Author Topic: Betterment Price Increase  (Read 16743 times)

FrugalMBA

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Betterment Price Increase
« on: January 31, 2017, 08:05:45 AM »
Hi Everyone,

It looks like Betterment is increasing their fees from 0.15% to 0.25% for $100k+ accounts.
Unfortunately, Wealthfront charges 0.25% fees as well.

New fees - https://www.betterment.com/pricing/

Any recommendation for better robo-advisors?


Thanks!

neo von retorch

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Re: Betterment Price Increase
« Reply #1 on: January 31, 2017, 08:11:43 AM »
Interesting - want to save this in case they update/remove this older update of pricing:

https://www.betterment.com/resources/inside-betterment/betterment-announces-major-changes/
Quote
February 22, 2012
What are the new fees?

Customers will fall into one of three fee buckets: Builder, Better, and Best.

The fee for “best” accounts is 0.15% for balances above $100,000; 0.25% for “Better” accounts with more than $10,000; and 0.35% thereafter for the “Builder” category.

My wife's IRA is there, and falls into the old "Better" plan, which means the price has not changed. And this does mean that users with less than $10k are getting a (tiny) discount.

NeonPegasus

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Re: Betterment Price Increase
« Reply #2 on: January 31, 2017, 08:23:01 AM »
I was wondering if anyone else would post about this.

I previously had a bunch of tax advantaged accounts with them so that I was over their threshold and got the lowest fee. There seems to be no reason to continue that so I will be moving IRAs to Vanguard and investing in VTSAX and VBTLX. I will probably keep my other smaller taxable accounts with Betterment because I use them for various shorter term goals (travel, etc) and like being able to get money in and out easily.

NeonPegasus

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Re: Betterment Price Increase
« Reply #3 on: January 31, 2017, 08:27:54 AM »
So here's a question related to transferring the accounts ...

I recently transferred a managed IRA from Scottrade to Vanguard. I didn't realize that there would be a $7 fee to sell each and every one of the 13 ETFs so I could buy the Vanguard mutual funds.

I am assuming that if I am going to transfer some accounts from Betterment to Vanguard, it'd be good to get as much into cash as possible, or to at least reduce the number of investments. Does anyone know the best way to do this?

neo von retorch

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Re: Betterment Price Increase
« Reply #4 on: January 31, 2017, 08:34:20 AM »
First - are you sure it's $7 for every ETF? I recently sold some of my transferred funds, and one of them had a $7 trade fee, while the others were free to sell.
Second - no :) I do not know the best way. But I did sell a bunch of bond funds that had not gained any (or much) money compared to their cost basis, so there wouldn't be (much) taxable income. I'm in the process of rolling them into my simple 4-fund portfolio.

NeonPegasus

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Re: Betterment Price Increase
« Reply #5 on: January 31, 2017, 08:45:52 AM »
First - are you sure it's $7 for every ETF? I recently sold some of my transferred funds, and one of them had a $7 trade fee, while the others were free to sell.
I'm glad you asked. Apparently, selling the Vanguard ETFs are free. Selling the ishares ETFs incurs the fees for each ETF. :(

I need to check if the Betterment funds are invested primarily in Vanguard ETFs or in ishares ETFs as well.

Aggie1999

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Re: Betterment Price Increase
« Reply #6 on: January 31, 2017, 09:26:04 AM »
I saw the Betterment email this morning. I didn't pay much attention but just assumed they were only talking about the low dollar accounts. Bumping $100k+ accounts from 0.15% to 0.25% is pretty bad. Glad I already have ditched Betterment for Vanguard.

tj

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Re: Betterment Price Increase
« Reply #7 on: January 31, 2017, 11:47:38 AM »
So here's a question related to transferring the accounts ...

I recently transferred a managed IRA from Scottrade to Vanguard. I didn't realize that there would be a $7 fee to sell each and every one of the 13 ETFs so I could buy the Vanguard mutual funds.

I am assuming that if I am going to transfer some accounts from Betterment to Vanguard, it'd be good to get as much into cash as possible, or to at least reduce the number of investments. Does anyone know the best way to do this?

Assuming you don't care about tax efficiency, you can sell everything at Betterment and transfer the cash proceeds.

Interest Compound

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Re: Betterment Price Increase
« Reply #8 on: January 31, 2017, 07:45:14 PM »
It begins...

That didn't take long.

My post from November 5th, 2015 regarding Betterment and their business practices:

This seems like an appropriate place for this article.

http://www.economist.com/news/finance-and-economics/21677245-growth-firms-selling-computer-generated-financial-advice-slowing-does-not

Robo-advisors see slower growth, and probably have trouble being profitable.



In my opinion this is the biggest risk with giving one of these tech startups your money. If they go under, or if their VC investors decide they aren't making enough money and they increase their fees, you're left with one of two choices:

1. Sell everything and pay a steep capital gains taxes.

2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.

Considering these robo-advisors were made to be a simple choice, making things easy for the financially-illiterate...and considering the failure rate for tech startups, it just doesn't seem like a wise move. Especially when Vanguard's version has all the same simplicity, for half the cost.

-------------------------------
Source: http://forum.mrmoneymustache.com/investor-alley/the-true-cost-of-a-robo-advisor/msg859869/#msg859869

The fact that these are money-loosing startups pushing hard on marketing to gain exponential growth would keep me from putty money there.

Interest Compound

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Re: Betterment Price Increase
« Reply #9 on: January 31, 2017, 07:58:09 PM »
Any recommendation for better robo-advisors?

