I recently received an email from a reader name Shameer. His message prompted a great question, which I wanted to share with you all:
“Would you suggest having my SEP IRA at Betterment or Vanguard? It’s new, I have no money in there now. But I wanna choose and be done with it. I’m listening to your podcasts from the first episodes onward, and I recall seeing an article where you wanted to move your SEP from Vanguard to Betterment, but don’t know if you actually did it.”
I always appreciate when you guys write in, as it gives me the opportunity to cover topics that I may have forgotten to go back and discuss, such as this one.
I may have mentioned in the past that I wanted to switch to Betterment. I actually considered both them and Wealthfront, but decided to stay at Vanguard in the end. I still believe both Betterment and Wealthfront are great options for SEP IRAs, regular IRAs, and taxable accounts, but I chose to stay with Vanguard for a number of reasons. They run your investments a bit differently, which works better for me.
With that being said, let’s compare Betterment and other robo-advisors with Vanguard.
Balancing Your Portfolio
Betterment and Wealthfront are both considered robo-advisors, or automated investment advisors. This makes investing a simpler process, and I can see why it’s appealing to many people. If you’re younger or a new investor, this will probably be the most enticing option to you.
You won’t need to make many decisions when choosing a robo-advisor. In fact, you’ll only need to make one: use their questionnaire to determine the percentage you’d like invested in stocks versus the percentage you’d like in bonds. They even have prepackaged asset allocation plans, to make it simpler.
Once you make that decision, these companies will do all of the allocation for you. You invest your chosen amount and they will divide it up among eight to ten ETFs. They even include some Vanguard ETFs in this. They’ll also rebalance your portfolio when needed and reinvest your dividends. This is sort of a “set it and forget it” way of investing, which many people prefer.
There is a downside to going the robo-advisor route: it’s gonna cost you.
The fee for using Betterment, for example, begins at 35 basis points (or .35%). This fee goes down to 25 basis points when you invest at least $10,000, and 15 basis points when you invest at least $100,000. This is over and above the expense ratios of the EFTs, which range from 5-15 basis points. Why the added cost? Well, you have to pay for the service these automated advisors are providing; it isn’t free for them to allocate your assets and reinvest your dividends, and this is where you pay.
So, will an additional 15-35 basis points really make that much of a difference? If you’ve been paying attention to our past podcasts, you know that compound interest really is the most important thing you have going for your finances. While these fees won’t be the end of the world, it can really add up. Why spend extra money if you don’t have to?
Can You Get the Same Services as Betterment, But From Vanguard or Fidelity?
I’m glad you asked! You absolutely can.
Vanguard, for instance, has something called target-date retirement funds. This is a structure where you put all of your money in one mutual fund and they divide it into four of their funds – one for domestic (US) stocks, one for foreign stocks, one for US bonds, and one for foreign bonds.
As you near retirement and want to shift your investments to a more conservative path, they will slowly begin to change your asset allocation to favor bonds. It’s a very slow process. If you’re 20-40 years from retirement, your investments will be almost entirely in stocks. As you near retirement, though, Vanguard begins to shift more of your investments into bonds..
If you want a fixed asset allocation that doesn’t automatically shift (the same as what Betterment and Wealthfront are offering), you can go with Vanguard’s Life Strategy funds. You can choose anywhere from 80% stocks/20% bonds to 80% bonds/20% stocks, and that allocation will not change.
Fidelity offers similar options. They call them the Freedom Funds.
So, Why Move to Betterment?
Well, you don’t have to. It really just depends on how many basis points you are willing to spend on your investments, and exactly what you’re looking for regarding asset allocation.
Personally, I like to be in control of my rebalancing and manage my own investments. If that’s not of interest to you, Betterment and Wealthfront are great options. I’ve had the privilege of helping several young adults open their first investment accounts, and many of them have chosen one of these robo advisors. Then again, Vanguard’s target-date retirement funds are effectively the same thing. It all comes down to preference.
A Note on Fidelity
By the way, Fidelity’s target-date retirement funds are very different. First and foremost, they’re very expensive. The Fidelity Freedom 2035 funds, for example, are a whopping 77 basis points! That’s quite the jump from Vanguard’s less than 20 basis points for its target date funds. Part of the reason for this is that your money will be divided among 20 or so funds with Fidelity.
As you can see, you have a number of choices for your investment portfolio. Betterment, Wealthfront, Vanguard, and even Fidelity are all great options. Some may suit you better, however, either in regards to the amount of fees you’ll pay or just the convenience of the investment process.
Which company do you prefer and why? How many basis points is too many, in your opinion?