We just saved $42,000 by not switching to Betterment

There is a popular car insurance commercial featuring someone who “just saved a ton of money by switching to GEICO.” How much is a ton of money? $400? Well, by that measure we just saved more than “100 tons of money” or a whole century worth of car insurance savings. And we didn’t do so by switching, but by not switching our brokerage account. Ka-Ching, how easy was that?

We decided to keep one of our (taxable) accounts at Fidelity instead of switching to the highly acclaimed and heavily endorsed Robo-adviser called Betterment. Betterment and its lesser known rival Wealthfront seem to be en vogue in the Financial Independence (FI) community. A lot of bloggers wrote rave reviews about Betterment. Some of the bloggers even met the Betterment founder, toured the Betterment office in NYC, and got a free T-shirt, too. But the rewards for the blogging community go beyond free T-shirts. Betterment also has an affiliate program and offers referral bonuses if new customers sign up. Hmmm, if we were malicious we’d suspect that the enthusiasm might have something to do with the referral fees because we found very little criticism of Robo-advisers in the blogosphere. We have written about the weaknesses of the Robo-advisers and in today’s post, we’d like to pile on to our Robo-adviser criticism some more by pointing out another flaw that – to our knowledge, at least – hasn’t been pointed out anywhere else. And it’s a major flaw, potentially worth many thousands, even tens of thousands of dollars.

Hardly anybody who considers investing a meaningful amount of money with Betterment has that kind of fresh cash just sitting around in a checking account. Personally, we are very financially savvy with a net worth qualifying as FI (financial independence) but even we have very little loose change to deploy right now because it’s all invested. Our little green soldiers are all working hard in equity funds and real estate to earn their upkeep. Thus, our commitment to Betterment would have to come from existing investments. So, here’s one taxable account with Fidelity worth about $270,000 right now. We hold Fidelity equity index mutual funds (one U.S. large cap index fund and one broad market index fund) in that account. How about we shift that account to Betterment?

The big problem with that move is that Betterment doesn’t accept incoming transfers of mutual fund shares. Why? We don’t know. There is nothing that prevents them from doing so. Most Mutual fund shares, including the run-of-the-mill equity index funds we hold at Fidelity, can be transferred through the so-called Automated Customer Account Transfer Service (ACATS).

The fact that Betterment doesn’t want to do it is more than an “inconvenience” to us: it’s worth almost $42,000. Here’s why: in order to transfer the money we’d have to first sell our Fidelity funds. We have about $145,600 in long-term capital gains, which we’d have to tax at our current marginal rate for long-term gains of almost 29% (15% federal, 3.8% ACA, roughly 10% state/local). Our tax bill: $41,932.80. Ouch! If we were to keep the money with Fidelity and wait until 2019, the first year after retirement, we could realize those gains tax-free because we intend to stay in the first two federal tax brackets in retirement and also move to a state with zero income tax. (This assumes we liquidate those capital gains not all at once in 2019 but over many years to avoid bumping into the higher tax brackets.) Wealthfront apparently does accept incoming mutual fund shares. But Wealthfront will still liquidate your funds with the same disastrous tax consequences because their systems are geared towards ETF trading.

But shouldn’t we be “rolling in dough” to compensate for the minor inconvenience of a nasty tax bill because of all that fancy “Robo tax loss harvesting” they do at Betterment? Hardly! We would have a maximum of three tax years (2016, 17, 18) with high marginal taxes on ordinary income (45%). Even if we generate the maximum $3,000 a year that we can write off on the tax return, we’d recover a paltry $1,350 per year (=$3,000 * 0.45), and even that only in the years 2017 and 2018. Any short-term loss we generate in the tax year 2016 would first be netted against the long-term gains realized in 2016. So that tax write-off is worth only $3,000 * 0.288=$864. Once in retirement in 2019, tax losses, even the carry-over tax losses from 2016-18, are no longer of any use because they would be used to first offset our long-term capital gains during retirement. But those gains are already taxed at 0%. Total maximum gain from Betterment tax loss harvesting: $3,564. This maximum possible tax loss harvesting benefit from Betterment would not be sufficient to make up for even one-tenth of the upfront cost of $42,000. And we haven’t even included the fees (0.25% p.a.) and some of the other inefficiencies in the Robo-adviser process, see our post here.

Cost Benefit Analysis
Cost/Benefit Analysis, assuming maximum possible TLH benefit in 2016-18

OK, OK, we can already hear people shouting at their screen:

“Objection, objection, ERN: that’s your own fault that you invested in your boring mutual funds and not in those hip and fun ETFs, the ones they would have accepted as transfer assets at Betterment.”

