Betterment Review

Betterment has been on a growth trajectory.  A year ago or so Betterment ads started to appear on New York City taxi cabs. A  recent visit to their website shows a substantial staff including investment pros in various disciplines including hires from Goldman Sachs and other respected firms.

The gist of Betterment is that you transfer money to Betterment to invest for you. They charge a very low, attractively priced management fee based on the size of the portfolio. Their investment strategy is publicized as being based on Nobel-Prize winning ideas. But this essentially boils down to the same passive index-fund based strategies touted by the other firms in this space. Their specific strategy is likely not very unique to Betterment.

Betterment is a great auto-pilot investment system. Betterment will withdraw funds from your account on a regular interval, invest the money,and rebalance your account as needed to ensure your stay within the appropriate asset allocations. There are no extra trading fees, account management or other hassles.

The only external account information they link to is a checking account. In analyzing your overall portfolio in light of goals, they can also factor in external accounts. However, they do not trade from existing accounts or offer a service to guide your selections for you to self-trade.

I can see this service being a great option for anyone wanting to invest in an age-based risk appropriate portfolio especially for the majority of folks who don’t want to be concerned with the day to day gyrations of stock market. Investors using Betterment will see drops when the market inevitably has setbacks. This is true of any investment strategy managed by any firm. The difference is that results from using a firm that follows passive index-fund strategies are almost always better in the long run compared to not investing at all or investing in select stock funds.

For folks who are more seasoned, or later stage, the service could be a hard sell. For example, I’ve been with Fidelity for a very long time. My employer’s 401K and option plans are linked to Fidelity. So I get a one-stop shop to see my portfolio. Fidelity has great tools that while I don’t use them frequently, I do occasionally go beyond looking at account summaries. To close my accounts, transfer my funds to Betterment seems like a lot of trouble especially for yet another passive index-fund strategy.

Betterment touts ‘Tax Loss Harvesting’ in their investment strategy.  This is an option Betterment provides to further enhance performance of the portfolio. Essentially, Betterment will sell a position that experiences a loss and replace it with a near identical fund and then take advantage of the loss to offset taxes or gains.There are times when this should not be done. Betterment provides guidelines on when to use this option. But it is a way to get more micro gains which eventually will add up to a larger portfolio size in the future. This is a significant differentiator. It also shows that the team is doing some ‘active’ management with passive positions and therefore providing added services beyond vanilla asset allocation with occasional rebalancing.

Betterment’s main advantage is their very reasonable management fees in light of what you get: portfolio recommendations, performance dashboards, auto-deposits to your Betterment account from your checking account, and all the trading and rebalancing needed to keep your portfolio in check.

I have to assume that given Betterment’s funding, hiring, and quality staff, that more features are in the works. For now, I have reviewed the offering based on my 30-day trial as of July 2015.

Set-up

First step is to indicate your goals. Depending on the goal, your age, current liquid net worth and other parameters, Betterment will determine the best portfolio allocation per goal type. There are numerous goal types to choose from:

In the above, I selected ‘Education’ to set up a college goal for my toddler.

Next step, is to fill in some basic info on the desired financial target. (It would have been nice if this wizard was more detailed helping to determine a suggested target amount based on type of university and tuition rate for when my daughter goes to college in 2031.)

2

Based on my inputs, Betterment determines the suggested portfolio.

The next step is to fund the goal. Betterment will connect to your banking institution so you can make deposits into Betterment. Both auto-deposits on a set periodic basis or one time transfers are supported.

As shown below, based on your planned contributions, Betterment will indicate you likelihood to reach your goals. If your contributions are too low, Betterment will indicate what you need to do make up the difference.

You will need to fund the goal. In the screen below, you’ll specify the withdrawal amount and date from your checking account.

You can track performance of the goal compared to other Betterment portfolios and also standard benchmark indexes such as S&P 500.

Instead of viewing ‘accounts’, you view your goals to understand how you’re tracking to those goals. So you would go through the same process as above for each goal (retirement, saving for a house, education, etc.)

