Betterment

[ripper1]

Has anybody heard of the automated investing service called Betterment? I know a lot of us like to do this on our own. But they have a low fee of around .15 and they have a tax loss harvesting tool that does it for you. Pretty cool.

[travelover]

Hard to beat a Vanguard Target fund for low cost and simplicity, if you really want hands off.

[MikeTN]

I think Bettermint would be slightly lower cost than a Vanguard target date fund. I'm interested because I need more discipline and this would help. However, Charles Schwab says it is coming out with something similar in the first Quarter of 2015 (almost over) and that there would be no cost.

I am waiting to see what Schwab introduces.

[samclem]

I don't think Betterment will be cheaper than a vanguard target date fund. Betterment charges 0.15% on amounts over $100K, and you'll still have to pay the ERs of the ETFs they buy. Vanguard target date funds have very low expenses of just .18%. I'd want to know a lot more about the ETFs they are going to use.

For an FA (and that's what betterment is--they provide financial advice), Betterment's fees are pretty low. The tax loss harvesting program they have is neat. I don't see that they will do sophisticated stuff (i.e. help you build a plan to maximize ACA subsidies, or even the best way to withdraw nd reduce taxes overall), but at least their fees aren't outrageous. I think most investors would be better off doing things themselves because they'll cut their costs in half and, more importantly, they'll know what is going on with their investments.

[LOL!]

Folks on the bogleheads forum are also curious about Betterment. After some initial discussions things have died off. There were some actual clients who noted automated tax-loss harvesting moves, too. A main issue seemed to be interference with other accounts that one had. I don't think anybody raved about it and at least one person stopped using Betterment.

With all the brouhaha from annoyed folks about late 1099s, we haven't heard a peep about Betterment's 1099 timeliness and accuracy.

I would think Betterment is for those folks who truly do not even want to open statements. These same folks would have no way of knowing if tax-loss harvesting was doing them any good or if Betterment could be doing a better job of that, perhaps with fewer TLH moves of larger losses rather than lots of moves with smaller losses. These folks would not be able to compare their portfolios to benchmarks either, so they would have to trust Betterment.

As for Schwab, I think folks figured out how they would make their money: It seems they would require a significant cash position in those portfolios. That cash would earne money market rates which we know are essentially zero. Of course, Schwab would make money by using that cash for themselves.

I'm thinking the best Roboadvisor solution is a simple Vanguard Target Retirement Index fund. Those things are pretty hard to beat on a risk-adjusted basis and fee basis. They have been around a while and are well-proven.

However, a mix of accounts: 401(k), rollover IRA, Roth IRA, taxable, 529, etc still seems to not be solved by roboadvisors.

I presume ripper1 reads the bogleheads.org forum.

[Dreaming of Freedom]

I am also interested in a company that provides tax loss harvesting. We want to get away from the fees of our FA, but managing/balancing capital gains & losses on my own scares me. The taxable account is currently with Schwab, so I am anxiously waiting to see what they come out with.

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[Sunset]

I read somewhere recently that show re-balancing which everyone and their dog thinks is a good idea, actually over a long span returns 0.15% less than not re-balancing. So this has made me less concerned over my poor re-balancing behaviour

[travelover]

Quote:

Originally Posted by Dreaming of Freedom I am also interested in a company that provides tax loss harvesting. ......

Just be aware that tax loss harvesting doesn't eliminate taxes, it just pushes them down the road. Depending on your current and future tax brackets that can be a good thing, or not.

[samclem]

Quote:

Originally Posted by Sunset I read somewhere recently that show re-balancing which everyone and their dog thinks is a good idea, actually over a long span returns 0.15% less than not re-balancing.

It depends on the data used. Failure to rebalance means that the assets with the highest returns (usually the riskiest equities) will eventually come to dominate the portfolio, and so the portfolio will have a higher overall return. But with much higher variability (beta). An investor can get the same results just by investing in those assets to begin with, but the ride is very wild.
Rebalancing >primarily< serves to keep the variability of our portfolio value in our comfort zone. There's also some forced "sell high/buy low" that improves results, but it (in general, and depending on the data used) that doesn't make up for the "drag" of the dull, low return, low beta assets inthe portfolio.