After speaking with hundreds of people about investing, I've come to recommend Vanguard's automatic accounts. MrMoneyMustache also recommends an automatic portfolio for his readers. Psychologically it makes sense. It takes the newbie's decision making out of the equation, as they put their portfolio in the hands of an expert. And what better expert than Vanguard? The only investment firm that's legally obligated to act in our best interests?



You have two amazing options:

1. "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"



2. "I want Vanguard's experts to do everything for me. I'll just tell them how much risk I want, and they'll put it in the appropriate LifeStrategy Fund"



Then forget about it.

Vanguard's automatic accounts are every-bit as automatic as Betterment. I would say I wish Vanguard advertised this more...but then all our fees would go up to pay for it :)

Choosing a Vanguard automatic account is effectively like saying, "Hey Vanguard. Will you manage that 3-fund portfolio for me that I keep hearing so much about?" These accounts:
  • Don't require advanced knowledge of the market to invest (anybody can do it with a few button pushes)
  • Are professionally managed automatically, by the only company which generates just enough profit to cover its costs, and with no outside owners (they are owned by people like you who invest with them) truly operates with your best interests in mind.
  • Relieve you of the burden of choosing your own asset allocation, and does so with no tracking error. Reducing behavioral mistakes and possible emotional abandonment to the strategy, the biggest risk to your portfolio.
  • Automatically rebalance.
  • Gradually get less risky as you age (TargetRetirement).
  • Keep you from tinkering with your portfolio.
  • Let you easily schedule automatic contributions while keeping your allocation balanced ($500 a paycheck automatically invested for example).
  • Let you easily schedule automatic distributions while keeping your allocation balanced ($4000 a month automatically deposited to your bank account for example).
  • Let you "Set it and forget it". You can literally login once, schedule automatic contributions, and come back 30 years later knowing everything has been taken care of for you.
  • Reinvest dividends automatically.
  • Don't try to beat the market by adding 10% of this and 5% of that. The aim is not to separate winners from losers, but rather to hold the entire market.
  • Give you the most diverse portfolio possible, with 21,600+ individual holdings across the world.
  • Allow you to easily invest money separately based on goals. Short-term money vs long-term money vs retirement money, for example.

And don't fall for the idea that tax loss harvesting will pay for Betterment's much higher fees. This is mathematically impossible in any market that goes up over time. When looking back at the ETFs that Betterment puts you in, all tax loss harvesting for any particular deposit completely stopped on average in a year or so. Again, this is what you expect in a market that goes up over time.

When a company starts making decisions which sound good for marketing, but make their customers worse-off (20+ ETFs, making sector bets which backtested well which looks great in marketing material, forcing Municipal Bonds on taxable accounts when 99% of Americans are mathematically better off without them), that's a big warning flag.

Their growth rate is stagnating, and they're still unprofitable. Today's price hike should not have come as a surprise. Choose wisely.

Interest Compound

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Re: Betterment Price Increase
« Reply #10 on: January 31, 2017, 09:12:38 PM »
Nice post Interest Compound, and I agree completely choosing a lifestyle or target date fund gives you a very comparable product for cheaper if we are talking about an IRA/tax advantaged account.   Where I take some issue is when we are talking about a taxable account.   These lifestyle funds typically at some point need to rebalance and may need to sell shares which results in a taxable gain distribution
.   The amount isn't usually huge but it is a taxable event.   So I guess the question becomes is the loss of money to pay taxes on your gain more or less then the typical fee for a robo manager.  I wonder if this has been researched.

Good question, looking at the capital gains distributions for 2015 and 2016 combined:



It looks like an investment of $100,000 in the 80/20 LifeStrategy fund would've distributed about $2300 in capital gains. Assuming your income is less than $464,850 a year, you're in the 15% tax bracket for long term capital gains:



So you would've paid $345 in taxes in 2015, and almost $0 in 2016.

To make a proper comparison, you'd need to know the following variables for both Betterment and LifeStrategy:
  • The capital gains distributed in a typical year as a result of rebalancing.
  • The expense ratio (yearly fee).
No one has done the math on this in any long-term way, because the data on past capital gains distributions for Betterment isn't published, and the future is unknown. The expense ratio, however, is known. And for a Betterment portfolio, it's about 0.41% (Betterment fee + underlying funds), compared to about 0.15% for a LifeStrategy fund.

chasesfish

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Re: Betterment Price Increase
« Reply #11 on: February 01, 2017, 06:07:23 AM »
One other point of note about the price increase:

Vanguard's flagship "managed" fund is back to having one of the lowest expense ratios.  If you want the 65% Stock, 25-35% cash/bond portfolio, the Vanguard Wellington Fund is the fund of choice.  0.26% for Investor Class Shares, 0.18% for Admiral Shares if you have $50,000 or more.

Similar return to the S&P 500 over the last 10 years without the higher standard deviation you get in index funds. 


neo von retorch

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Re: Betterment Price Increase
« Reply #12 on: February 01, 2017, 07:01:28 AM »
...
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
...

Agree with your overall post - for clarification, I moved Betterment funds to Vanguard.
a) If it's tax-advantaged, you can (and will) liquidate your funds before moving them to Vanguard, where you'll just add to the funds you have or want.
b) There are exactly 10 funds that moved from my taxable account over. Of those, 4 were ~break-even (mostly bonds), of those 3 had to no trading fees, the 4th had a $7 fee, so I sold them so I could plug them into my Vanguard funds. The others - not sure of trade fees, but do plan to migrate them when the timing is better (currently they are short-term and profitable) so I'm leaving them there. Those 6 will sit in my asset allocation spreadsheet, but otherwise will not be "managed" in any way.