Performance

The most important question for most investors is performance. Betterment’s performance overview is provided here: https://www.betterment.com/portfolio/

Companies such as Betterment are too young to have any meaningful historical data. Betterment relies on backtesting which essentially models their current portfolio from earlier dates (even before Betterment was founded)  and projects how the portfolio would have hypothetically performed.

As with any company substantiating results, information has to be provided in ways to show the value of the service. In Betterment’s case, their results are compared to traditional financial advisors. The main variable is the fees. It’s not discernible how much of the performance is actually driven off of Betterment’s ETF allocation strategy versus simply the added fees you would pay for a traditional advisor. Given the passive nature of index investing, I would have to assume that most of these strategies are very comparable.

Pricing

Pricing is simply a percentage of the portfolio balance that Betterment is managing. The most you invest, the lower the overall percentage. Pricing is summarized below:

Conclusions

Betterment is a great solution for anyone wanting a set-it and forget it strategy to manage investments for a variety of goals. There is a very low flat fee across all your goals.

The main obstacle to get over for any investor with funds invested in other firms such as brokerages, is to transfer the money to Betterment. Unlike other services, they won’t manage your money in other accounts and this could prevent more established investors from going through the trouble of moving to Betterment.

Betterment has all the right certifications, credentials and security mechanisms in place to ensure your money is protected. So this shouldn’t be a major concern.

Also as I have mentioned before, passive index-fund investing is not rocket science not does require frequent trades. A few trades a month at most is all that’s needed. So the task of self-management is not very hard. However, Betterment’s fees are very reasonable. For a 100K portfolio, the annual fee for Betterment is $150 per year. Some of the advisory services I have reviewed earlier charge that much just for recommendations. $150 to get all the trades covered and save the hassle of trading is a great deal. So while the investment strategy may be fairly standard, the low fees are the real selling point. In my opinion, getting the management and trading hassles (even if infrequent) covered for a very low fee, make Betterment a great value.

JemStep.com Review

JemStep provides online advisory services geared to help individuals achieve retirement goals. Founded in 2008, the main idea behind JemStep is to connect to your various investment accounts, look at your current holdings, and recommend specific buy/sell actions to optimize your portfolio. JemStep will provide an asset allocation based on your profile, and for a fixed monthly fee give specific buy/sell recommendations in your portfolio (Unless the portfolio is under 25K for which the recommendations are free.)

Overall, I felt JemStep provided a level of depth in their analysis and recommendations not available from their competitors. At this time, they provide only recommendations and do not execute trades on behalf of online clients. The recommendations are usually simple rebalancing actions once a quarter.

JemStep claims to track more than 2 billion dollars in assets for private clients. I’m usually a little skeptical of these kind of claims. Since they don’t actually manage the money, you could theoretically say you have a portfolio of any size or get advice on a portfolio but not execute the trades. However, this isn’t really relevant for the evaluation of their services which I consider quite good.

Step by step details are provided below about how JemStep works:

Provide Profile and Goals
The first step is to enter some simple profile information most importantly age, target retirement age, salary and yearly retirement savings.

 Figure: Provide basic profile information

Another important component is to enter your self-assessed risk profile. This is the most critical factor JemStep uses in determining your recommendations. All online investment advisory services include risk profiles with around 5 classifications ranging from conservative to aggressive. To help select your profile, each classification is shown with best and worst case scenarios of portfolio performance based on historical patterns. This is a fairly general way to derive a portfolio and obviously doesn’t result in particularly personalized advice but nonetheless even with live advisors, this is the common model as it’s the easiest and cheapest to implement.

Figure: Specify your risk profile and also Mutual Fund and ETF investment type preference

You are given the option to use ETFs or Mutual Funds. Jemstep’s preference is to select from both Mutual Funds and ETFs to pick the best funds. JemStep takes into account fees in making recommendations.

