpful for people to at least have an idea on how to do it and where their money goes, which is still good knowledge to have.

    Reply

  • effigy98 February 1, 2017, 2:11 pm

    What a great post. This post shows what FU money can do as you have no master. A lot of tech companies can learn from this experience, focus on the customer!! But so many are focused on short term gain rather than long term. I have been watching the experiment and was on the fence and about to start investing large amounts of money after the house was paid off. I am not interested now and will go back to plan A and just use Vanguard as they have a very long history of trust built up. It is not so much the fee like you said, it is the fact they can keep having these surprise increases over and over again giving you a potential net loss later when you get fed up and move your money out and back to Vanguard. It feels like my old Verizon bill where it kept getting fee’d to death until it was DOUBLE my first contract in price. I am now a happy Google FI customer and I love Google.

    Reply

    • Mr. Money Mustache February 1, 2017, 2:26 pm

      Yeah! Google vs. Verizon is a great example of corporate trust. I have learned to Hate, Hate, HATE these older companies like Verizon, ATT, Comcast, and all the other stalwarts that profit through mildly deceptive marketing practices like “introductory offers”, flashy discounts in exchange for long-term contracts, etc.

      I mean holy SHIT, you should see the flyers that Comcast/Xfinity still send to my house – offering a “home phone line for only $29.99 per month for the first 3 months as long as you also buy a bunch of other cable/internet crap with a 2 YEAR CONTRACT.

      Meanwhile, Google quietly offers a mobile phone that WORKS PERFECTLY EVERYWHERE IN THE WORLD, for 20 bucks a month, plus cheap data charged only on the amount you use. And they have never required a long-term contract for anything.

      Even Google’s much bigger advertising business works this way: I use it for the ad box at the bottom of the site, and it’s a transparent, open, quit whenever you like type of contract, despite the fact that there is a lot more than $100 per month involved.

      http://www.mrmoneymustache.com/2015/09/20/google-fi-review/

      Google is one of the very few richest companies in the world and in world history, and will remain so precisely because they are doing business honestly and continuing to build trust.

      Reply

  • 13owie February 1, 2017, 2:21 pm

    No need to post this comment on the site, but just a minor clarification that yes there is an increase up to 3.3M, but it is not 66% for those 2M-3.3 as your graph nicely shows. ‘Those of us in the $100k-3.3 million band will see a 66% increase in fees.’ Still feel betrayed from yesterday. I was really talking them up to family/friends/and own company & custodian for 401k move. completely agree with your email to them. hope they will listen to this post and/or petition!

    Reply

  • Alex February 1, 2017, 2:22 pm

    Thanks for the post. I’m one of the angry ones who emailed you to share my frustration at the company (I emailed them as well). I’m glad you emphasized trust and loss aversion, because I think you’re absolutely right. There’s an excellent chance that I would have gone with Betterment anyway even if the fee had been 25bps from the beginning (indeed that’s what it was for me when I had less than 100k in my account).

    The frustrating and troubling thing is the feeling that the future is now in question, that the whole company’s outlook has changed, and that they’ve betrayed their early customers and their founding ideals in some core way. I also think the way in which all this was disclosed was incredibly shady. They could have answered question 1 in full but instead they chose to try to hide this from people rather than be upfront and acknowledge that they were increasing their prices and explain why.

    Anyway I am trying to follow your example: be rational, avoid impulsive decisions, leave my money where it is for now but think seriously about whether I want to add more and consider moving to Vanguard. I am also keeping an eye on the twitter anger in the perhaps vain hope that they will cave and undo this horrible mistake.

    Reply

  • Divi Cents February 1, 2017, 2:43 pm

    I always get OVERLY upset when a company changes it’s prices. I once boycotted Starbucks for 365 days because they raised their price on a Grande coffee. It hurt me a lot more than it hurt them but eh.

    I thinks it’s smart to do as you did and take a step back to evaluate and question, is the service still worth the fee?

    I think for you, it is. My 1 cent

    Reply

    • Aimee February 3, 2017, 7:30 am

      Reading MMM and buying Starbucks daily? Doesn’t that deserve a face punch? :)

      Reply

      • Divi Cents February 5, 2017, 11:33 am

        This was 15 years ago.

        I have a 70% saving rate and no debt with a house paid off at 35.