AdrianC

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Re: Betterment Price Increase
« Reply #13 on: February 01, 2017, 07:36:18 AM »
No one has done the math on this in any long-term way, because the data on past capital gains distributions for Betterment isn't published, and the future is unknown.

Though with large cap, mid cap and small cap value funds there's bound to be more cap gains than the Vanguard LifeStrategy.

My only beef with LifeStrategy is they don't do a 100% stocks version. I don't want 20% bonds in taxable.


rxmurphy

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Re: Betterment Price Increase
« Reply #14 on: February 01, 2017, 07:41:03 AM »
...
2. Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life.
...

Agree with your overall post - for clarification, I moved Betterment funds to Vanguard.
a) If it's tax-advantaged, you can (and will) liquidate your funds before moving them to Vanguard, where you'll just add to the funds you have or want.
b) There are exactly 10 funds that moved from my taxable account over. Of those, 4 were ~break-even (mostly bonds), of those 3 had to no trading fees, the 4th had a $7 fee, so I sold them so I could plug them into my Vanguard funds. The others - not sure of trade fees, but do plan to migrate them when the timing is better (currently they are short-term and profitable) so I'm leaving them there. Those 6 will sit in my asset allocation spreadsheet, but otherwise will not be "managed" in any way.

Hi Neo. Am considering sliding from Betterment to Vanguard also. I have a traditional IRA and a taxable acct at BET. Are you saying you HAVE to liquidate all in the IRA, or SHOULD? Haven't called Van yet. TIA.

Interest Compound

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Re: Betterment Price Increase
« Reply #15 on: February 01, 2017, 07:51:55 AM »
No one has done the math on this in any long-term way, because the data on past capital gains distributions for Betterment isn't published, and the future is unknown.

Though with large cap, mid cap and small cap value funds there's bound to be more cap gains than the Vanguard LifeStrategy.

My only beef with LifeStrategy is they don't do a 100% stocks version. I don't want 20% bonds in taxable.

Sure they do, they just give it a different name :)



https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

neo von retorch

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Re: Betterment Price Increase
« Reply #16 on: February 01, 2017, 08:13:33 AM »
Hi Neo. Am considering sliding from Betterment to Vanguard also. I have a traditional IRA and a taxable acct at BET. Are you saying you HAVE to liquidate all in the IRA, or SHOULD? Haven't called Van yet. TIA.

I'm saying you HAVE to. As in, you'll initiate the transfer from Vanguard; Betterment WILL liquidate the funds and send a check. There are no tax consequences (as long as you complete the transfer.) Win-win :)

PizzaSteve

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Re: Betterment Price Increase
« Reply #17 on: February 01, 2017, 08:45:16 AM »
As mentioned above robo fees are a rip off.  I would suggest schwab (no fees) but their ETF mix for their robo product includes some higher expense ratio fundamental ETFs.   

I like a 3 fund portfolio at Schwab, Fidelity, TD Ameritrade using their lowest fee diversified ETFs (E.G. VTI) and moving the funds around to get the .25% bonuses they usually offer to attract funds.   If they ever let you pick your mix i might consider schwabs robo to be a vanguard alternative.

Interest Compound

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Re: Betterment Price Increase
« Reply #18 on: February 01, 2017, 09:01:57 AM »
As mentioned above robo fees are a rip off.  I would suggest schwab (no fees) but their ETF mix for their robo product includes some higher expense ratio fundamental ETFs.   

I like a 3 fund portfolio at Schwab, Fidelity, TD Ameritrade using their lowest fee diversified ETFs (E.G. VTI) and moving the funds around to get the .25% bonuses they usually offer to attract funds.   If they ever let you pick your mix i might consider schwabs robo to be a vanguard alternative.

Schwab's robo-advisor fee is potentially the biggest of them all, as they force you to hold some % of your portfolio in cash. Depending on your desired asset allocation, the opportunity cost is at least the same as Betterment's new 0.25% fee. I'd say it's at about the equivalent of a 0.50% fee (expense ratio) for the typical investor on this forum.

Schwab Intelligent Portfolios: The True Cost of A Cash Drag

That's how they're able to advertise "no fees!", because they're profiting off of the cash allocation their forcing you to hold with them.

This is what it looks like when I say Vanguard is legally obligated to act in our best interests. Schwab is not.

AdrianC

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Re: Betterment Price Increase
« Reply #19 on: February 01, 2017, 09:06:49 AM »
No one has done the math on this in any long-term way, because the data on past capital gains distributions for Betterment isn't published, and the future is unknown.

Though with large cap, mid cap and small cap value funds there's bound to be more cap gains than the Vanguard LifeStrategy.

My only beef with LifeStrategy is they don't do a 100% stocks version. I don't want 20% bonds in taxable.

Sure they do, they just give it a different name :)


Good point! Forgot about VT.

Mgmny

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Re: Betterment Price Increase
« Reply #20 on: February 01, 2017, 11:18:24 AM »
I'm using Wealthfront, and I have 20k in assets managed free, and my wife has 15k managed free.

I have about $41k in my account with them, and she has somewhere between 10-15k

So I'm paying the 0.25% on 21k (or effectively 0.12%) and my wife is paying 0%

This brings our total effective fees at 0.0954% fees. This seems really low. Obviously this will go up and up until it approaches the 0.25% fee that is standard, but right now it seems reasonable.

