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Re-evaluating Betterment After Their Price and Service Change

Most readers of this blog are passive investors of some form or another, whether via Target Retirement/LifeStrategy funds, robo-advisors, or just simple index-fund/ETF portfolios.

A few readers have asked for my thoughts on the changes that robo-advisor Betterment recently made to their fees and offerings.

Previously, Betterment’s cost was 0.35% pear year for accounts up to $10,000, 0.25% for accounts from $10,000-$100,000, and 0.15% per year for portfolios of at least $100,000. And for that price, the customer received automated portfolio management, including tax-loss harvesting for taxable accounts.

Now, they will be offering three different levels of service, two of which include ongoing human advice along with the portfolio management:

  • For 0.25% per year you get the same portfolio management service as before.
  • For 0.40% per year you get portfolio management, plus an annual call with their CFP team.
  • For 0.50% per year you get portfolio management, plus unlimited calls with their CFP team.

In other words, it’s a price increase for people who have at least $100,000 with Betterment, and a price decrease for people who have less than $10,000 invested with them. And now there are two additional options to choose from (for people who meet the applicable minimum account sizes).

The price change makes Betterment’s portfolio management price nearly identical to that of their closest competitor, Wealthfront, which also charges a flat 0.25% per year for portfolio management (with the exception of the fact that Wealthfront will manage the first $10,000 of assets for free).

Compared to Target Date Funds

I’ve always found it instructive to compare robo-advisors to an alternative hands-off portfolio solution: all-in-one funds, such as target-date funds, balanced funds, or LifeStrategy funds.

In my view, relative to all-in-one funds, the primary advantage of Betterment’s portfolio management service has been the fact that it is more tax-efficient when there’s a taxable account in the mix, because it includes tax-loss harvesting, offers asset location planning, and uses muni bonds rather than taxable bonds when appropriate.

As a result, the situation in which Betterment always seemed most appealing to me was for investors who:

  • Have at least $100,000 to invest (such that they’d qualify for the lowest cost),
  • Want a hands-off portfolio management solution, and
  • Have a large part of their assets in taxable accounts (such that the improved tax-efficiency would provide significant value).

I think the same holds true today, except for the fact that there’s no longer a need to hit the $100,000 threshold for lower pricing. (Of course, for people who do have more than $100,000 to invest, the price just went up by 0.1%, thereby meaning that the value of the tax-efficiency must overcome an additional 0.1% annual hurdle in order to provide a net benefit to the customer.)

Compared to other Human/Robo-Advisors

Vanguard’s Personal Advisor Services costs 0.30% per year. For that cost you get portfolio management, plus phone/email/Skype contact with a Vanguard advisor whenever you want. The service does not, however, include tax-loss harvesting.

Similarly, Schwab recently announced that they’ll be launching a human/robo service later this year. The cost for that service is supposed to be 0.28% per year (with an annual maximum of $3,600). And what you get for that cost looks very similar to Vanguard’s service — portfolio management, plus as-needed contact with a Schwab advisor. One noteworthy difference: for accounts of at least $50,000, they will also provide automated tax-loss harvesting.

Schwab’s upcoming service and Vanguard’s Personal Advisor Services seem most comparable to Betterment’s 0.5% service level, because they each include unlimited access to human advisors.

The Betterment platform would be preferable to the Vanguard platform if you think that tax-loss harvesting will be worth at least 0.2% per year (in order to justify the additional cost). But I’m not really sure how it would be better in any way than Schwab’s new service once that is released, as the Schwab service appears to offer all of the same things, at a lower cost (0.28% annually rather than 0.5%).

(Of course, it’s possible that the Schwab service will have some “catch” that we have yet to learn about. Presumably we’ll get more information when the service is actually released and people try it out and report back on their experiences.)

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