To address various points in no particular order:
I ran these numbers because I am on the fence, and I am on the fence because the Vanguard vs. [X] decision isn't black and white for every single person. To be honest I am not that pleased with the municipal bonds allocation, but my income is high enough that it isn't a big deal right now. It is not clear that one needs to be in the highest tax bracket to justify owning municipal bonds (see, e.g., http://news.morningstar.com/articlenet/article.aspx?id=637082 ) Conversely, Vanguard's portfolios have a relatively lower international allocation, which I don't agree with.
Sure, if Betterment's bets are similar to the bets you personally would be taking anyway. The target market, however, (people who are looking for one-button-push investing and want someone to handle it for them)
shouldn't be betting at all. The various tilts in Betterment's 10-20 ETF portfolio would make a financial newbie's head spin, and I'm sure that was their intent when choosing it.
The morningstar link supports my argument. It's simple math, and it doesn't make sense for 99% of Americans.
http://forum.mrmoneymustache.com/investor-alley/when-to-use-municipal-%28tax-exempt%29-bonds/I maintain the freedom to move my money from Betterment at any time, as other people in this thread have done. I will not be leaving it there for 30 years without paying attention to what they're doing. The changed allocation risk you've identified applies to Vanguard's portfolios as well -- in fact they very recently changed their portfolios. If they go out of business I'll simply be in the same situation as now -- looking at places to move the ETFs/money, though presumably with a more specific deadline.
Yes you have the freedom to move, and when you do, you'll have two choices:
1. Take a possibly huge capital gains tax hit when selling all the 10-20 ETFs they put you in.
or
2. Manually manage their 10-20 ETF portfolio for the rest of your investment horizon. For the people on this forum, that could be 30-60 years.
This is huge, and the biggest thing most people don't realize. Does this sound like a good path for a financial newbie trying to
simplify their life savings?
I filled out a questionnaire at Betterment and they recommended something like 60/40, which I promptly ignored.
80/20 and 90/10 are appreciably different. 80/20 and 85/15 are less so, but as I proved, even this small difference can overcome a significant difference in expense ratios. Although my post above ignored the effects of TLH, it's already reduced my taxes by over $1000, and will again this year due to carry forward.
Never use different asset allocations as an excuse for higher fees. "Yes, the fees are higher, so to compensate I'll just take on more risk!" is a
horrible lesson to impart on any financial newbie (the people currently considering Betterment). Tax Loss Harvesting will never be able to counteract the fees. Again, this is simple math. The fees will always beat it in the long-run. This is inevitable, for the simple reason that the fees are both
percentage based (so they get higher as your account grows), and
forever (each and every year, for the rest of your life), while the tax loss harvesting benefit is
temporary.
Another thing to watch out for, they love advertising the tax benefits, when most people have no idea how to interpret them. Even the great MilesDividendMD, a prolific investor and blogger, didn't understand that a Tax Loss Harvest of $1000, will only put around $300 back in your pocket, depending on your tax bracket. It sounds like you understand it, but this was a pretty big embarrassment for him in one of the Betterment threads...what chance do you think the newbies have of understanding this stuff, when even the experts are misled?
VT does not employ rebalancing or target allocations (nor should it), so it is appreciably different from holding, say, 50% of VTI and 50% of VXUS. With the latter you're also getting over 2000 additional companies versus the former (and a lower expense ratio to boot).
VT automatically rebalances, as does any market-weighted instrument. If you believe it doesn't rebalance, you have a fundamental misunderstanding of how market-weighted funds/ETFs work.