Finance

Why I’m Leaving Betterment

Last March I wrote this review of Betterment, a robo-advisor, which I’ve been using for my taxable brokerage account. The main draw of having an account with them was their tax loss harvesting feature. After having my taxable account handled by Betterment for the last year and a half, I’ve decided to close my account and move the funds into a new taxable brokerage account with Vanguard. Here’s why.

Reason #1: Consolidation of Accounts

Since my 401(k) rollover IRA and Roth IRA are both with Vanguard already, it makes sense to move my taxable account to Vanguard as well. It’ll be one less login and account to keep track of, and it’ll be much easier to move funds around when/if that time comes. I originally created a brokerage account with Schwab, due to how little it takes to start investing (vs. Vanguard’s $3,000 minimum for mutual funds). But Schwab made transfers from my bank account to my brokerage account, and then investing those funds, very cumbersome. I then moved the funds to Betterment, which did make transfers and investing much easier.  But now that I have more than enough in my brokerage account to invest in whatever Vanguard funds I’d like, now is the time to open a brokerage account with them.

Reason #2: Performance

While I’m not necessarily disappointed by how my account has performed over the last 1.5 years, I’m also not blown away. In fact, my rate of return for 2016 was slightly lower than the two Vanguard accounts that I manage myself (and rarely touch in regards to reallocation). If I’m going to pay an advisory fee, I’d like to see a better return than I can get on my own.

Reason #3: Excessive Account Activity

Because a robo-advisor is constantly reallocating your account and doing tax loss harvesting, there’s a lot of activity. I first realized this a year ago, when I was working on my 2015 taxes. With only 6 months of activity, the tax form was 16 pages. While I haven’t gotten my 2016 form yet, I’m guessing it’ll be even longer. Fortunately, I can upload the data directly to my tax prep software. Even then, I’m required to ensure each line was loaded correctly. It’s time consuming and something I’d prefer not to do going forward. I’ve also heard that this excessive activity can impact ACA subsidies. While this is something I’ve taken into consideration, it’s not relevant at this point since I don’t plan to retire for at least 10 years and we have no idea what health insurance will look like at that point.

I’m sure that people can provide even more reasons why I should leave Betterment (or not invested with them in the first place), but these are my main reasons for leaving. Overall it was a fine experience, and I’m glad I tried their service, but I had hoped for something so much better.

A Note On How I’m Transferring the Funds

To prevent paying capital gains taxes, I’m doing what’s called in in-kind transfer. This means that I’ll remain invested in the exact same funds, and only the brokerage will change. Since Betterment has me invested in 19 different funds, I’ll likely start selling off some of them to invest in Vanguard funds instead.

Have you ever used a robo-advisor? Would you ever consider it?

 

13 thoughts on “Why I’m Leaving Betterment

  1. That was a very informative post. I’ve been wondering about Betterment since it’s all the buzz in the PF community. I had my taxable investment in a Schwab index fund through Capital One. Such a waste of money. I had to pay each time I bought additional shares. So stupid. But I, too, started with Schwab because of their low entrance requirement. The problem was I was going through yet another brokerage firm. I have since transferred everything over to Vanguard. Glad to hear you were able to transfer without too much hassle or cost! Kudos 🙂

    Mrs. Mad Money Monster
    Mrs. Mad Money Monster recently posted…Early Retirement Resistance – When Friends Push BackMy Profile

    1. I’d heard a lot about Betterment as well, so I thought I’d give it a try. I’m glad I did – it’s very easy to use and I’d definitely recommend it for anyone who wants to be hands off. But I’m also happy with Vanguard so it’s easier to have everything in one place. Vanguard makes account transfers easy but they’re never fast. That’s my only complaint 🙂

  2. Hmmm, very interesting point. It’s funny because I see a lot of people consolidating their accounts with Vanguard both for simplicity and performance. I was just talking to Mr. Picky Pincher this morning about retirement. I definitely think Vanguard is our go-to for investing, once we get out of debt first.
    Mrs. Picky Pincher recently posted…A Review of Living On One DollarMy Profile

    1. Either Vanguard or Fidelity are great choices. A previous employer had our 401k plan with Vanguard so that’s how I got started with them. Just easier to have everything in one place.

  3. Was going to comment about the potential tax impact of switching but looks like you’ve got that under control.

    I do like Betterment for majority of people who really have no idea how investing works. But right, if you’re already a do it your selfer, might as well cut out the middle man and save those management fees.
    Financial Panther recently posted…Net Worth Report – Q4 (2016)My Profile

    1. I agree that Betterment is a great option – very easy to use and their website is user friendly. I’d definitely recommend it to certain people.

  4. The tax complexity is huge and the main reason I wanted out personally. And checking each line? Uh, nope. Sure didn’t do that.

    I pride myself on being able to do my own taxes. It’s too much work with all those transactions. And in the end, I guess I feel I’m smarter than the robot, with basic understanding of things like folks in low brackets shouldn’t be in tax exempt bonds, but all of the robo’s put everybody in tax exempt bonds in a taxable account. I feel like if the robot was a bit smarter, I’d be more excited about it, but I’d still probably not use it for the tax simplcity reasons

    Hopefully you don’t have any snafu’s with transferring to Vanguard. I know their customer service is not that great particularly when things go wrong.
    TJ recently posted…When The Routine Dies, Create a New One.My Profile

    1. I completely agree. I would much rather have at least some control over which funds I’m invested in and you can’t do that with Betterment – they control everything.

      I’ve been working on this transfer for 2 weeks now. Vanguard is painfully slow….

  5. The number of transactions scared me away from robo-advisors right off the bat. I wonder how many people have been correctly following wash sale rules with their Betterment accounts, especially if they hold related funds in IRAs or 401ks that automatically reinvest dividends and capital gains…

  6. You have described most of my concerns with Betterment. Yes, it’s easy to use, but so is Vanguard really too once you have the initial $3,000. You can send part of your direct deposit, do automated investments from your checking account, and allocate those in the ratios you want. When you only need three funds for your portfolio (Total Stock Market, Total International Stock Market, and Total Bond Market), it’s a pretty easy math problem to solve. Betterment sounds like it was really helpful to get you started though, which is also super important! I usually only suggest robo advisors to friends if they are going to use it for a tax-advantaged account because of the tax annoyances.

  7. My college friend keeps trying to get me to use a robo adviser like Betterment. In the end, I don’t want to pay their additional 0.25% account management fee. I also only do tax-advantaged investing at the moment, so I wouldn’t gain anything through tax-loss harvesting.

    Do you know if they do tax-gain harvesting in tandem with tax-loss harvesting?

    1. That’s a good question. I looked at their website but the focus is only on tax loss harvesting.

      I do think it’s a decent service for people who are hands-off and/or have no interest in learning how to manage their investments. Nobody in the PF blogosphere needs this kind of service.

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