Am I still being stupid for leaving my funds with Wealthfront?

tj

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Re: Betterment Price Increase
« Reply #21 on: February 01, 2017, 11:27:57 AM »
I'm using Wealthfront, and I have 20k in assets managed free, and my wife has 15k managed free.

I have about $41k in my account with them, and she has somewhere between 10-15k

So I'm paying the 0.25% on 21k (or effectively 0.12%) and my wife is paying 0%

This brings our total effective fees at 0.0954% fees. This seems really low. Obviously this will go up and up until it approaches the 0.25% fee that is standard, but right now it seems reasonable.

Am I still being stupid for leaving my funds with Wealthfront?

The 0.0954% is in addition to the underlying ETF fees. The funds don't manage themselves.

Interest Compound

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Re: Betterment Price Increase
« Reply #22 on: February 01, 2017, 11:55:25 AM »
This brings our total effective fees at 0.0954% fees. This seems really low. Obviously this will go up and up until it approaches the 0.25% fee that is standard, but right now it seems reasonable.

As tj mentioned, that doesn't include the underlying funds, which are about 0.15% on their own. But let's ignore that for a moment. You think 0.0954% is reasonable, but presumably 0.25% isn't. What's your plan for 5-10 years from now when your balance hits 0.25%?

Again you're left with few good options:
  • Sell everything and pay a steep capital gains taxes. (probably won't do this)
  • Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life. (there goes that simplicity you were looking for)
I still think a standard 3 fund portfolio, rebalanced once ever 3-5 years (for a total of 5-10 minutes), is the best way to go. But if people aren't comfortable with that, a Target Retirement or LifeStrategy account is the next best thing.

For the people who say their time is too valuable to rebalance...more power to you. But paying thousands of dollars to avoid 5-10 minutes of work every 3-5 years doesn't sound very Mustachian to me :-P

Mgmny

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Re: Betterment Price Increase
« Reply #23 on: February 01, 2017, 12:22:17 PM »
This brings our total effective fees at 0.0954% fees. This seems really low. Obviously this will go up and up until it approaches the 0.25% fee that is standard, but right now it seems reasonable.

As tj mentioned, that doesn't include the underlying funds, which are about 0.15% on their own. But let's ignore that for a moment. You think 0.0954% is reasonable, but presumably 0.25% isn't. What's your plan for 5-10 years from now when your balance hits 0.25%?

Again you're left with few good options:
  • Sell everything and pay a steep capital gains taxes. (probably won't do this)
  • Move the entire 10-20 fund portfolio they put your money in, over to another broker like Vanguard, and be stuck manually managing those 10-20 funds for the rest of your life. (there goes that simplicity you were looking for)
I still think a standard 3 fund portfolio, rebalanced once ever 3-5 years (for a total of 5-10 minutes), is the best way to go. But if people aren't comfortable with that, a Target Retirement or LifeStrategy account is the next best thing.

For the people who say their time is too valuable to rebalance...more power to you. But paying thousands of dollars to avoid 5-10 minutes of work every 3-5 years doesn't sound very Mustachian to me :-P

Is there a getting started, talk to me like a moron, idiots guide, etc thread for moving money from robo investors to Vanguard?

I don't mind spending the time and learning. MMM seems to think the tax-loss harvesting is potentially undervalued and may be worth it, and for 2016, my wife's account TLH about $19, so should get like $5 back on this, and considering she paid $0 for the service, it seems reasonable?

My accounts TLH only $1 in 2016, so it didn't do much good for me.

neo von retorch

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Re: Betterment Price Increase
« Reply #24 on: February 01, 2017, 01:42:21 PM »
Again, interesting analysis Interest Compound.   But one thing personally I would take into consideration is that Betterment doesn't have capital gains distributions.   They most likely won't need to rebalance either as long as your are rebalancing by making regular contributions. You just own the individual ETF's. 

This is what could give Betterment the edge in my mind.  I think based on your research it sounds like this is the big question.   If Betterment's total cost to own is .41% (management fees plus aggregate expense ratios), how does that compare to Vanguard's .15% plus whatever amount is an average amount lost to taxes for gain distributions.

I suppose the best choice is to simply own 3 fund ETF, but if you're making regular contributions like weekly it will become a bit tiresome to allocate correctly.

I'm really confused by your original premise here (the bolded statement.)

If you withdraw money from Betterment, all the usual rules apply. If it's a taxable account, you'll pay short or long-term capital gains based on the profit and your marginal tax rate. If it's a retirement fund, you better be following the law, or you'll pay taxes/penalties accordingly. The only thing I could guess is that you mean "Betterment only reinvests dividends and doesn't give you the option to pay them out", which you could do with Vanguard - but you don't have to. Either way, dividends are still reported by Betterment and will be taxed according to the usual set of rules.

I don't believe this is an "advantage" because I don't believe this is different from how your investments with another brokerage would be treated.

Interest Compound

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Re: Betterment Price Increase
« Reply #25 on: February 01, 2017, 04:24:12 PM »
Again, interesting analysis Interest Compound.   But one thing personally I would take into consideration is that Betterment doesn't have capital gains distributions.   They most likely won't need to rebalance either as long as your are rebalancing by making regular contributions. You just own the individual ETF's. 

This is what could give Betterment the edge in my mind.  I think based on your research it sounds like this is the big question.   If Betterment's total cost to own is .41% (management fees plus aggregate expense ratios), how does that compare to Vanguard's .15% plus whatever amount is an average amount lost to taxes for gain distributions.