You can also can specify to use actively managed funds but the recommendation is for passive funds.

Connect to Existing Accounts
The next step is to allow JemStep to connect to your investment accounts by providing your user/login credentials. As with other services, the credentials are not stored and the process is secure (this is the claim). Especially, in light of recent online and in-store security breaches, one can never be 100% sure of security. I personally have not overcome my concerns. Therefore an option is provided to enter this information manually. Since JemStep will mostly likely recommend you change most of your existing portfolio, the manual option while tedious is sufficient to move ahead in the process.

 Figure: Either provide credentials to your investment accounts, or enter your portfolio data in manually

JemStep will analyze your current holdings across different accounts to make recommendations.

Determine Asset Allocations
JemStep then runs your input data through its engines to determine the most appropriate asset allocation model for you. I surmise that they likely have a fixed number of models and match each client to the best one. The asset allocation determines the broad categories where you will invest (such as US stocks, international, commodities etc.) and the percentage of your portfolio to invest in each.

Figure: JemStep shows all the steps it goes through in coming up with the asset allocation

Then JemStep shows the asset allocation recommendation compared to your current portfolio.

Figure: Asset allocation showing the difference between your current and recommended target allocations

Recommendations
JemStep then determines what funds to sell completely or in part from your existing portfolio and what to buy instead.

While the asset classes are similar to that of other advisory services, the key part – the actual ETFs and Mutual Fund portfolio components- vary greatly between services. I found that JemStep provides fairly detailed information about their recommendations. For example, JemStep actually looked closely at my current holdings. Instead of taking the simplest approach of selling off all my holdings to purchase their recommendations (like FutureAdvisor), they allowed me to keep some of holdings of a fund but balanced it out with their suggestions.

 Figure: JemStep shows you the steps it undertakes to determine the specific recommended holdings including buy/sell actions for your portfolio

JemStep has its own ranking system for funds. I’m sure this is algorithmic based on their own criteria looking at fund performance and other published factors. It simply wouldn’t scale for them to analyze every fund. The analysis provided seemed decent. They provide good detail about their recommendations, choosing funds that they rank at the top of their list (as opposed to using an third party like Morningstar). The information was fairly detailed about rationale.

I tried MarketRiders portfolio as my existing portfolio to which they suggested improvements – slight ones over MR portfolio US stocks.

 Figure: Action Plan shows specific buy/sell actions with explanations.

For comparison, I went back to the first screen to change my criteria to use ETF and Mutual Funds (as opposed to only ETFs). The results were slightly different. You might want to choose this option if holding the account in a tax-deferred or tax-exempt account.

Figure: Mutual Fund and ETF Recommendations

It’s clear that the guidance provided is computerized and not personalized at a 1-to-1 level. For example, I had one allocation in my current portfolio that was 1% off the target (as shown in the above asset allocation screenshot, my US stocks allocation was 52% vs 51%). The rationale provided was obviously canned – “Based on your financial situation, JemStep’s analysis of your current portfolio shows that it’s weighted too heavily in U.S. equities.”

Despite this, I still found a lot of the information helpful. There is a lot of data and algorithms to back their suggestions. They also provide useful charts such as simulating the average and worst case scenarios of portfolio performance. This kind of data is nothing to act on but it’s still good to have perspective on the content of your portfolio and for your own education to understand the rationale behind it.

Pricing
JemStep has tiered pricing based on the size of your portfolio. If the portfolio is under 25K, the service is free and you can get the specific buy/sell recommendations. The next tier is 17.99 a month for a 100K portfolio. There is a promotion for first 3 months for 17.99. Then 17.99 a month thereafter. This amounts in $215 a year which I think is reasonable.

For all size portfolios, you can get a free evaluation of your current portfolio that will tell general things like where you are over or underexposed or not covered, but it doesn’t show any recommendations unless you pay. The asset allocation suggestions are not actually very useful. You need the specific funds. They follow very standard asset allocation models which can be found with free tools from most brokerages.