Partially true but mostly irrelevant. Had we invested in ETFs, the transfer to Betterment would still be a major headache:

  1. Betterment does accept incoming ETFs, but unless they are part of the “approved” ETF universe of 24 funds, your ETF will be liquidated and capital gains will be realized. If you got the iShares ITOT in your portfolio, tough luck. It might be highly correlated with the VTI (both are proxies for the U.S. Total stock market index), but Betterment will sell your ITOT and reinvest into the VTI, tax consequences be damned. It’s not even 100% clear they will delay liquidation until the transferred tax lots with gains become long-term gains, though it wouldn’t matter for us personally since all gains in the Fidelity account are indeed long-term already. Wealthfront does point out that for each tax lot they will delay the forced liquidation until the gain becomes a long-term gain to prevent an even worse tax impact. They sanctimoniously announce that the forced liquidation will be done in the most tax efficient way, avoiding short-term gains (see link) but it’s still inefficient! They basically tell you, “sure, we slap your face, but consider yourself lucky that we didn’t punch in the face!”
  2. Even in the best possible case, i.e., had we held our Fidelity equity index portfolio in VTI, Betterment liquidates 83.8% of it to buy other ETFs that fit their target portfolio. That’s because in the Betterment target portfolio VTI has a share of only 16.2%. The rest is made up of other domestic equity ETFs, international equity ETFs and, inexplicably, bond funds. Even taxable bond funds! How dumb is that? They liquidate 80+% of our cherished long-term capital gains at a tax of 28.8% (instead of 0% in 2019) and then – adding insult to injury – use the proceeds to buy tax-inefficient bonds in a taxable portfolio. That is the epitome of tax-inefficiency. Robo-advisers call themselves a great innovation in personal finance. Some of what they are doing seems more like financial malpractice.
messy robot
We won’t let that guy touch our finances!

There’s another objection coming:

“Objection, objection, ERN: Your situation is special because you are so close to retirement. If someone has a longer investment horizon they can use tax loss harvesting longer and make up for the tax bill!”

The exact opposite is the case. The longer the horizon, the more the Betterment account will fall behind. Here’s why: If we assume that the Fidelity account starts out at $270,000, the Betterment account at $228,000. Both accounts grow at a (conservative!) rate of return of, say, 5% and Betterment receives an additional $1,350 from Tax Loss Harvesting per year (making the most optimistic assumption that Betterment garners enough tax losses to max out the $3,000 every year) you’d get the following:

Year 1:

  • Fidelity: $270,000*1.05=$283,500
  • Betterment: $228,000*1.05+$1,350=$240,750, or $42,750 behind the Fidelity account

Year 2:

  • Fidelity: $283,500*1,05=$297,675
  • Betterment: $240,750*1.05+$1,350=$254,147.50, or $43,537.50 behind Fidelity

We get the picture: not only will we never recover the $42,000, but the foregone capital income from the missing $42k is more than you can ever recover from the maximum tax loss harvesting every year. You’re in a $42,000 hole already; digging a few more years won’t help! A longer horizon makes the problem only worse.

Then why do the Robo-advisers encourage account transfers?

The quote from Wealthfront:

“Not only is [a transfer] possible – we encourage it. […] For taxable accounts, we will do [the transfer] in a tax-minimized way. In particular, we will […] [s]ell assets with long-term capital gains.”     (our emphasis)

Two explanations:

  1. A principal-agent problem: Robo-advisers are not in this for charity. They’d rather see assets invested with them than elsewhere even if it’s costing you more in taxes. It’s already difficult enough to gather assets. If you attract new savings from your clients at the pace of a few hundred dollars a month (or a few thousands a month from your rich clients in NYC and Silicon Valley) it’s still only a slow trickle. The real money motherlode is the trillions of dollars of existing investments. But that money is somewhat sticky. Why make it harder to access that money by telling your clients about unpleasant tax implications?
  2. Applying Hanlon’s Razor (“don’t suspect malice in what can be explained by stupidity”) there could be a certain degree of ineptitude. My impression from the occasional interaction with folks working for the Robo-advisers is that they are very smart, tech-savvy and expert programmers. But with all due respect, finance and economics seem foreign to them. Talking to some even very senior folks, I had the impression they don’t even fully understand the one concept they claim they do really well: Tax Loss Harvesting. They seem to think that TLH is mostly about the arbitrage between ordinary income taxes and long-term capital gains. Hence their nonchalance about realizing long-term capital gains prematurely. Betterment might think it’s irrelevant when you pay taxes for your LT gains; today or in three years or twenty years down the road, it doesn’t matter, right? Well, it does matter, and it matters a lot! In our own research (see our previous post) we found that the “time value of money effect” and the “lower future tax bracket effect” are equally or even more important than the arbitrage between ordinary income tax rates and long-term capital gains tax rates. But the Robo-advisers may simply be oblivious to those.

