Building Wealth And Being Happy

A Practical Guide To Financial Independence

Betterment Raises Fees; Are Robo-Advisors Worth It?

Betterment, one of the biggest robo-advisors, made news a few days ago by announcing they are increasing their fees from .15% to .25%, with no additional benefits or services being offered in return. On a $100,000 portfolio earning 7% a year for 30 years, investors will be left with $30,000 less at the end. That’s got to be worth at least a latte a day. Betterment customers are livid, so it’s worth re-examining robo-advisors as a whole.

What is a Robo-Advisor Again?

Target date funds, such as those offered by Vanguard and Fidelity, are all-in-one portfolio solutions with names like “Target 2035”, for those who expect to retire in the year 2035. These fund holds a mixture of stocks and bonds and slowly makes the portfolio less risky (by adding a higher percentage of bonds) the closer you get to the target date.

Robo-Advisors, like Wealthfront and Betterment, are not actual robots. But they do take the hands-off approach of target date funds a step further. They offer portfolios that you put money into and, based on your risk profile and goals, a computer program buys and sells diversified broad-based funds for you in return for a fee on top of the fee you pay to the fund. They’re like cheaper financial advisors without emotions.

Are They Worth It?

One of the main purported advantages of robo-advisors is that they automatically re-balance your asset allocation for you. They’ll also automatically re-invest dividends for you and even do some tax-loss harvesting in taxable accounts (i.e. not 401(k), IRAs, TFSAs, or RRSPs)

In Building Wealth And Being Happy, I noted that if you read all the way through to the appendix where I discussed robo-advisors, you knew enough from reading the book that you had no use for them. It’s simply cheaper to employ a true DIY style approach using low-cost ETFs because the extra .25% of fees that a robo-advisor takes can add up to tens of thousands of dollars over the life of your portfolio.

The Disagreement

Other bloggers disagree. Popular financial independence blogger Mr. Money Mustache, who has a marketing relationship with Betterment, had this to say:

It is overwhelmingly clear that my Betterment account delivers more than 0.25% net annual improvement over trying to manually approximate its performance with Vanguard ETFs.

It’s an interesting argument – that the tax loss harvesting and re-balancing services provided by Betterment negate any fees they charge. Or even more so: you might be missing out on money by not investing with Betterment!

But this overlooks a simple point: You can do-it-yourself tax-loss harvest. Simply note when one of your ETF holdings is down below its cost base, sell it (obtaining the paper loss) and buy back a similar fund offered by another ETF provider. I mentioned this to Mr. Money Mustache, who responded:

Yes! You are right in theory… But the way Betterment does TLH algorithmically is several times more efficient than what I could do with some buy/sell orders, even in a brokerage account with Vanguard ETFs. They do stuff rapidly on an intra-day basis, and you KNOW I am not looking at the stock market every day.

Equally important is what you enjoy doing: managing investments is necessarily an indoor, sedentary activity. I already have a surplus of those in my life, so I’d rather outsource it in order to do the other physical/body-based activities. Even though they pay less on a dollars-per-hour basis, they pay more in life-enjoyment-per-hour.

Fair enough! It’s definitely admirable to prioritize your time on things that make you happy, and chances are that tax-loss harvesting isn’t something that puts a smile on your face.

But MMM has presented a false choice:

  1. Do zero tax loss harvesting on your own or;
  2. Use betterment for super-efficient, intra-day tax loss harvesting.

Robo-advisors never sleep, and are always looking to trade to your advantage. But there’s a third choice: Do some tax-loss harvesting on your own – maybe a few hours a year. You don’t need to tax-loss harvest every day to get the majority of the losses available to you. I have an (unsubstantiated) hunch that checking even just a few times a year for unrealized losses would allow you to get enough tax-losses to make any extra losses Betterment can provide not worth it at their fee levels.

Robo-Advisors in Canada

Canadian investors get an even shorter end of the stick. Leading rob-advisor in Canada, WealthSimple, offers staggeringly high fees of .5%. Yikes.

Heck, Canadians can’t even get any good Target date fund offerings. Vanguard introduced them for institutional plans (like your company RPP) a few years ago, but if your employer doesn’t offer the Vanguard funds then you’re out of luck.

Final Thoughts

Still, that doesn’t mean robo-advisors are the worst. In fact, they rank quite favourably compared to expensive mutual fund managers and pushy financial advisors. If you don’t have a few hours to read Building Wealth and Being Happy (shame on you!), then don’t feel bad about using robo-advisors or recommending them to your less savvy friends.

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3 replies

  1. Great points! I really wish we had some viable robos or target date funds in Canada 🙁

  2. Great post Graeme! This is why I prefer to just DIY and save on the MER since I just invest in the same funds every time I rebalance to maintain my asset allocation.

  3. Interesting article. I recently started putting a small amount of money into Betterment. As of this point in time, I don’t have enough in taxable accounts to see a lot of benefit from their model, but I like the model and want to see how it works in the long run. $30,000 over the course of 30 years is nothing to sneeze at, but it’s also not a life-altering amount of money and I’m willing to take this minor gamble.

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