[Kaufmanrider]

Quote:

Originally Posted by LOL! As for Schwab, I think folks figured out how they would make their money: It seems they would require a significant cash position in those portfolios. That cash would earne money market rates which we know are essentially zero. Of course, Schwab would make money by using that cash for themselves.

Vanguard does the same if you go for a "Personal Advisor Service."

The Service will recommend that you establish a new money
market fund, or designate an existing money market fund,
to facilitate cash flow into and out of the managed accounts,
herein defined as a “Spending Fund.” If you have established
a Spending Fund, any additional cash added will remain in
the established, or existing, Spending Fund until the total
amount of assets in the Spending Fund exceeds an agreed
upon maximum limit (the “Upper Threshold”). When the
Upper Threshold is exceeded, your Spending Fund balance
will be reduced to the agreed upon target amount (the
“Target Balance”), and the additional assets will be invested
according to the terms of your current Financial Plan,

[ERD50]

Quote:

Originally Posted by Sunset I read somewhere recently that show re-balancing which everyone and their dog thinks is a good idea, actually over a long span returns 0.15% less than not re-balancing. So this has made me less concerned over my poor re-balancing behaviour

Agreed - I've decided to not worry much about it, which fits in well with my lazy approach to many things. A really big swing could have me looking at it again (last time I did anything was OCT 2008, and a little more in SEPT 2009 which worked out pretty well).

Other than that, I'll just use withdrawals to adjust a bit, pulling from whatever side is relatively high.

-ERD50

[petershk]

I'm currently using it... primarily for a long term account for my kids (15-20 years). The 0.15% fee is about as low as you can get, but -of course if you rebalance yourself, over time that's actually a good chunk of money on 100k. So why on earth would I use it? Well... it turns out I'm pretty undisciplined and lack self control. While IN THEORY I could just do this myself, my urge to play around will be great when the market goes through it's madness. So it's better if I just "forget" and focus on other things (maybe they should call it forgetterment :P). But if I do that and don't rebalance, etc. I think that it'll be "a bit worse" in the long run. So betterment lets me automate all of those things for a reasonably low fee.

Also, Betterment doesn't call me offering me ideas or bug me about anything. It just grows. I think a Vanguard Target Date fund is probably the same so it's possible I'm just being an idiot falling for clever marketing. So... I'm doing a bit of a comparison to see which type of thing I like more. I do like their fund selection process and I like their approach quite a bit.

I'm not really into religious battles... I think piece of mind is a very important thing and if you pay 1500/year to have it on 100k... that's fine... if you don't pay that and do it yourself to have it... that's fine . To me it's like the "should I pay off my house" argument. If you sleep better with it paid off... pay it off... if you sleep better with the low interest write off/option... don't pay it off.

[samclem]

Quote:

Originally Posted by petershk I think piece of mind is a very important thing and if you pay 1500/year to have it on 100k... that's fine...

AAAgh! I hope not! $100K x .15% = $150 per year! Whew!

[LOL!]

And while I do like peace of mind, I might give folks a piece of my mind for mixing up homonyms.

[pb4uski]

Quote:

Originally Posted by travelover Just be aware that tax loss harvesting doesn't eliminate taxes, it just pushes them down the road. Depending on your current and future tax brackets that can be a good thing, or not.

True IF the investment recovers in value, but that is somewhat presumptuous. It can be good if your tax bracket declines as is common when one retires or if one can use the losses to offset ordinary income.

[LOL!]

For many people, tax-loss harvesting does eliminate taxes. There are two reasons for this:

1. Later in life, one can be in the 15% marginal income tax bracket which means that Long-Term Capital Gains are taxed at 0%. This turns out to be most important. For instance, suppose one sells $200K of mutual fund shares in order to pay expenses for a year. If the basis is $100K and the long-term capital gains is $100K, and $26K of the LTCG is offset by previous carryover losses from tax-loss harvesting, then the income tax on your $200K is $0.00.