        We all change and grow :)

        Reply

  • Adam February 1, 2017, 2:43 pm

    My biggest issue with the idea of tax-loss harvesting is that it assumes that you never touch any of the funds Betterment might use, or any “substantially similar” funds, in any account not managed by Betterment, or you not only lose the benefits of it, but open yourself up to the possibility of highly confusing tax pain later. This also means, notably, that if my *wife* were to open a Betterment account and turn on tax-loss harvesting, *I* would also be locked out of ever being able to touch any of those funds, or vice versa, too. Just feels like Betterment assumes that you will use 100% all Betterment all the time, for all your accounts, which is not so nice of it to assume that.

    Reply

  • Mrs. Picky Pincher February 1, 2017, 2:57 pm

    It’s not just you, MMM. I’ve read about tons of FIRE bloggers running away from Betterment due to its recent changes. Womp womp!

    Reply

  • Jonathan February 1, 2017, 2:58 pm

    Still you are paying 25 basis points on your assets every year, and this will definitely cut into your returns in the long run. It won’t matter much if you average return over 20 years is 8%, but what if it is 4%?

    For anyone with any financial savvy, managing your money at a discount brokerage is a much better option. If you have a decent asset base, your fees should be no more than 2 or 3 basis points.

    Reply

  • Dale February 1, 2017, 3:17 pm

    Readers, please correct me if I’m wrong:

    1) Only taxable accounts can benefit from tax loss harvesting (TLH). As a general rule the only time retirement savings should be invested in taxable accounts is after all tax advantaged accounts (401ks, IRS) have been maxed out. So if you’re throwing money into Betterment before you’ve maxed your tax advantaged accounts you’re probably making a mistake.

    2) While TLH can lower your taxes now, the trade off is that you will likely have higher taxes in the future (since TLH reduces cost basis which increases future gain). Therefore, the only concrete benefit of TLH relates to the time value of money. Other impacts of TLH are virtually unknowable (what will my tax situation be in the future?, will there be changes to tax law impacting capital gains?…).

    Interested in contrary thoughts…

    Reply

    • Moneycle February 1, 2017, 5:56 pm

      1) All correct.
      2) While it true that you will reduce your basis, many early retirees tend to find themselves in lower tax brackets where capital gains get favorable (0%) tax treatment. So if you can defer until a time where you don’t pay taxes it’s a win-win. The other benefit of TLH is that a capital loss can be used to offset earned income (assuming no other gains).

      Reply

  • Mustard Seed Money February 1, 2017, 3:19 pm

    In evaluating the betterment product and I guess the bottom line for me is does the increased costs also increase the value for me the consumer or am I paying for increased margins. While I like the product I would probably look around at alternatives to see if I could find another program that would increase my ROI. It’s unfortunate as I probably wouldn’t if they didn’t hike their prices.

    Reply

  • Larz February 1, 2017, 3:25 pm

    This part has me really stumped:
    “Question #2 is just a math question, and the answer is Yes. It is overwhelmingly clear that my Betterment account delivers more than 0.25% net annual improvement over trying to manually approximate its performance with Vanguard ETFs.”

    What you’re essentially saying is that Betterment CONSISTENTLY AND OVER TIME beats the market as a whole by more than .25%. This seems to fly in the face of that lovely little book by Mr. Collins that you wrote the Foreword to.

    Reply

    • Mr. Money Mustache February 1, 2017, 3:54 pm

      No, I would not expect a Betterment portfolio to beat the performance of the market.

      But I would expect a human who holds a Betterment account, to receive an after-tax return that is higher than the after-tax return of a human who is manually maintaining a selection of equivalent Vanguard funds.

      This is a big difference – the gap between theory and practice – and the whole reason I was in support of the Betterment business model in the first place.

      Reply

  • Sarah February 1, 2017, 3:43 pm

    I appreciate your honesty. I sent Betterment a short e-mail about the proposed fee increase after reading your post. Instead of a reply to my e-mail, I was disappointed to receive an auto-reply form letter further trying to justify their fee increase. I don’t trust them.