1. If Betterment sells any of your ETFs while rebalancing, and those ETFs rose in value from the original purchase, you will pay capital gains taxes. Just like a LifeStrategy capital gains distribution.

2. Betterment's total cost to own is 0.41%. Forever. Each and every year. No matter what. (Unless they increase prices again)

Capital gains as a result of rebalancing aren't big enough (in my opinion) to play a factor in this analysis. The numbers simply aren't that big, and they're unpredictable. For all we know, Betterment's portfolio might have more capital gains taxes to pay in 2017, due to the specific value-tilted ETFs they hold, or a number of other factors.

The only guarantee here is fees. And they are much higher with Betterment.

I suppose the best choice is to simply own 3 fund ETF, but if you're making regular contributions like weekly it will become a bit tiresome to allocate correctly.

It doesn't matter. Seriously. After reading Vanguard’s “Best practices for portfolio rebalancing” study:

http://www.vanguard.com/pdf/icrpr.pdf

Rebalancing just doesn’t seem to be that big of a deal. They recommend looking at the portfolio once a year, and rebalancing only if it deviates by 5% from your target. If it doesn’t deviate, don’t rebalance. They did the math using market returns from 1926-2009, and only had to rebalance 28 times. Most years a rebalance wasn’t necessary. They charted it out for us:



Look at the chart, if you only rebalanced when your portfolio deviated by 10% from your target, you only would've rebalanced 15 times. That's about once every 5.5 years. Rebalancing constantly just isn't anything I think people should be stressed about. Something tells me the marketing efforts of investment companies like Betterment have mis-represented the complexity of investing.

So all that to say, yes, I agree. A 3 fund portfolio is the best. If your asset allocation is 40/40/20 (US/International/Bonds), invest any new money in exactly those same allocations, don’t even worry about rebalancing new money. Don't look at the market. It doesn't matter. You can even tell Vanguard to automatically invest the money each month for you, withdrawing it from your checking/savings account:



That’s it. No need to even login to your account anymore, unless you want to change the $2,000 auto-deposit. After one year (or 5), log in to your account. Put the numbers into the calculator, and see if the percentages are more than 5% off. If it looks like this, then great! No need to rebalance this year! Feel free to logout knowing you won’t have to sign back in for another year (or 5):



If the numbers are off, the calculator notifies you, and tells you the 3 trades it takes to fix it. Spend the next few minutes buying/selling as indicated on the right:



And that’s it! You’re done for the year. The fee for such a portfolio is about 0.07%, compared to 0.41% had the money been with Betterment. The difference between 0.41% and 0.07% (assuming a $100,000 deposit, and adding $1,000 a month) is about $793,797 in extra fees after 35 years:



No it’s not “one-stop” investing, but I think it’s important to see how easy rebalancing is, before paying someone a yearly percentage fee on your portfolio to do it for you.

Interest Compound

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Re: Betterment Price Increase
« Reply #26 on: February 01, 2017, 04:38:21 PM »
MMM seems to think the tax-loss harvesting is potentially undervalued and may be worth it

I have a feeling that lots of people won't hold their portfolio at Betterment long enough for any Tax Loss Harvesting to matter. Especially if they keep increasing their fees like this, causing people to cash out.

Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell. If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year. However, if you plan on cashing out your investments in 5 years to buy a house/car, or if you cash out to leave Betterment while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year. In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan. Not bad! And how much will Betterment charge you for this service? $255. How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets? $56

Don't pay $199 to earn $96. Keep it simple.
« Last Edit: February 01, 2017, 05:55:13 PM by Interest Compound »

Interest Compound

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Re: Betterment Price Increase
« Reply #27 on: February 01, 2017, 04:40:34 PM »
Is there a getting started, talk to me like a moron, idiots guide, etc thread for moving money from robo investors to Vanguard?

1. Call Vanguard.
2. Give them your age and tell them you want a Target Retirement Fund.
3. Tell them where your money is, so they can transfer it for you.

Mgmny

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Re: Betterment Price Increase
« Reply #28 on: February 01, 2017, 05:29:54 PM »
Thanks for the explanations IC - I really appreciate it.

I'll get on vanguard tomorrow!!

rxmurphy

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Re: Betterment Price Increase
« Reply #29 on: February 02, 2017, 10:13:49 AM »
Is there a getting started, talk to me like a moron, idiots guide, etc thread for moving money from robo investors to Vanguard?

1. Call Vanguard.
2. Give them your age and tell them you want a Target Retirement Fund.
3. Tell them where your money is, so they can transfer it for you.

Thanks for all the common sense language IC. Is the 3Fund Portfolio calculator you showed above proprietary, or available anywhere?

Thanks in advance!

Interest Compound

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Re: Betterment Price Increase
« Reply #30 on: February 02, 2017, 11:08:01 AM »
Is there a getting started, talk to me like a moron, idiots guide, etc thread for moving money from robo investors to Vanguard?

1. Call Vanguard.
2. Give them your age and tell them you want a Target Retirement Fund.
3. Tell them where your money is, so they can transfer it for you.

Thanks for all the common sense language IC. Is the 3Fund Portfolio calculator you showed above proprietary, or available anywhere?

Thanks in advance!

Attached.

MayDay

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Re: Betterment Price Increase
« Reply #31 on: February 02, 2017, 11:08:54 AM »
I've transferred old accounts into vanguard, including a somewhat complicated one that held Actual Paper Stocks.

