Et Tu, Betterment?

I’ve been watching you for a long time. Ever since you launched at TechCrunch Disrupt in 2010.

I remember:

Betterment, a new startup that is launching today at TechCrunch Disrupt, is looking to become the “replacement for your savings account” — it earns you more money than a standard savings account while offering more flexibility than you’d get from higher yield accounts. And, unlike most financial services, Betterment is designed so that anyone can use it, regardless of their knowledge about the market and financial products.

Their presentation starts at 1:05:00.

Watch live streaming video from disrupt at

I have a lot to quibble with, and that’s just from the paragraph & video, but there’s something I want to address first.

Frankly, I don’t like what you wrote in your blog post yesterday —  Financial Advisors Are Bad For Your Wealth

First, you missed the mark by a pretty big margin. The report you cite in your post is about Registered Representatives (brokers) who can charge commissions, not Registered Investment Advisers who don’t, and are fee-only. There is a huge difference & to quote The Reformed Broker:

Betterment uses the terms “broker” and “financial advisor” interchangeably in their post, either because they don’t understand the difference or because their weak point benefits from the intentional obfuscation.

Secondly, the Advisor Sting’ report everyone & you are buzzing about from NBER is pretty inherently flawed as-is, as renowned CFP Michael Kitces points out. So to cite it — well, it’s more bad form.

Ok– where do I start? How about this? Your entire product offering was started as a “replacement for your savings account”. I’m surprised your compliance officer didn’t have a full coronary right there at their desk when you said that. And, you actually said that in front of people, in public. You let a huge news outlet say it for you. Meanwhile…

Today I used the word “nipples” in a mini-press announcement almost begging to get attention in our boring stodgy industry, and in some cases I may have lost people forever as a result. And you are claiming that your account, which is supposed to be the better answer for investors around the country, offering a democratized, simple approach to investing, is a replacement for their savings account; and no one bats an eye. Heck, they say you’re “reinventing investing…”

I certainly learned my lesson today. My company needs to hire a PR person —  if for no other reason than to hear the obvious from a professional saying, “Don’t ever say nipples to the press, until you’re famous enough to pull it off.” Thanks a lot team, btw (they all thought it was “hilarious” & “awesome” when I ran it by them)

But, I guess, that’s the point of having someone who knows what they are doing; specializing in things. My Director of Operations, who is a girl by the way, isn’t a PR expert — She just thinks Mike Myers rubbing his nipples is hilarious. (Fun Fact: I grew up on Myers Drive)

She didn’t know that people who write financial news will have a full-on seizure if they see the word nipple, let alone see an actual nipple. (okay, and maybe the gratuitous ass-slapping wasn’t such a great idea either).

Anyway, that’s what we bounced you to; when you submitted your invite request. We have something much more tame now. I Dare You to subscribe.

Now, in my opinion, could she have guessed how the reporters would react? Sure — but, in our opinion, we thought it was worth the risk for the potential return. We were wrong. (results may vary)

So, hiring a professional — who, in this case, specializes in preventing me saying from saying suicidal words while trying to be bold and capture attention — should prevent the person who isn’t a professional, from making too many fatal mistakes. And even then, success is by no means guaranteed.

Your approach is “a lot people tried to make asset allocation easy, we made it easier than anyone else.”

And, I agree with Chris Sacca (during the video Q&A); you’ve made it too simple. To allow a person to simply twist a knob to ratchet risk up & down on a whim, with maybe a couple of browser windows warning — “hey, this is long-term” really isn’t going to stop the biggest problem facing most individual investors — bad decision-making when it comes to money & investing.

Perfect case in point… on your site, you show how your average portfolio earns 7.86% vs. the typical investor earning 3.46% (conceivably with their bad-for-your-wealth advisor) and then you actually compare your returns vs. a savings account — offering .9%.

And you do all of this for 0.35% a year. Granted you started your 2010 $3million dollar investor-funded venture charging 0.9%, which is a pretty major pivot– but I digress.

So, to the unskilled, the unknowing — your offering sounds pretty easy, cheap, and awesome. Twice as awesome as using their crappy advisor, perhaps.

Here’s the biggest problem I have though; you’re still selling the hot dot, just like the incumbents — in my opinion.

If you actually look at the portfolio you use to highlight earning that magical 7.86% (since 1987) you realize the portfolio is 70% Stocks (65% domestic (VTI– vanguard US Stocks) 35% (International EAFA btw, that’s probably a typo — there is no EAFAthere’s EAFE, is that what you meant?)) and 30% SHY (Short-Term Treasuries). I’m not going into a ton of other things that bother me at this point. All I’m going to say is this: you don’t seem to talk about risk anywhere on your site, other than the disclosure language no one really reads, past performance doesn’t guarantee blah blah blah.

So, does anyone here know what a 70%/30% allocation like this can lose at any given time being rebalanced monthly? Well, as it happens I ran some numbers for you… since July 30, 2007 to April 16,2012 (as far back as I can backtest using the funds that Betterment uses).

Here’s what it looks like vs. the S&P 500:

And here’s the risk profile of that allocation…

Now…see the Max Drawdown? That’s how much you can lose from the portfolio’s peak to its trough. This allocation would have lost 42.54% as you can see from the chart above. Check it out for yourself on ETFreplay.