    Reply

  • Colin Carr February 1, 2017, 3:43 pm

    Mr. MMM
    So I’ve seen your recommendations to Betterment, and have a burning question I hope you will reply to. In March of 2015 Schwab opened up Intelligent Portfolios which is a robo-advisor (as you may know). I’ve been using it since it opened and honestly love it. It provides very simple graphs of your money over time, is easy to use and has tax loss harvesting. It truly made me actually like going to look at my accounts without having to decipher so cryptic cluster of an investment website just to understand what my return is in some given period. In fact I’m moving more money into other IP portfolios in the next couple weeks. One thing I haven’t checked is what the fee is for using this (stupid of me I know, when I signed up I just knew it was much cheaper than traditional ETF’s and what not).

    Anyways, my question is this; have you looked into Schwab’s Intelligent Portfolios, and if so, how do you think it compares to Betterment? Also along those lines (and maybe there is room here for a future article), there appears to be a deluge of robo-advisors coming out these days. What would be your requirements for choosing the correct one? Are there multiple right answers? And how do you deal with a sore bike butt?

    So many questions, so little time my friend.

    Sincerely
    Another frugal Coloradan

    Reply

    • Moneycle February 1, 2017, 6:12 pm

      SIP has zero “overt” fees. The big knock against SIP is that they hold some percentage (7%?) of your portfolio in cash. This cash holding is essentially a fee because it means you aren’t fully invested in the markets. Do a Google search on “schwab intelligent portfolio cash drag” to get more information. The bottom line is, the cash drags your portfolio down by some small percentage which is equivalent to a hard-to-quantify fee. If you’re comfortable with holding cash, it may be a fine fit for your situation.

      Reply

      • ZJ Thorne February 1, 2017, 11:11 pm

        I had no idea that’s why my SIP held so much cash. I assumed it was just waiting to spring the money on a good investment. I’ll be researching this now. Thank you.

        Reply

      • Colin Carr February 2, 2017, 7:51 am

        Moneycle
        This is interesting and I never thought about why I couldn’t get that cash into stocks. I suppose it makes sense that they are selling that money and making money off me (like any bank), which seems a bit like a breach of trust. However I do also see some validity in their point of having a liquid asset in the portfolio.

        I put an article at the bottom of this post which responds to the Betterment article about cash drag. It appears to get into the nuance of it all and I am not a total stock nerd so I had a very rudimentary understanding of it. Also, assuming the Betterment article is correct, if I am losing .5% due to cash drag, I make .25% back from the fees that Betterment charges that Schwab does not. I also checked out Betterment, they recommended that I do 90% stock and 10% bonds. My Schwab account sits at 94% stock 6% cash. So I would expect a greater return than the assumptions by the Betterment director. Couple that with the nuances of the article and I’m guessing that I come out pretty close to even.

        Now all this being said, it’s all speculative and everybody in these articles assumes the market acts rationally and will indefinitely go up at historical returns, which is anything but certain. Though we have to start somewhere to make any sort of sense of this crazy thing called the stock market.

        I do appreciate your comments though, they have been very insightful and caused me to really think about all this. For now I am going to keep what I have at Schwab, but I was considering opening another account which I may now move to Betterment. This would actually set up a nice little experiment over the next couple years to watch them both grow and see who wins this round of fisti-cuffs. Thanks!

        https://thefinancebuff.com/schwab-intelligent-portfolios-the-true-cost-of-a-cash-drag.html

        Reply

  • Heywood February 1, 2017, 3:46 pm

    Are the majority of Betterment clients in the $100k-3.3M sweet spot for higher Betterment fees?

    Reply

  • Div Tech Guy February 1, 2017, 4:50 pm

    There is no added value to the consumer, its a robo-advisor, I see it as a slap in the face of its customer for increased margins. The Tax Loss Harvesting is over-rated for the average investor, you would need to have a good size portfolio and be on the top tax bracket and even then its capped at $3,000. I like simple and I like passive, I just use a Target Fund at Vanguard, 0.16% blended rate.

    Reply

  • Kevin Knox February 1, 2017, 6:11 pm

    Not only is the fee increase a boneheaded move, it shows just how dubious the Roboadvisor situation is for independents now that Vanguard, Schwab and Fidelity are in the market.

    If you’re going to go to all the trouble to slice-and-dice why not go with a set fee (vs. % of assets – which is always a bad idea as well as an irrational one since it doesn’t cost them anymore to manage 2 million than it does 200,000) advisor that has access to DFA funds, which are far more sophisticated in their targeting of market segments, more tax efficient, etc.

    Evanson Asset Management, one of my favorites, would charge you $2500 a year to do everything you’re getting from Betterment but with much better funds. There’s good info on Evanson’s site on the important differences between DFA’s funds (which are not index funds) and Vanguard’s.

