[mfrykman]

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?

[lewisl9029]

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.

[prdonahue]

I used to work with a lot of these custodians. They typically make ~40+% of their revenue from cash products.

They'll keep you in some fund paying 1 bps and turn around and invest it elsewhere. Yes, you want some cash (esp. to the extent it's part of your asset allocation), but no you don't want to use the awful sweep vehicles they default you to.

[KyleJune]

I use Schwab for checking and like their free ATMs feature. Thought about using their Intelligent portfolios but I didn't like the higher-cost ETFs and the mandatory cash component. Decided to go with Wealthfront. Keep my cash that's not invested in a 1% yield savings account with Ally bank.

[toomuchtodo]

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

[caleblloyd]

I am also moving from Betterment to Vanguard. I like Vanguard's selection of funds better than Betterment's one-size-fits-all option.

For example I am a cautious investor right now. At Betterment this means I have to lean more towards their Bonds option, which yielded a very low return over the past year. At Vanguard, I can invest in the Income fund which is a mix of high dividend paying stocks and bonds. Still cautious but much better returns.

[prdonahue]

You'll get more fine grained tax management, e.g., tax-loss harvesting if using something like Wealthfront. You can't pass along these individual losses (and net against other gains/carry over to future years) with a target date fund.

I actually use Vanguard target date for my tax-advantaged accounts, but I use Wealthfront for taxable account.

[simo7]

Tax loss harvesting only makes sense if you keep on buying and selling multiple funds/products.

Hold only one index fund, hold it long-term and the problem vanishes: all the gains are not taxed until you sell the fund and they are always net of losses.

Not to mention the massive benefit of deferring taxes in a compounding context.

[mrkurt]

Wealthfront buys the individual shares that track an index. When shares lose value, they'll sell those and buy other shares that are equivalent.

It worked pretty well for me in 2016. I was up ~11% total and about to deduct about 6% in losses.

[pscsbs]

However, that 6% is capped by the IRS at $3,000 per year.

[mrkurt]

No, it offsets my other capital gains that year. $3k per year after that can be applied to normal income. Or it can all be applied to future capital gains.

[ctchocula]

It's nice that the rest of the loss can be carried over to future years.

[yunong]

The one advantage with these robo advisors, or any broker for that matter, compared to a mutual fund is tax loss harvesting.

By having a separately managed account of ETFs or stocks, you can sell and exchange similar stocks when they lose value and harvest the tax losses to use at a later date.

[dragontamer]

Tax loss harvesting only works in an account that generates capital losses AND is taxed on capital gains.

IE: IRAs and Roth accounts instantly don't give a care, because they're not taxed. Soooo, no benefit to tax-loss harvesting.

IE#2: Any security that actually makes money will be unable to be tax loss harvested. (You need a LOSS to benefit from the tax loophole)

[prdonahue]

Huh? If you're buying a diverse portfolio of equities then you're guaranteed to have some losers and some winners. You let the winners ride, sell the loses/bank the loss, and replace them with companies that have as similar risk profile to the one you sold as possible.

[sigstoat]

to reiterate what dragontamer is saying, if all of your investments are in IRAs (where there are no taxes, at all!), then TLH is meaningless.

only if you're maxing out your tax advantaged accounts, and still have additional funds to invest is TLH even relevant.

[deelowe]

TLH is oversold a bit these days: https://www.bogleheads.org/forum/viewtopic.php?t=206806 It's unclear how much of a difference it really makes for most people.

[PretzelFisch]

I thought Hedgeable's perspective on not doing tax loss harvesting was interesting[1] I have been looking at these robo advisers since the start of the year.

https://www.hedgeable.com/blog/2015/09/how-to-protect-your-p...

[Ductapemaster]

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.

[twblalock]

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.

[dragontamer]

> rebalancing

Vanguard Target Date funds rebalance automatically.

> including asset selection

Vanguard's asset selection is "literally buy everything on the market". Its a dumb strategy, but it seems to work. In particular, Vanguard's total market index will perform by definition the average (minus Vanguard's very low fees).

> how to manage taxes

Its no harder than Betterment. You get a 1099-DIV next year, and then fill out your taxes. Since Vanguard Target Date funds automatically rebalance and everything, its unlikely that you get any benefits from Betterment.

[sulam]

How much money do you have in Vanguard? I guarantee you will save from TLH if you have assets north of $1M. My annual tax burden has been reduced by 6 figures each year due to taking losses intelligently.