And, while this is still less than the “stock market”, it’s certainly not exactly a substitute for a savings account. It might also not be worth pursuing the 7.86% you think you’re going to get, for the risk you’re really taking. Of course, I can’t know this until I give them money, because when I signed up again for the service today all I got was a screen to update my profile.

AND, immediately you ask me all kinds of personal questions, when we just met. Tell me, where do you live? What are your security questions & answers? Honestly, you should give me some hypothetical money to see how the thing really works first. At least show me some portfolio history. I think it would actually improve your conversion rate. — in my opinion. Have you read, How To Make Your Advisor Site Not Suck?

So, let’s say I invest. At what point during the potential 42% fall, do you think the investor decides maybe this wasn’t such a good idea to pursue? Maybe they twisted their knob to make some changes.

So, tell me — how is it that an advisor might have added value in this situation? I’m not talking broker, but Adviser (with an ‘e’)…

Really, there’s one simple answer. There might have been an actual conversation with an actual market professional about the actual decision about to be made, instead of the echo effect that probably occurs when an individual investor who is relying on such a simple tool might experience. That ‘worthless’ adviser might be able to talk to the investor’s lizard brain, at a time when they need it most.

Example: market goes up “Oh, my gosh this is awesome, let me turn this knob a little more. Look, other people who don’t need this money for 30 years are doing it too.” And a little more, and more — and then the market corrects. “OH MY GOSH, get me out of this thing!!!” — and the knob is twisted off.

And, by the way, 5% corrections occur about 3 times per year, 10% corrections once per year, and 20% declines occur once every 3-5 years. And that’s the US market. Non-US investment volatility is higher. But you accounted for all of this when you built your engine, right?

And sure, warning boxes will probably pop up. Are You Sure? Check Box & Submit. But I’m guessing the client submits anyway, because logic is pretty much out of the window once greed/fear emotions kick into overdrive.

This is all just my personal opinion & observation, but I think you would have been better off to pursue a different marketing approach at TechCrunch. And certainly in the message from your blog post yesterday:

At Betterment, we don’t think you should have to pay for advice. We provide recommendations on what you should do for where you want to be, and then we help you put a plan in place to implement it: diversification, rebalancing, and auto-deposit. It’s really that simple.


1) They are paying you for advice. (I hope) You’re a Registered Investment Adviser.

2) It’s not that simple. (see: nipplegate)

3) Your blog post title implies maybe somehow that you, too, have been a bad store of wealth — as an Advisor — What are you going to tell the people who gave you your funding?

It takes knowledge to be smart about money. And twisting a knob — in my opinion — is not the solution to a very real problem most investors have when they aren’t working with true professionals. Nor does it address the issues facing those who do know they need or want an advisor (a much bigger market, btw).

Now, to be fair — I’m clearly biased. And, I’m willing to hear why my approach to Wall Street’s problem is worse & where I can improve. Trust me, I’ve got a lot of those needs improvement cards staring at me right now — and I read every single one. I want to keep this cordial, but I also want to keep it real.

I was thinking about doing a roundtable with some of the other online advisors anyway & hopefully my PR person will be able to handle the arrangements. I just sent an email hiring her today.

Now if you will — please pardon me, I need to go figure out how much nipplegate is going to cost me…


Exhibit A: The All-In playlist that will now forever be known in our house as nipplegate




Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.



10 thoughts on “Et Tu, Betterment?

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  3. Atticus

    Don’t fear my young friend, embrace it. Every disruptive force in the creative destruction process is feared by those with the most to lose. Case in point, the vast majority of tactical, hands on, more research firepower then you would know what to do with mutual funds have failed to simply outperform vanguards simple balanced index fund. Not my words but Morningstars. Your days of “yeah I charge 1 Percent and manage risk better than the next guy” are coming to an end. That model is coming to an end. There will always be a need for advice and hand holding but the deliver mechanism will improve in efficiency and cost. If you don’t believe me, ask my three year old who’s currently battling me for an iPad. And by the way, I hope your not one of those guys that charges 1 percent a year to pick mutual funds for clients. Pleeeease.

  4. iheartWallSt

    You really should read me more often, because I do agree with you. As a matter of fact, read this– I’m about to lead an effort to re-imagine the whole thing.

    But that being said, the Morningstar study was also pretty limited.

    I actually think investors have three basic choices: Beta (buy&hold) AlphaBeta (actively manage risk, reduce volatility) and Alpha (try to beat the market).

    Alpha is the hardest & is what most mutual funds purport to offer — and investors spend most of their time chasing Alpha, courtesy of the fallacies perpetuated by the incumbent Wall Street firms and asset managers. I’ve been saying this for a while. 

    And, as it happens my company happens to offer buy and hold. We’re not as inexpensive as Betterment but sometimes you do get what you pay for. check it out:

    And, we offer a portfolio tracker powered by Morningstar — it’s pretty sweet.

    Thanks for commenting. Hope you’ll keep visiting.

  5. rwohlner

    New to your site, this may be the best financial blog post I’ve ever read, thanks.

  6. iheartWallSt

    Wow, you just made me blush. Thanks @rwohlner:twitter . I’m a big fan of yours. Here’s a post of yours I referenced ages ago.

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