When it comes to optimizing personal finance, it’s important to realize that sticking to a checking account or a savings account is not the best option. It makes more sense to find an investment account that is suited to an individual’s financial goals and risk tolerance.
However, many people steer clear of investing because they don’t have knowledge of the subject and they are wary of paying out for expensive financial advice and investment opportunities. This means that they end up relying on traditional saving options rather than optimizing their finances with well-informed investing choices. This is perhaps understandable given the level of performance and costs associated with some investment options.
Take mutual funds for example. They have a long history of underperformance vs. the overall stock market indices. To make matters worse, they also charge exorbitant fees for all kinds of standard business expenses. They may not be amongst the wisest investment options a person could choose. It’s no wonder that with the surge in online brokers and online innovators, that someone would come along and create a better way to service individuals who want the benefits of a mutual fund but don’t want to pay for the high cost of management as the fund underperforms the overall market.
Enter a new company that is changing the game when it comes to investing in funds whose name is Betterment. Betterment is a budding company that wants to make it easy and affordable to invest in stocks and bonds, and create an investment portfolio, while making good returns and minimizing fees. What follows is a comparison between Betterment and a standard mutual fund. I think that you too will clearly see why Betterment has raised the standards for investing.
A Typical Mutual Fund
Mutual Funds have now been around long enough to critique. Since their inception, historic returns for almost all of them have underperformed the overall market. There are a few that consistently outperform the market but they are hard to find or are closed to new investors. To make matters worse, when you subtract the fees from the already lower returns, you almost end up with no gains whatsoever.
What fees am I referring to? How about management fees that can run you 1-2% of your total account balance per year regardless of if your account goes up or down in value. Then there are load fees which can include a 1% fee just to get into the game. That’s right, this is charged just for opening a brokerage account and it’s 1%! If you finally do decide to move your money somewhere else, there are sometimes additional fees for account closure.
Although Section 36(b) of the Investment Company Act enables mutual fund investors to sue when funds charge excessive asset management fees, it is seen simply as a nuisance by funds and has not changed the landscape. As Quinn Curtis writes in the Harvard Law School Forum;
“Whatever the hopes of the proponents of 36(b) at the time of its enactment, there is little evidence that it has been effective in protecting investors.”
It seems that excessive charges are going to continue being an issue when it comes to investing in mutual funds. By the time everything is said and done, you can watch a 4% gain in the fund have no effect on your account balance. All the gains went towards paying fees!
If that’s not bad enough, many funds are not totally diversified and are sector based or stock behavior based like growth or value funds. These funds are somewhat diversified but not as good as they could be. Oh, and one last thing, you’ll need a lot of money to open an account. This can sometimes be $1,000, $5,000 or $10,000 depending on the fund.
- $1,000, $5,000 or $10,000 to open an account
- Load fees which can be 1%
- Management fees that can be 1-2%
- Some diversification
- Other transaction fees
You can start to see that this may not be your best option, when it comes to looking for low cost investment options. So, what is the alternative solution that Betterment provides?
The Betterment Advantage
Betterment gives you diversity by giving you access to 12 asset classes that are varied across funds that hold diversified exchange traded funds (ETF’s) . In addition, you can own a mix of stocks and bonds all in one place. Besides access to US based companies, Betterment also offers funds with exposure to both international and emerging markets. Best of all you can start an account with them for as little as $100 per month. Their fees are very small and range from .35% to .15% depending on your account balance. With all these features, it’s impossible to not outperform most mutual funds.
- $100 to open an account
- Fees between .35% and .15%
- No other transaction fees
You can see that from an annual fee and ongoing fees point of view, Betterment is a good option. There is also no minimum balance required for a basic digital account, although $100,000 is required for a premium account. But, aside from lower fees, good balance requirements and diversity what does Betterment have to offer?
Betterment in more detail
There are several advantages to be had from choosing a hybrid investment platform like Betterment. You get access to one of the best robo advisor provisions in the business while the premium plan also gives you unlimited access to a certified financial planner (cfp), to help you with concerns such as asset allocation. Betterment compares favorably with other platforms such as Vanguard and Wealthfront and certainly gives you a better opportunity for investment success than simply investing in mutual funds.
Retirement accounts advice at Betterment
Let’s face it, one of the major reasons that many people choose to invest is to gain financial protection for their retirement. Using a Betterment account makes it easy to choose the right retirement account. Accounts that you can consider include a traditional IRA, Roth IRA and a rollover IRA which enables you to move money into an IRA account. The low Betterment fees make choosing it for retirement investing a good idea. Of course, you do not have to be planning for retirement to make use of the investment advisors at Betterment. You may have other investment goals, such as building an emergency fund or paying for college. Whatever your financial goals are, you can take advantage of the fair Betterment charges.
Tax efficient investing with Betterment
One of the most valuable Betterment uses is enabling tax efficient investing for users. The Betterment system makes use of automatic rebalancing which can save on capital gains tax if the rebalancing takes place in tax advantaged accounts. You can be sure that tax returns will always be optimized by the advice which Betterment provides.
Betterment enables you to be socially responsible with your retirement planning or other investing, by providing socially responsible investing options. Whether you are looking for short-term investments, or have a longer term focus, you can choose to invest in companies that have a high level of social responsibility and a reputation for helping to protect the planet. This means that not only do you get a Betterment portfolio that is best suited to you but you also get to feel good about your investment choices and their social impact.
You can see that mutual funds have a reputation for under performing and that the better performing mutual funds are not readily available to new investors. The cost of choosing to simply invest in mutual funds can also be high.
On the other hand, choosing to develop an investment strategy using a Betterment account attracts a low service fee making it more attractive financially. The fee structure at Betterment certainly bears comparison with competitors such as Schwab and Blackrock. There is also no massive minimum investment required in order to access accounts such as a sep IRA. Simply put, using Betterment is an excellent way of gaining access to a financial advisor with low fees attached. You can rely on sound advice to manage taxable accounts and high quality tax loss harvesting services. Using Betterment to invest also means that you have an improved social conscience.
After reviewing a side by side comparison of each service, including fees, performance and diversification, it’s clear that Betterment is the winner. Even if the returns were exactly the same, the savings in fees alone would make Betterment stand out for its total returns including fees. Take some time to research this company for yourself. I think that you’ll like what you find.