2. One can die. There is a step-up no-tax basis applied to the assets.

[travelover]

Quote:

Originally Posted by pb4uski True IF the investment recovers in value, but that is somewhat presumptuous. It can be good if your tax bracket declines as is common when one retires or if one can use the losses to offset ordinary income.

Good point. I've only done this with broad index funds, and I was pretty confident on a recovery.

Quote:

Originally Posted by LOL! For many people, tax-loss harvesting does eliminate taxes. There are two reasons for this: 1. Later in life, one can be in the 15% marginal income tax bracket which means that Long-Term Capital Gains are taxed at 0%. This turns out to be most important. For instance, suppose one sells $200K of mutual fund shares in order to pay expenses for a year. If the basis is $100K and the long-term capital gains is $100K, and $26K of the LTCG is offset by previous carryover losses from tax-loss harvesting, then the income tax on your $200K is $0.00. 2. One can die. There is a step-up no-tax basis applied to the assets.

Great points. Ironically, my situation is that I'm in the 25% tax bracket in retirement and I see this rising after RMDs. I probably will die, though.

[hnzw_rui]

Quote:

Originally Posted by samclem I don't think Betterment will be cheaper than a vanguard target date fund. Betterment charges 0.15% on amounts over $100K, and you'll still have to pay the ERs of the ETFs they buy. Vanguard target date funds have very low expenses of just .18%. I'd want to know a lot more about the ETFs they are going to use.

Quote:

Originally Posted by LOL! I'm thinking the best Roboadvisor solution is a simple Vanguard Target Retirement Index fund. Those things are pretty hard to beat on a risk-adjusted basis and fee basis. They have been around a while and are well-proven.

Hmm, a comparison would be interesting to see. Might do that next year with my 2015 Roth IRA contributions using $1,000 opening deposit and $50 biweekly contributions on each account. Will use Target 2045 on Vanguard and just set the target retirement age on Betterment. Granted, I think the fees are a heftier 0.35% for small accounts on Betterment so that's bound to eat into the returns.

[samclem]

Quote:

Originally Posted by hnzw_rui Hmm, a comparison would be interesting to see. Might do that next year with my 2015 Roth IRA contributions using $1,000 opening deposit and $50 biweekly contributions on each account. Will use Target 2045 on Vanguard and just set the target retirement age on Betterment. Granted, I think the fees are a heftier 0.35% for small accounts on Betterment so that's bound to eat into the returns.

You can calculate the costs of both options without investing anything, and it will be a firm number. I don't think you'll get much useful data from a one year experiment in total returns--any differences (aside from costs) will be due to the asset allocation of each portfolio and the vagaries of market in that one year. Even 20 years wouldn't tell you which was "better", only which allocation happened to best match what the market did (e.g. foreign developed markets did great, EM got clobbered, US bonds performed better than expected, etc). That's something we can't know in advance.

Costs matter, and you can control those.

[hnzw_rui]

Quote:

Originally Posted by samclem You can calculate the costs of both options without investing anything, and it will be a firm number. I don't think you'll get much useful data from a one year experiment in total returns--any differences (aside from costs) will be due to the asset allocation of each portfolio and the vagaries of market in that one year. Even 20 years wouldn't tell you which was "better", only which allocation happened to best match what the market did (e.g. foreign developed markets did great, EM got clobbered, US bonds performed better than expected, etc). That's something we can't know in advance. Costs matter, and you can control those.

Yeah, I already estimated the costs. Target 2045 has a 0.18 expense ratio, iirc. Betterment fees are 0.35 for accounts <10K, 0.25 for 10K to <100K and 0.15 for 100K or more. Add those to underlying ETFs' average 0.10 ER.

I realize portfolio performance is partly a matter of luck. Just thought it would be interesting to see how a simpler portfolio like Vanguard's more or less compares to Betterment's automated software. Consider this little experiment my fun money if you will. Just no tax implications as long as I don't withdraw earnings until I'm 59 1/2.