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Betterment's bad-news play at getting in good with RIAs and investors

The NYC-based auto-advisor will flash tax ramifications at investors as they test drive trades

Author Brooke Southall October 30, 2014 at 11:44 PM
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Jon Stein: It's thousands and thousands of dollars instead of $8.




Brian Froisy

Brian Froisy

October 31, 2014 — 2:52 PM

I am not a Betterment customer, so forgive me in advance if my conclusions are off target. That said, ...
The tax preview is stated to be for investor-inititated withdrawal or changes in allocation. But what about automated trades during rebalancing (i.e., no change in asset class allocation)? The most tax-efficent lots are chosen. Suppose that the trades incur a significant tax liability but only improve the asset class imbalance a little. It would seem that the optimal action would be “do nothing” and allow a small imbalance to persist. That is, consider the tradeoff between the degree of imbalance and the transaction costs (commission, tax and spread). I wonder if Betterment and other rebalancing algorithms explicitly consider all transaction costs.



October 31, 2014 — 6:33 PM
This is on top of what Brian said. So 94% saw the tax implications and didn’t proceed with the transaction and that is a good thing? What about the fact that very often the decision to sell is the right one in spite of the tax implications. Letting the tax tail be a primary decision making criteria is a dumb way to invest. More and more bells and whistles and less and less substance.
brooke southall

brooke southall

October 31, 2014 — 6:44 PM


It seems like implicitly you are saying that investors can’t handle the truth. That is certainly the prevailing wisdom on Wall Street when it comes to charging fees and hiding them, never mind taxes.

And maybe investors can’t handle real price and tax data because they have had so little experience in digesting it. Nobody has ever trusted them to swallow it. But if tax implications become part of the everyday meal, I’d guess maybe the right equilibrium of emotions and hard numbers would be reached over time.


Daniel Egan

Daniel Egan

October 31, 2014 — 8:57 PM

Hi Brian,

Yes, our rebalancing algorithms do take known costs involved in rebalancing into account, and do not rebalance blindly nor over-actively (allowing a small imbalance to persist).

Note that Betterment customers do not pay per-transaction fees (or commissions) of any kind. Our AUM fee is the only charge our customers every pay.

Because we use cash flows (deposits, withdrawals and dividend re-investments) to rebalance, sizable imbalances are mitigated, keeping the vast majority of accounts below our rebalancing threshold.

However, if that threshold is exceeded, we then take tax liability into account before proceeding, and will not sell any lots that impose a high tax burden upon the customer. For instance, we almost always wait for capital gains to be long-term rather than short-term.

Finally, note that Betterment customers often do not pay the full bid-ask spread:




October 31, 2014 — 10:42 PM

I am not implicitly saying anything like that, and when did taxes become analogous to charging fees and hiding them. I am part of an RIA and clients hire us for one specific reason, to make money for them when opportunities exist and not to give it back when opportunities contract. We are not traders so almost every sale we have ever made triggered only long term capital gains. That said we just had a client call who thinks like you do, he said he was upset because we had sold him out of positions we thought were going to roll over and he would owe taxes on the gains. Here was our response, “we just made you a pile of money, suck it and pay your taxes”. We don’t lose any sleep when we make clients money and they owe taxes as a result. Not selling out of position when you should to avoid paying taxes is about as dumb as it gets.
You seem to be drinking too much of the cool aid, I might suggest you read Mike Edesess in your competitor Advisor Perspectives as he has made some excellent points about the dubious value of tax harvesting and constant rebalancing.

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Mentioned in this article:

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein

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