[mikedouglas]

How? There's a $3000 cap on THL against regular income and capital gains is only taxed at 15%. $1M in realized capital gains is a pretty extraordinary circumstance.

[avenoir]

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.

[twblalock]

Read through the Bogleheads wiki, especially the pages about "lazy portfolios." There are some recommended books on that site as well.

I disagree with some of the Boglehead stuff, but the wiki is a good resource.

You don't need to do any trial and error. You just need to pick some funds and hold onto them for a long time. The funds Betterment has already picked for you are probably pretty good.

[phillco]

Agree with the sibling comment -- you can achieve a good portfolio allocation with 3-4 ETFs. What Wealthfront and Betterment do is pick these funds for you, then charge you 0.25% year over year for the privilege of maintaining them. It's not the best deal for the investor because the work is not particularly hard -- "managing" your investments as a Boglehead would ideally involve logging into Vanguard once a year to rebalance.

(In fairness, they do some other stuff which is more value-added like TLH, which is more work to do yourself, but again, it's hard to justify the 0.25%.)

"If You Can" by William Berstein is a good, short ebook on this subject.

[zerkten]

Hiring an independent financial adviser was one of the best decisions I've ever made. It's an occasional check-in to support decisions I make around investments with Vanguard and my 401k. Finding an adviser is the hard part, so it's worth talking to a bunch of people so you can find someone that's comfortable with what you want to do.

I got the Wealthfront pitch when I started with my employer, but I feel much better with my current arrangement. Your comment "I have very little choice but to stay put" is never nice to hear in any context, so I hope you can move along from that place.

[toomuchtodo]

You must ensure that your financial planner or adviser is a fiduciary. Otherwise, they have no obligation to advise or act in your best interests.

http://www.cnbc.com/2015/06/16/is-your-advisor-a-fiduciary-c...

[Veratyr]

> 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.

Just felt like pointing out that you'd have to rebalance the same way Betterment does, which isn't the way I believe normal people do it. Betterment uses portfolio optimization techniques that can be hard to implement yourself: https://www.betterment.com/resources/investment-strategy/por...

[kobeya]

I would be very surprised if either wealth front or betterment has better ROI than Vanguard. One exists for the purpose of sucking you dry, the other is a mutually owned cooperative with a mission to drive down costs and a history of doing so. Unfortunately as far as I'm aware wealthfront and betterment don't provide aggregate performance information (although if it were in their favor I'm sure they would).

[toomuchtodo]

Betterment weights more heavily towards international allocations, so my returns have been lower than a fund more US-centric. That's not why I moved though; Betterment just raised their fees, which were somewhat acceptable before (0.15% of assets under management) but are now out of line with the value they provide (0.25%).

Those fees were on top of the ETF fees for the funds they assembled your portfolio with.

[matwood]

Fees are one of the main items you control in investing. Why pay Betterment when you can go to brokers like TD or Schwab and buy exactly the same funds commission free? You can then spend an hour each quarter rebalancing.

If you don't want to even rebalance, then go buy one of the target date funds from the likes of Vanguard.

TLH is extremely oversold. I don't need to repeat what is easily found in a google search though.

[axxl]

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.

[sigstoat]

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

[hendzen]

You can do even better by going directly through Vanguard and getting Admiral Shares of the corresponding mutual fund, which have much lower fees than the ETFs.

[sigstoat]

> You can do even better by going directly through Vanguard

yes, definitely go straight to vanguard for any of their products! i should've said as much, thanks for doing so.

they're so easy to deal with there's hardly any point in purchasing any of their products elsewhere.

> and getting Admiral Shares of the corresponding mutual fund, which have much lower fees than the ETFs.

once you've saved up enough to buy into the admiral shares, that's certainly the easiest thing to do. but their ETFs are just shares of the admiral-level funds. so their expense ratios are identical.

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundId=0928&...

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I... https://personal.vanguard.com/us/funds/snapshot?FundId=0970&...

that's apparently some sort of magic that vanguard has patented.

[avenoir]

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

[thinkloop]

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.

[Spooky23]

Cash has some benefit too. I usually keep a reserve of cash that I float and use to rebalance based on market conditions due to trading restrictions that make dollar cost averaging harder.

[walshemj]

But why keep any non trivial cash amount in this sort of account I keep my "cash" rainyday fund out side of my brokerage account

[deelowe]

I think it depends. I use schwab and just keep part of my emergency fund in the cash reserves.