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Roughly nine months ago, my wife and I had (nearly) put the final nail in our joint debt load coffin. The not so problematic “problem” was that we now had a large chunk of our monthly income that was unallocated. After many long discussions about our next financial chapter, our two predominant paths were to pursue home ownership or aggressive savings. The aggressive savings train of thought evolved into financial independence and even dreams of early retirement. Without knowing a whole lot more, we jumped on board for a test run – enter Betterment. Up until this point, our only retirement savings was in the form of my company’s 401(k) plan so we didn’t have any other long-standing accounts and after some research, I was willing to give Betterment a try.

Our Betterment Goals

We created two goals in Betterment:

  1. IRA – 98% stocks, 2% bonds
  2. Taxable Retirement Growth – 98% stocks, 2% bonds
General Observations
  • Transfers initiated before 11pm Eastern will post the next business day.
  • Purchases post at 10:30am Eastern.
The Good / Okay
  • It is very easy to change asset allocations
  • They leverage industry standard low-cost index funds (primarily Vanguard)
  • Tax loss harvesting reduces taxable income
  • No cash drag
  • Automatic rebalancing after 3% portfolio drift (selling involved)
  • All deposits and dividends used to rebalance portfolio
  • Nice UI – the advice and projections are pretty neat to show different expected portfolio outcomes when changing variables such as allocation, withdrawal age, auto deposit amount, and one-time deposit amount.
The Bad / Annoying
  • Tax reporting…boy that’s a lot of transactions
  • Tax loss harvesting imposes limits / wash sale concerns when buying and selling the same ETFs used by Betterment, which is quite a lot – see Betterment Portfolio ETFs
  • Additional fees (see Betterment Pricing) negate some of the savings of low-cost index funds
  • Fees are assessed quarterly and involve asset sales – why not hold some of those quarterly dividend payouts as cash instead for the purpose of fees?
  • Stuck with a really high (greater than 50%) international allocation – see Portfolio Diversification by Country for a breakdown at different stock/bond allocations.
  • Other than bond and secondary ETF choices, the allocation breakdowns are the same for taxable and tax-advantaged accounts

Here is our current Betterment taxable account breakdown: Betterment taxable account with 99% stocks, 1% bonds

After six months of using Betterment as our primary long-term savings vehicle, I can see two primary value propositions:

  1. Its incredibly easy – deposit desired amount and the rest is taken care of with no minimum deposit amounts or trading commissions.
  2. Tax loss harvesting – for a taxable account, this could easily offset the annual Betterment fees.

So far, we have deposited enough into our Betterment goals to put us in the 0.25% fee bracket ($10k - $100k). We experienced our first tax loss harvesting event on February 8th equal to $66.21 (~$1k worth of VEA was sold and SCHF was purchased instead).

By far the biggest problem with Betterment is the fact that in order to take advantage of their second primary benefit (ie, TLH+), you really have to keep all accounts with any overlapping ETFs with them as well. So even though there is no benefit for me keeping my IRA with them, I’m virtually stuck, have to disable TLH+, have to micro-manage and double check every non-Betterment purchase of ETFs they use, or have to move everything away from them. The only advance notice you get of a pending tax loss harvest is if you make a deposit and happen to realize that a different ETF was purchased. I’m committed to sticking with them for a full year and would like to reach $100k in a taxable account to see what can be achieved on the tax loss harvesting front. Beyond that, I’m curious to find if there is a sweet spot where a portion of our total taxable assets are with Betterment to generate maximum annual tax losses but not be totally confined to the Betterment fee and allocation regime. Speaking of which, I’m going to touch base with them about more transparent tax loss harvesting notices. If anything comes of that, I’ll post an update here.

Another point that I’m not crazy about is that each goal is essentially its own distinct bucket. This leads to mirrored asset allocation instead of being spread logically across all accounts. Betterment should consider all long-term goals as part of a singular account for asset allocation and recommendation purposes, or at least allow the option to do so.

On the positive front, it really is dead simple. Beyond just an outright “easy” button, I can see that it does a lot to strategically remove psychological triggers that may spur someone to make a rash allocation change at the worst moment. Their people are friendly and can provide access to features beyond what are available from the frontend interface. For example, it bothered me that in order to change asset allocation, it automatically triggered a sale. Since there is no way to disable automatic rebalancing from the UI, I suggested the feature. They quickly came back and said that they could always make a manual allocation change on the backend that wouldn’t trigger a sale of existing assets – future contributions would be used to fill the allocation gap, which is precisely what I was wanting.

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