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What's The End Goal for Wealthfront and Betterment? (2016)

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Re: What's The End Goal for Wealthfront and Betterment? (2016)

#21

Post by twblalock »

Ductapemaster wrote: post #11
toomuchtodo wrote: post #10

Earlier quoted context omitted.

Neither option is better than a Vanguard account with one of their target date funds (or funds targeted by level of aggressiveness). Vanguard is a mutual company; they exist for the benefit of their users. Hard to compete against that. Disclaimer: moved from Betterment to Vanguard

Could you explain a bit more? Are you making a better ROI? I currently have a Betterment account and would consider switching if there's a good reason.

If you moved your money to Vanguard and invested in the same funds Betterment currently invests in for you, and you rebalanced as often as necessary, you would get a slightly higher ROI at Vanguard because Vanguard has lower fees.

However, all of the things Betterment does for you now would be your responsibility, including asset selection, rebalancing, thinking about how to manage taxes, etc.

The bottom line is that you can do this yourself for less money, but you have to do it all yourself. Betterment offers more convenience for a higher fee.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#22

Post by thinkloop »

mfrykman wrote: post #6

In the article, it states that Chase is offering 0% funds, yet Betterment claims that their "All-in Actual Cost" for a 100k fund is better than Chase's due to cash drag and a lower expense ratio. (Found here: https://www.betterment.com/comparison/schwab-intelligent-por... ) This is confusing and hard to fact check. Who do I believe?

Index-based robo-advisors generally invest your money in vanguard, ishares, schwab broad-market etfs, which come with their own fees (industry-lowest). The expense ratio is the accumulation of all those fees. To check the accuracy of the claim, you would need to find the specific instruments each company invests in, at what proportions, and add up their fees.

Cash drag is the penalty you pay for the time and amount of your wealth that is spent in sub-productive, inflationary cash. The article states:

"Schwab allocates up to 30% of a portfolio to cash. In certain circumstances, keeping up to 30% in uninvested cash can result in up to a 0.56% annual return penalty"

This sounds like a worst case scenario. To roughly calculate cash drag, you can take the avg percentage of wealth that will be in cash throughout the year, then multiply by 5% rule of thumb avg returns. For example if you had to keep 10% in cash, that would be 0.1 * 0.05 = 0.5% in lost potential earnings due to cash.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#23

Post by Analemma_ »

I don't use them, but I can tell their strategy is working. My broker (through work) is Fidelity and lately they've been throwing up pop-ups on login, and sending me emails, urging me to try their low-cost funds that they insist are cheaper and better than Vanguard. They're definitely feeling the heat; I don't think companies like this push their low-fee funds on you unless they're up against the wall.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#24

Post by lewisl9029 »

mfrykman wrote: post #6

In the article, it states that Chase is offering 0% funds, yet Betterment claims that their "All-in Actual Cost" for a 100k fund is better than Chase's due to cash drag and a lower expense ratio. (Found here: https://www.betterment.com/comparison/schwab-intelligent-por... ) This is confusing and hard to fact check. Who do I believe?

For a different perspective, here's Schwab's response to critics on its decision to keep a mandatory cash component in its robo-advisor offering: https://www.aboutschwab.com/ceo-statement#anchor-copy-ceo-st...

I think their reasoning is sound in theory, but it strikes me as suspect that they would not allow even the option to stay fully invested for clients who would prefer to manage the cash component of their portfolio in a bank account where it can actually be spent at moments notice. And it does also strike me as a bit too convenient that their decision to remove this option from clients just happens to directly benefit Schwab's bottom line.

Their decision to compose more than half of the equity portion of their portfolio using dramatically higher-cost fundamentals ETFs from Schwab in place of using solely market cap ETFs also triggers similar warning bells for me, however sound the technical reasons for doing so might be: https://intelligent.schwab.com/public/intelligent/insights/w...