Positives
JemStep’s interface is well designed and easy to follow. Their recommendations are more detailed than other services out there. For example, they take into consideration different factors like taxable and non-taxable account.

While they don’t offer trade execution, the trading actions require rebalancing only once a quarter. Furthermore, JemStep will tell you exactly what actions to take and when.

I also like that they are cautious to check if how long you’ve held a position before selling it to ensure you don’t incur penalties.

Negatives
The main negative is that unlike other services like MarketRiders, they do not provide recommendations specific to brokerages. Therefore, you are likely to incur more trading fees if your brokerage charges for certain funds. For example, JemStep provides many Vanguard recommendations. It’s free to buy Vanguard funds in a Vanguard account but not Fidelity. But on the flip side, buy and sell actions occur only 4 times a year.

The fact that they don’t execute trades could be a negative for some. However I will gladly forgo that option in lieu of lower cost. Following asset allocation models to does not require frequent trading.

Some additional insights would be appreciated in terms of what to expect in the future would have been nice. For example, do they adjust the holdings as market conditions change or stick to the same holdings

They do say they will make adjustments in allocation and risk based on your age. This I would expect. But it’s not clear if they would make more significant changes in portfolio based on market drivers. I suspect like the other tools, that they follow a simple asset allocation model based on Modern Portfolio Theory.

Bottom Line
I like JemStep. It’s the most comprehensive of its direct competitors. It’s reasonably priced. Information is detailed but what I like is that the management process is still easy. The details aren’t essential to self-management. If you want the details behind their rationale, it’s available.

FutureAdvisor Review

FutureAdvisor.com offers ETF asset allocation portfolio recommendations for free. For a fee, they will also manage your portfolio, making needed trades on your behalf (and sending you notices beforehand to review). This site will examine all of your holdings in various brokerage accounts and provide recommendations of what to do in each portfolio to achieve a target portfolio based on your age and self-assessed risk profile.

You have to sign up with the website to get started. This is simply a matter of providing an email address and setting up a password. There is no charge for this. After registering, you specify two input parameters to determine your portfolio: age and your self-assessed risk tolerance.

You then have the option to manually enter all your holdings from one or more brokerage accounts. Or more simply, you can enter your login credentials to your various brokerage accounts in order to import information about your holdings automatically. FutureAdvisor indicates that they use “Bank-level 256-bit encryption” and that credentials are not stored. When I signed out and signed back into FutureAdvisor, my portfolio was resynced from the brokerage without me re-entering  my brokerage credentials. So it seems as though some credentials  were stored or cached.

   

Screenshot: Enter account credentials for one or more brokerages or manually enter that information. Note: private information is obscured in screenshot.

FutureAdvisor appears to cover all brokerages even smaller ones  from some individual banks in addition to the big names like Vanguard and Fidelity. While the site appears to keep your login credentials to the brokerage, it seems that none of the account information about what you own is stored with FutureAdvisor. They login in real-time to your various brokerage accounts to show your portfolio status.

Once you provide your brokerage account credentials. FutureAdvisor  securely imports data from all brokerages you specified. They then assess your current portfolio against what I assume are their models and associated benchmarks. They rate things such as performance of the portfolio, fee-efficiency, and tax-efficiency. Performance rating is a bit arbitrary because they are not evaluating the portfolio over its history, they are simply specifying performance assuming you owned that exact portfolio for the time period shown. For fees and tax-efficiency, this is usually very simply looking for expense ratios under 1%. Tax-efficiency is likely looking at whether you own ETF or Mutual Funds in your portfolio and turnover of the portfolio (see my article on ETFs. Vs Mutual Funds.) For diversification, they are looking to see how your holdings are varied across different asset classes.

Screenshot: Performance of current portfolio shown. Note: private information is obscured in screenshot.

Then FutureAdvisor provides your recommended portfolio and buy/sell actions to take in your portfolio to achieve this recommendation.