I basically called and said "I want to transfer my XYZ account to you. I don't know how. Help!". They walk you through the whole thing while you are on the phone, with them doing 90% of the work. In my complex case, they 3-way called the old account and got everything sorted right then and there. I had to make zero other phone calls.

Cycling Stache

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Re: Betterment Price Increase
« Reply #32 on: February 02, 2017, 11:17:55 AM »
MMM seems to think the tax-loss harvesting is potentially undervalued and may be worth it

I have a feeling that lots of people won't hold their portfolio at Betterment long enough for any Tax Loss Harvesting to matter. Especially if they keep increasing their fees like this, causing people to cash out.

Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell. If you earn $100,000 a year (28% tax bracket), and get the full $3000 deductible, you'll get $840 back in taxes this year. However, if you plan on cashing out your investments in 5 years to buy a house/car, or if you cash out to leave Betterment while you're still in the 28% tax bracket, you will owe the government an additional $840 in taxes that year. In other words, while tax loss harvesting doesn’t necessarily produce any net tax savings, it is the equivalent of getting an interest-free loan from the Federal government.



If you invest that $840 back into the Betterment, and get an 11.5% gain for the year, your $840 will have grown to $936, for a profit of $96 from your interest free loan. Not bad! And how much will Betterment charge you for this service? $255. How much would Vanguard have charged you for a fully automatic "set it and forget it" 60/40 stock/bond fund that handles rebalancing across 10,752 unique assets? $56

Don't pay $199 to earn $96. Keep it simple.

Interest Compound, I think you need to take this discussion to the comments of the latest blog post on the main page.  You always make excellent points that are well supported by evidence, and it's an important enough issue that it should get to the casual blog reader.  I know I've shifted some of my investments based on information you've provided given how helpful it was.

brooklynguy

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Re: Betterment Price Increase
« Reply #33 on: February 02, 2017, 01:45:37 PM »
Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.

For the prototypical mustachian aspiring early retiree (who will transition from a higher tax bracket to a lower tax bracket between the date of harvesting a loss and the date of selling the applicable investments), tax loss harvesting does generate "free money."  However (as has been previously discussed to death in various threads across the forum), Betterment's TLH feature still does not justify paying Betterment's fees.  Tax loss harvesting is something you can easily do yourself when traditional TLH opportunities (i.e., significant market drops) present themselves (which happens frequently enough), and, even if that weren't the case, the costs of using Betterment quickly eclipse the TLH benefits for the average mustachian (who probably can't benefit from more than $3k of tax losses per year) given that the cost-to-benefit ratio will only increase over time (as Betterment's percentage-based fee grows with the portfolio size and the "harvestability" of the portfolio shrinks with the overall cost basis).

Interest Compound

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Re: Betterment Price Increase
« Reply #34 on: February 02, 2017, 03:13:06 PM »
Tax Loss Harvesting isn't free money, whatever you deduct is owed back when you sell.

For the prototypical mustachian aspiring early retiree (who will transition from a higher tax bracket to a lower tax bracket between the date of harvesting a loss and the date of selling the applicable investments), tax loss harvesting does generate "free money."  However (as has been previously discussed to death in various threads across the forum), Betterment's TLH feature still does not justify paying Betterment's fees.  Tax loss harvesting is something you can easily do yourself when traditional TLH opportunities (i.e., significant market drops) present themselves (which happens frequently enough), and, even if that weren't the case, the costs of using Betterment quickly eclipse the TLH benefits for the average mustachian (who probably can't benefit from more than $3k of tax losses per year) given that the cost-to-benefit ratio will only increase over time (as Betterment's percentage-based fee grows with the portfolio size and the "harvestability" of the portfolio shrinks with the overall cost basis).

Agreed. The point is, I have a feeling that lots of people won't hold their portfolio at Betterment long enough to reach those lower tax brackets. Especially if they keep increasing their fees like this, causing people to cash out.

Aggie1999

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Re: Betterment Price Increase
« Reply #35 on: February 06, 2017, 08:58:17 AM »
More Betterment annoyances. I started the process of transferring an IRA out of Betterment today into Vanguard. Betterment seems to be requiring a medallion signature. Wealthfront was all digital. No mailed in paperwork needed.

neo von retorch

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Re: Betterment Price Increase
« Reply #36 on: February 06, 2017, 09:05:36 AM »
More Betterment annoyances. I started the process of transferring an IRA out of Betterment today into Vanguard. Betterment seems to be requiring a medallion signature. Wealthfront was all digital. No mailed in paperwork needed.

If I remember correctly... the forms for transfer include the medallion signature area, but it's not actually required. I could be mis-remembering (I did this back in August) but I was able to transfer my IRA from Betterment to Vanguard successfully. If I did get a medallion signature, I didn't do it in person. I would've had to fax or mail something to Vanguard and get it back. But I don't remember doing that. I just filled out my Vanguard transfer forms, skipped the M/S section, and it ended up working.

NoStacheOhio

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Re: Betterment Price Increase
« Reply #37 on: February 06, 2017, 09:16:07 AM »
More Betterment annoyances. I started the process of transferring an IRA out of Betterment today into Vanguard. Betterment seems to be requiring a medallion signature. Wealthfront was all digital. No mailed in paperwork needed.

More Betterment annoyances. I started the process of transferring an IRA out of Betterment today into Vanguard. Betterment seems to be requiring a medallion signature. Wealthfront was all digital. No mailed in paperwork needed.


