Betterment vs. Mutual Funds: A Comparison

 

Sticking to a checking account or a savings account isn’t always the best option. If you want to optimize your finances, there are other things to consider. Indeed, you must find an investment account that is suited to your financial goals.

However, many people steer clear of investing because they don’t have knowledge of the subject. Plus, they are wary of paying out for expensive financial advice and investment opportunities.

This means that they end up relying on traditional saving options rather than optimizing their finances. And yet, that is somewhat understandable given the costs associated with some investment options.

Take mutual funds, for example. They have a long history of under-performance vs. the stock market. To make matters worse, they also charge exorbitant fees for all kinds of standard business expenses. Mutual funds certainly aren’t always the best investment option.

In contrast, a new company is changing the investing game. That company’s name? Betterment. Betterment has made it easy and affordable to invest in stocks and bonds.

Plus, it helps you create an investment portfolio while making good returns and minimizing fees. What follows is a comparison between Betterment and a standard mutual fund. I think that you too will clearly see why Betterment has raised the standards for investing.

A Typical Mutual Fund

Mutual Funds have now been around long enough to critique. Since their inception, very few have kept pace with the market. There are a few that consistently outperform the market, but they are hard to find or are closed to new investors. On top of that, when you almost end up with no gains after subtracting fees.

What fees am I referring to? How about management fees of 1-2% of your total account balance per year? You can even be charged a 1% fee just to start. That’s right, just for opening an account! And if you finally do decide to move your money somewhere else, there might be additional fees for account closure.

Although Section 36(b) of the Investment Company Act allows investors to sue when funds have excessive fees, it hasn’t much changed the investing landscape. As Quinn Curtis writes in the Harvard Law School Forum:

“Whatever the hopes of the proponents of 36(b) at the time of its enactment, there is little evidence that it has been effective in protecting investors.”

Thus, it seems that high fees will continue. By the time everything is said and done, you can watch a 4% gain in the fund have no effect on your account balance. That’s because all the gains went towards paying fees!

If that’s not bad enough, many funds are not totally diversified and are sector based or stock behavior based like growth or value funds. These funds are somewhat diversified but not as good as they could be. Oh, and one last thing, you’ll need a lot of money to open an account. This can sometimes be $1,000, $5,000 or $10,000 depending on the fund.

  • $1,000, $5,000 or $10,000 to open an account
  • Load fees which can be 1%
  • Management fees that can be 1-2%
  • Some diversification
  • Other transaction fees

You can start to see that this may not be your best option, when it comes to looking for low cost investment options. So, what is the alternative solution that Betterment provides?

The Betterment Advantage

Betterment gives you diversity by giving you access to 12 asset classes that are varied across funds that hold diversified exchange traded funds (ETFs) . In addition, you can own a mix of stocks and bonds all in one place. Besides access to US-based companies, Betterment also offers funds with exposure to both international and emerging markets.

Best of all, you can start an account with them for as little as $100 per month. Their fees are very small and range from .35% to .15% depending on your account balance. With all these features, it’s impossible to not outperform most mutual funds.

  • $100 to open an account
  • Fees between .35% and .15%
  • No other transaction fees
  • Diversified

You can see that from an annual fee and ongoing fees point of view, Betterment is a good option. There is also no minimum balance required for a basic digital account, although $100,000 is required for a premium account. But, aside from lower fees, good balance requirements and diversity what does Betterment have to offer?

Betterment in More Detail

There are several advantages to be had from choosing a hybrid investment platform like Betterment. You get access to one of the best robo-advisors in the business, while the premium plan also gives you unlimited access to a certified financial planner (CFP). A CFP can help you with concerns such as asset allocation.

Betterment compares favorably with other platforms such as Vanguard and Wealthfront and certainly gives you a better opportunity for investment success than simply investing in mutual funds.

Retirement Accounts Advice at Betterment

Let’s face it, one of the major reasons that many people choose to invest is to gain financial protection for their retirement. Using a Betterment account makes it easy to choose the right retirement account. Accounts that you can consider include a traditional IRA, Roth IRA and a rollover IRA which enables you to move money into an IRA account.

The low Betterment fees make choosing it for retirement investing a good idea. Of course, you do not have to be planning for retirement to make use of the investment advisors at Betterment. You may have other investment goals, such as building an emergency fund or paying for college. Whatever your financial goals are, you can take advantage of the fair Betterment charges.

Tax-Efficient Investing With Betterment

One of the most valuable Betterment uses is enabling tax efficient investing for users. The Betterment system makes use of automatic rebalancing which can save on capital gains tax if the rebalancing takes place in tax advantaged accounts. You can be sure that tax returns will always be optimized by the advice which Betterment provides.

Responsible Investing

Betterment offers socially-responsible investing for your retirement planning or other investing. Whether you are looking for short-term investments or have a longer term focus, you can choose to invest in companies that have a high level of social responsibility and a reputation for helping to protect the planet.

As a result, not only do you get a Betterment portfolio that is best suited to you, but you also get to feel good about your investment choices and their social impact.

In Summary

You can see that mutual funds have a reputation for under performing and that the better performing mutual funds are not readily available to new investors. The cost of choosing to simply invest in mutual funds can also be high.

On the other hand, choosing to develop an investment strategy using a Betterment account attracts a low service fee making it more attractive financially. The fee structure at Betterment certainly bears comparison with competitors such as Schwab and Blackrock.

There is also no massive minimum investment required in order to access accounts such as a SEP IRA. Simply put, using Betterment is an excellent way of gaining access to a financial advisor with low fees attached. You can rely on sound advice to manage taxable accounts and high quality tax loss harvesting services. Using Betterment to invest also means that you have an improved social conscience.

After reviewing a side by side comparison of each service, including fees, performance and diversification, it’s clear that Betterment is the winner. Even if the returns were exactly the same, the savings in fees alone would make Betterment stand out for its total returns including fees. Take some time to research this company for yourself. I think that you’ll like what you find.

Click for Betterment Pricing and Details.

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