    Pretty ironic that Betterment jacked up fees at almost exactly the same time as Vanguard lowered them for a bunch of funds – including the venerable Wellesley (.15% ER for Admiral shares – and good luck beating its 9.85% annual returns since…1970!).

    Prior to this move I’d have said Bettement was an acquisition candidate, but it looks like they’ll find a way to just go under on their own.

    Reply

  • Kyle February 1, 2017, 6:45 pm

    I joined betterment a few years ago when I was still learning a lot. I’m a noob but eventually realised betterment has no benefit to me as I’m low income and only had an Ira with them. Opened a vanguard account but I’m not sure how you move money in retirement/ investments accounts so I just have both for now.

    Reply

    • mary w February 3, 2017, 10:29 am

      Talk to Vanguard. They will help you move your IRA from Betterment.

      Reply

  • Matt Radcliffe February 1, 2017, 7:15 pm

    Can’t you request your stock or etf certificates and move them to different management company or broker without liquefying the assets? I expect it to be a bit of a hassle but is it prohibitive?

    Reply

    • DW February 4, 2017, 2:07 pm

      It’s easier than you would imagine. I just moved my eTrade personal brokerage and IRA accounts to Vanguard within about 15 minutes. If you have trouble, just call the broker you are moving to and they will be all to happy to help.

      Reply

  • Mark H February 1, 2017, 8:21 pm

    As a Betterment customer with >$100K balance, it is disturbing to me that I am finding out about this fee increase via MMM.

    Reply

  • Nicole February 1, 2017, 8:49 pm

    My guess is that they are beefing up the bottom line to sell the company. They are a target for Wells Fargo, BofA, Fidelity, etc. Time will tell.

    Reply

  • Ryan February 1, 2017, 9:13 pm

    I still like the service. They rebalance daily tax efficientlly. I could not do that on my own. Fees do matter to investments, a little over a lifetime is big. However, I think the value of the service overrides the negative fee increase. I would hope they would put more thought into a fee increase because this could very well cause them to fail if a company with greater scale comes and provides more value for less.

    Reply

  • GfireRo February 1, 2017, 10:20 pm

    Jack Bogle shared his opinion on Betterment a few months ago (below).
    What do you think of robo-advisers?
    “I think their time is here. In a world where you’re picking stocks, this wouldn’t work at all. In this new world of indexing, where you’re selecting an asset allocation—usually big market sectors—I think robo-advisers are in a position to do it right. Shops like Betterment are doing basic allocation using Vanguard funds. I don’t think robo-advisers can add a lot of value, but for investors who need a helping hand, I think it’s good and fairly priced. I happen to think our way of doing it at Vanguard is better, but it’s more expensive—and you’ve got a live body, or at least the availability of one. It’s going to make it tough on brokers and registered advisers, though.”

    What Jack doesn’t do is compare Betterment to the target-date funds or auto-allocation funds from Vanguard. Seems like investors who need a helping hand should also consider one of those two, lower-cost, set-it-and-forget-it options.

    Reply

  • Brian C February 1, 2017, 11:04 pm

    For those looking for an alternative, I’ve been trying a similar experiment with the Schwab Robo-Advising service. I only put one small Roth account there, so tax loss harvesting doesn’t do anything for me.

    I’ve had money in it for maybe 1-2 years now. I’ve been happy with it so far.

    I honestly like the structure better than Betterment anyways. There’s plenty of forums filled with long discussions on this. My personal conclusion is that Schwab will have a better risk/reward profile over the long term, although plenty of smart people come to different conclusions.

    Reply

  • Al February 2, 2017, 6:18 am

    Absolutely agree that the way this was “communicated” to us as customers was not transparent and trust-eroding.

    “Hi, we have new services because we listen to our customers!”

    “Of course if you don’t want a personal adviser you can keep your account as it is for just a .25% fee”

    Transparent would be a table showing the before and after comparison of fees.

    Regardless of the economics involved and whether it’s a better financial decision for the individual, I applaud your post focusing on the company and our perception of their honesty, transparency, and trustworthiness. I’d be willing to bet those factors are far more important when choosing a personal advisor rather than a .1% fee difference. Betterment is taking a gamble that investors don’t place the same emphasis on those factors when choosing their robo advisor.

    Reply
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