If I remember correctly... the forms for transfer include the medallion signature area, but it's not actually required. I could be mis-remembering (I did this back in August) but I was able to transfer my IRA from Betterment to Vanguard successfully. If I did get a medallion signature, I didn't do it in person. I would've had to fax or mail something to Vanguard and get it back. But I don't remember doing that. I just filled out my Vanguard transfer forms, skipped the M/S section, and it ended up working.

Whenever I've seen this, it's been a function of account balance. So account under the limit (10k or whatever) don't need medallion, but over the limit does.

Edited to fix bungled quote tags
« Last Edit: February 06, 2017, 09:23:50 AM by NoStacheOhio »

Aggie1999

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Re: Betterment Price Increase
« Reply #38 on: February 06, 2017, 09:22:14 AM »
Thanks for the info. I'll probably go ahead and do the medallion signature anyways since I have to go to the bank today for other things.

Another thing Vanguard is saying I need to provide is a copy of the latest monthly statement from Betterment. I just opened the Betterment IRA at the start of Jan and have not seen any monthly statement show up in my Betterment account. I guess I'll need to call Vanguard and see what I should do.

PizzaSteve

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Re: Betterment Price Increase
« Reply #39 on: February 07, 2017, 08:48:14 AM »
Thanks for the info. I'll probably go ahead and do the medallion signature anyways since I have to go to the bank today for other things.

Another thing Vanguard is saying I need to provide is a copy of the latest monthly statement from Betterment. I just opened the Betterment IRA at the start of Jan and have not seen any monthly statement show up in my Betterment account. I guess I'll need to call Vanguard and see what I should do.
When ive looked into this (Fidelity also asked for a statement on a transfer) the reason for the statement is to confirm that all the assets transferred correctly (they want to check).

Aggie1999

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Re: Betterment Price Increase
« Reply #40 on: February 07, 2017, 11:52:58 AM »
Thanks for the info. I'll probably go ahead and do the medallion signature anyways since I have to go to the bank today for other things.

Another thing Vanguard is saying I need to provide is a copy of the latest monthly statement from Betterment. I just opened the Betterment IRA at the start of Jan and have not seen any monthly statement show up in my Betterment account. I guess I'll need to call Vanguard and see what I should do.

Update: I got on Betterment chat and they were able to generate an interim statement for me. I'll send that in with the paper work to Vanguard.

BTW, being new to brokerage type accounts I find it interesting that each brokerage seems to have a different set of rules. Seems odd that Vanguard would transfer an IRA from Wealthfront without any physical paperwork on my part but they wouldn't with Betterment. Oh well. Probably just a few weeks added to the Betterment transfer process.

PizzaSteve

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Re: Betterment Price Increase
« Reply #41 on: February 07, 2017, 03:03:52 PM »
As mentioned above robo fees are a rip off.  I would suggest schwab (no fees) but their ETF mix for their robo product includes some higher expense ratio fundamental ETFs.   

I like a 3 fund portfolio at Schwab, Fidelity, TD Ameritrade using their lowest fee diversified ETFs (E.G. VTI) and moving the funds around to get the .25% bonuses they usually offer to attract funds.   If they ever let you pick your mix i might consider schwabs robo to be a vanguard alternative.

Schwab's robo-advisor fee is potentially the biggest of them all, as they force you to hold some % of your portfolio in cash. Depending on your desired asset allocation, the opportunity cost is at least the same as Betterment's new 0.25% fee. I'd say it's at about the equivalent of a 0.50% fee (expense ratio) for the typical investor on this forum.

Schwab Intelligent Portfolios: The True Cost of A Cash Drag

That's how they're able to advertise "no fees!", because they're profiting off of the cash allocation their forcing you to hold with them.

This is what it looks like when I say Vanguard is legally obligated to act in our best interests. Schwab is not.
If you read my post i was saying exactly what you are saying.  I did not recommend schwab robo, as it is is too high fee (please read jy quote more carefully) I said that iff they let you select the asset mix %, yourself, then one could pick only low fee ETFs.  Only then would i consider recommending it, but that is not the case.  They require cash and other funds i dont want.

NeonPegasus

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Re: Betterment Price Increase
« Reply #42 on: February 08, 2017, 11:23:42 AM »
I'm in the process of transferring some of my accounts from Betterment to Vanguard. FYI - if you first switch your allocation to 100% stocks, you'll be in all Vanguard ETFs. Then when you transfer over to Vanguard, it'll be free to sell them.

Dicey

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Re: Betterment Price Increase
« Reply #43 on: February 09, 2017, 08:28:29 AM »
Wow, Interest Compound, great input! I'm on the edge of a serious forum crush!!!

What irks me to no end is that MMM made it crystal clear that he only invested a tiny portion of his portfolio with BM. Then newbs with very little saved, and no need for tax loss harvesting, put all they have there, thinking they're doing the right thing, arrrrgh! In the future, when MMM publishes his "Results of the Great BM Experiment", he will still have a big ball o' money elsewhere. He'll be fine no matter what. Meanwhile, people of lesser means would have fared much better with Vanguard. That's possibly where the bulk of MMM's considerable army of green soldiers are stationed.

- - - - - -

Just wondering how you feel about folks who prepay their cheap, affordable, fixed-rate mortgages at the expense of investing for retirement?

I understand wanting to pay off the mortgage,  but I'd love to see a good discussion of why sequence is so crucial. The opportunity cost of putting the cart (mortgage) before the horse (investments) is simply not well understood. I know it's complicated, but you have a clear talent for explaining things in an easy-to-understand manner, which is no small feat.

