Betterment vs. Mutual Funds: A ComparisonMutual funds 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. 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 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 be a 1% fee just to get into the game. That’s right, this is charged just for opening an account and it’s 1%! If you finally do decide to move your money somewhere else, there are sometimes account closure fees.

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

The Betterment Advantage

Betterment gives you diversity by giving you access to 12 asset classes that are varied across funds that hold diversified 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
  • Diversified

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.