It appears that they use ETF recommendations and have some standard models. In a nutshell, the analysis of your current portfolio  and “personalized” recommended action is basically to sell all or most of your positions and buy their recommended portfolio (unless of course you owned their recommended funds or similar ones already).  Also, you only specify two personal criteria – age and risk-appetite. To me this is fairly lightweight analysis and not particularly personalized advice.

There is a ‘Why’ column to indicate why they recommend to buy or sell the position. The information is somewhat generic.  If I owned a different fund in a category of their portfolio than their recommended fund, I got the explanation: “Making this trade will enable other trades in this account, bringing you closer to your target portfolio.” If I didn’t own a fund in a category, I received a message that I was underexposed in that category.

There are different recommendations for tax and tax-deferred or non-taxable accounts. I like this as it demonstrates some forethought in knowing that these accounts are treated differently and therefore should be managed differently. See my blog post on the topic of taxable and tax-deferred accounts.

Screenshot: Recommendations to improve each brokerage portfolio with buy/sell actions specified and rationale behind recommendation. Note: private information is obscured in screenshot.

 Fees:

It’s free to get the recommended actions in your portfolio. However, you don’t get any automated services to rebalance your portfolio when needed. It’s a one time service. However, you could conceivably manually login periodically to get the recommended actions and make changes manually.

It costs .5% of the portfolio value for them to manage the portfolio for you, specially to make the needed buy/sell trades and monitor the portfolio and make future trades as needed. They indicated this is a good deal as the fee is  half of the typical 1% fee charged by financial advisors. For a $100K portfolio, the fee would be $500. $250K portfolio would cost $1250 to manage.

Note that you’re getting the same advice and same service regardless of how much  money you have. This is the major negative for me. To some degree, the higher your portfolio value, the more you are charged for the same amount of work. Since the models are simplistic ETF models with fees scaling up based on the size of the portfolio, I’m not sold on this company.  Remember, in these types of asset allocation portfolios, you should not be trading very frequently anyway. FutureAdvisor  will be making very few trades per year. Most of the trades will be commission-free based on their recommendation. So you’re potentially paying a lot of money to have someone make a few trades for you. You are better off checking every month or quarter to see if changes need to be made and making those trades yourself. It’s not worth paying more that $150 for this type of ETF-based asset-allocation portfolio management.

Bottom-line:  FutureAdvisor’s free portfolio recommendation is  basically the same as what you get for free from your brokerage. ETF asset-allocation models are very common and easy to find and follow. So there is no highly specialized investment advice. Their recommendations are fairly obvious: usually the low-cost or free ETFs for a brokerage and a standard asset allocation model. However, there is added value in that they do look at all your holding across multiple brokerages. In my opinion, the for-fee management service is too expensive for the service being offered. It’s easy to make trades yourself and since ETF models don’t change that frequently, you won’t have to trade often. I would have preferred another pricing option to receive email alerts for a small subscription fee (under $150 per year) and making the trades myself.

-mariamtariq

Investment Portfolio Management Websites

Financial investment websites have been popping up left and right over the last couple of years. I will be reviewing these sites in a series of blog entries. These types of websites capture some profile data about you and then provide a recommended portfolio of funds to own. For most of these sites, the recommendations are low-fee or no-fee ETFs. The portfolio follows an asset allocation model where funds are owned across different asset classes. The percentage of the fund in each class varies based on the sector or asset class.

In addition to the initial recommendations, these services will send alerts when your portfolio is out of balance with the recommended buy/sell actions and depending on the services offered will also execute trades on your behalf.

Note that most brokerages offer a free ETF portfolio tool that will give you similar recommendations. What they are missing is the active monitoring of the portfolio and also alerts to ensure you stay in balance. However, you could simply recheck your portfolio manually with these tools every month or even every quarter and make adjustments as needed. However, I will admit that most average investors won’t remember to do this. So paying a small fee per year is worth it to get the alerts and actions sent to you.

I will review these sites and provide an overview of each offering and respective fees.