That said, I'm curious how Betterment came up with their numbers for their cash drag analysis. If cash drag on the highest end of the spectrum of a portfolio with 30% in cash is supposed to cost investors 0.56%, I'm not sure how they derived the lowest end of a portfolio with 6% in cash to be 0.38%. It seems to me Schwab might not be the only one here guilty of misleading potential clients.

Disclaimer: I am a Schwab client, but am not actively using their Intelligent Portfolios offering. I have done a bit of research into it back when it was announced though.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#25

Post by tehlike »

nateberkopec wrote: post #13

I haven't switched to a roboadvisor product for a few reasons, but one of them is that saving for retirement is a decision you make on a 30+ year timeline. Most startups hardly last 3 years, much less 30. Why would I trust my money to an industry where the typical case is a flameout in only a few years?

buffet's advice will work for some 30 year horizon just fine.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#26

Post by lukejduncan »

nateberkopec wrote: post #13

I haven't switched to a roboadvisor product for a few reasons, but one of them is that saving for retirement is a decision you make on a 30+ year timeline. Most startups hardly last 3 years, much less 30. Why would I trust my money to an industry where the typical case is a flameout in only a few years?

It's a fair concern. Both Wealthfront and Betterment are Broker dealers and they have legal obligations in the event of going out of business.

Wealthfront spells it out as: "In the unlikely event Wealthfront were to cease doing business, your account would be held by our brokerage partner until you transferred your account to a new broker or chose to liquidate your account to receive a check."

https://support.wealthfront.com/hc/en-us/articles/211004083-...

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#27

Post by lewisl9029 »

While we're on the topic of robo-advisors, I'd love to see a robo-advisor that lets clients customize a portfolio allocation and just advises them on when and what to trade to keep their portfolio balanced on a regular schedule, for a fixed fee. That is, instead of these so-called robo-advisors that are actually robo-managers, in the sense that they manage your portfolio and trade on your behalf, and are compensated as such, for a percentage of the entire value of your portfolio.

I'm sure there is enough space in the market for both types of products, the robo-advisor and the robo-manager. Personally, I'd prefer the former.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#28

Post by hn_throwaway_99 »

teej wrote: post #3

Wealthfront has raised ~$100M and Betterment has raised ~$200M. If they are only burning $4M/year to grow as fast as they are, they are doing fantastically well. I suspect though that the author's burn rates are off by an order of magnitude.

Agreed. I know the author was trying to be conservative, but I wouldn't be surprised if fully loaded employee costs were about double his estimates.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#29

Post by avenoir »

twblalock wrote: post #21
Ductapemaster wrote: post #11

Earlier quoted context omitted.

Could you explain a bit more? Are you making a better ROI? I currently have a Betterment account and would consider switching if there's a good reason.

If you moved your money to Vanguard and invested in the same funds Betterment currently invests in for you, and you rebalanced as often as necessary, you would get a slightly higher ROI at Vanguard because Vanguard has lower fees. However, all of the things Betterment does for you now would be your responsibility, including asset selection, rebalancing, thinking about how to manage taxes, etc. The bottom line is that…

I know next to nothing about investing and this is exactly why I'm using Betterment. Even with the recent hikes in fees they're still cheaper than hiring a financial adviser. I really feel like I have very little choice but to stay put. However, how does one get started managing their investment account? I have more than 100K tied up in Betterment and trial-and-error type of learning could be pretty disastrous.

Re: What's The End Goal for Wealthfront and Betterment? (2016)

#30

Post by avenoir »

sigstoat wrote: post #16
axxl wrote: post #14

Earlier quoted context omitted.

What are the fees on those? Edit: looked it up, the 2050 is 0.16%, not bad. I usually see much higher fees on those target date funds.

if you're willing to handle the allocation yourself, you can just see what vanguard is putting into their 20xx fund, and buy the corresponding funds as ETFs (or their admiral shares funds if you've got enough money in there) and get even lower expense ratios. as a general note, anyone interested in this should take a look at the bogleheads site, starting with their wiki: https://www.bogleheads.org/wiki/Main_Page

Thanks for sharing that link! I've got some weekend reading material now :)
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