Don't mean to hijack this thread, just suggesting a possible new topic, if the subject speaks to you.

Guide2003

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Re: Betterment Price Increase
« Reply #44 on: February 09, 2017, 10:44:02 AM »
I understand wanting to pay off the mortgage,  but I'd love to see a good discussion of why sequence is so crucial. The opportunity cost of putting the cart (mortgage) before the horse (investments) is simply not well understood. I know it's complicated, but you have a clear talent for explaining things in an easy-to-understand manner, which is no small feat.

Don't mean to hijack this thread, just suggesting a possible new topic, if the subject speaks to you.
I think there are already several threads along those lines. Here's one that's had some recent activity.

http://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/

Guide2003

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Re: Betterment Price Increase
« Reply #45 on: February 09, 2017, 11:08:23 AM »
I'm in the process of transferring some of my accounts from Betterment to Vanguard. FYI - if you first switch your allocation to 100% stocks, you'll be in all Vanguard ETFs. Then when you transfer over to Vanguard, it'll be free to sell them.
VBACmama, what was your Betterment allocation before you switched and did you have any TLH trades? Due to TLH about a third of my originally 100% vanguard fund portfolio ended up in other funds. I'm more concerned about the $50k in capitals gains I'll face if I switch rather than trading fees, but if you had a hack to get back into Vanguard before switching that would help!

SeattleCPA

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Re: Betterment Price Increase
« Reply #46 on: February 09, 2017, 03:27:49 PM »
This is sort of on topic though late to the discussion...

Mike Piper has a related post at his Oblivious Investor blog... I like Mike. He's a good writer and provides true insights.

http://www.obliviousinvestor.com/re-evaluating-betterment-after-their-price-and-service-change/

NeonPegasus

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Re: Betterment Price Increase
« Reply #47 on: February 23, 2017, 11:27:26 AM »
I'm in the process of transferring some of my accounts from Betterment to Vanguard. FYI - if you first switch your allocation to 100% stocks, you'll be in all Vanguard ETFs. Then when you transfer over to Vanguard, it'll be free to sell them.
VBACmama, what was your Betterment allocation before you switched and did you have any TLH trades? Due to TLH about a third of my originally 100% vanguard fund portfolio ended up in other funds. I'm more concerned about the $50k in capitals gains I'll face if I switch rather than trading fees, but if you had a hack to get back into Vanguard before switching that would help!

I moved only my retirement funds. I left my taxable accounts because I enjoy being able to add new goals (each of my daughters saves half of their allowance) and I value that feature enough to warrant the increased fees… But only on the taxable portion of my investments.

Before transferring, I switched my allocation to 100% stocks. That put all of the funds in Vanguard ETFs. After they are transfer to Vanguard, there will be no charges to switch from the ETFs to Vanguard mutual funds.



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tj

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Re: Betterment Price Increase
« Reply #48 on: February 23, 2017, 11:36:22 AM »
I'm in the process of transferring some of my accounts from Betterment to Vanguard. FYI - if you first switch your allocation to 100% stocks, you'll be in all Vanguard ETFs. Then when you transfer over to Vanguard, it'll be free to sell them.
VBACmama, what was your Betterment allocation before you switched and did you have any TLH trades? Due to TLH about a third of my originally 100% vanguard fund portfolio ended up in other funds. I'm more concerned about the $50k in capitals gains I'll face if I switch rather than trading fees, but if you had a hack to get back into Vanguard before switching that would help!

I moved only my retirement funds. I left my taxable accounts because I enjoy being able to add new goals (each of my daughters saves half of their allowance) and I value that feature enough to warrant the increased fees… But only on the taxable portion of my investments.

Before transferring, I switched my allocation to 100% stocks. That put all of the funds in Vanguard ETFs. After they are transfer to Vanguard, there will be no charges to switch from the ETFs to Vanguard mutual funds.



Sent from my iPhone using Tapatalk

You actually can't do a share conversion of ETF to mutla fund, you'd need to sell and re-buy, or just keep the ETFs. Vnaguard allows you to convert mutual funds to ETF but not vise versa.

NeonPegasus

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Re: Betterment Price Increase
« Reply #49 on: March 07, 2017, 11:31:37 AM »
I'm in the process of transferring some of my accounts from Betterment to Vanguard. FYI - if you first switch your allocation to 100% stocks, you'll be in all Vanguard ETFs. Then when you transfer over to Vanguard, it'll be free to sell them.
VBACmama, what was your Betterment allocation before you switched and did you have any TLH trades? Due to TLH about a third of my originally 100% vanguard fund portfolio ended up in other funds. I'm more concerned about the $50k in capitals gains I'll face if I switch rather than trading fees, but if you had a hack to get back into Vanguard before switching that would help!

I moved only my retirement funds. I left my taxable accounts because I enjoy being able to add new goals (each of my daughters saves half of their allowance) and I value that feature enough to warrant the increased fees… But only on the taxable portion of my investments.

Before transferring, I switched my allocation to 100% stocks. That put all of the funds in Vanguard ETFs. After they are transfer to Vanguard, there will be no charges to switch from the ETFs to Vanguard mutual funds.



Sent from my iPhone using Tapatalk

You actually can't do a share conversion of ETF to mutla fund, you'd need to sell and re-buy, or just keep the ETFs. Vnaguard allows you to convert mutual funds to ETF but not vise versa.

 I didn't mean anything technical like a conversion when I said "switch". I meant selling and buying something else. Selling non-Vanguard ETFs costs $7/ea. Selling Vanguard ETFs is free.