Whether it’s malice or incompetence, it doesn’t really matter. In the world of finance, both are deal-breakers and we are not shifting any money to a Robo-adviser anytime soon.


Robo-advisers are not for us. We are DIY asset allocators and like to keep it that way. Some of the inefficiencies in the Robo-adviser technology are merely quirks, destroying a few basis points of annualized returns here and there. The fees are also too high for us, even at 0.25% (Betterment and Wealthfront). Destroying 15% (again, not 0.15% but 15%, the equivalent of 100 years worth of Betterment management fees!!!) of the portfolio value for no good reason right upon transferring assets doesn’t help either.

t-shirt-1261820_1280 copy
That’s not a T-shirt we’d like to get from Betterment!

Robo-advisers can be a good alternative for folks who don’t want to deal with their personal finances: Folks who don’t want to implement the TLH themselves. Still, they should invest only new savings or transfer existing investments that have zero (or close to zero) capital gains or even capital losses. Never, ever transfer existing taxable accounts with sizable capital gains! The tax implications could be so disastrous, you will never recover the initial loss, even under the most optimistic tax loss harvesting assumption.

Does anybody have experience with the Robo-advisers, especially for account transfers? We’d like to hear your opinion!

Disclaimer: We currently have no affiliate relationships with any firms mentioned here or any other firm for that matter. Please check out our general disclaimer page.

89 thoughts on “We just saved $42,000 by not switching to Betterment

    1. Not an advocate of Betterment either . But what u r not taking inyo consideration is that when the stock market crashes u will lose 1000’s more than 42 with Fidelity and Vanguard accounts. Taxes and fees paid with Betterment transfer have allowed liquidation and access to transfer funds to wiser investments like ones with 0% floor insurance like Nationwide IULs and Annuities. Furthermore, for those not planning to move out of state who want to avoid risk of greater losses such as over 50% of investment value . Transferring out of Fidelity make sense. Using Betterment as a transitional step to liquidate does serve a valuable purpose. Down the road taxes will only increase so paying now can be better than paying later. Granted slower is preferable but inevitably taxes will be paid in any case so best to avoid high tax bracket if possible by not liquidating too much qualified funds in a given year but still better than sticking with Fidelity and suffering fatal losses of upcoming stock market crash.

  1. Haha I love the fact that the Google Adsense ad picked for me at the bottom of this post is for Betterment 😉

    Fantastic breakdown of the true costs of switching over. I love that Wealthfront actually says that they “encourage” account transfers – Of course they do! I would encourage anything that makes me money!

    1. Thanks!
      Oh, that’s too funny they put a Betterment ad at the bottom. It goes to show that robots still get it wrong sometimes. I hope Betterment didn’t pay too much for that ad.
      Also, very true: I never see any company advertising “keep your money where it is”
      Of course they will recommend transferring assets!

  2. Way to keep it real ERN! You won’t see an endorsement from me for a product I don’t use and love, that’s for sure! It’s easy to see the conflict of interest there.

    Thanks for calling out the difficulties in doing transfers to the robo advisors also. While I would prefer a slap in the face over a punch, I think I’ll just stick with my current brokerage accounts.

  3. Of course the scenario of Fidelity vs Betterment would work in Betterment’s favor if one started with a cash lump sum pulled from a fat bank account. Like we all have >$100k burning a hole in our pockets to do that…….

    Enlightening that they don’t work with the ACATS system. Quite the flexible bunch they are indeed.

    Apparently there are now three things in life that are certain
    1. Death
    2. Taxes
    3. Death of Betterment because of taxes.

    1. “3. Death of Betterment because of taxes.”
      That’s funny! But then again, they have very powerful backers, and I’m not talking about bloggers. Venture Capital investors! So the Robo-advisers are probably here to stay. Which is odd, because only transfers of tax-deferred accounts avoid this tax issue. But with those accounts you can’t do tax loss harvesting. Why pay 0.15%-0.25% fees for static weights you can replicate for free in a Vanguard account? In the taxable accounts where you can do TLH you have the issue of the potentially realizing capital gains too early. It’s a catch-22!
      Thanks for stopping by!

  4. Great article, ERN. Big props for the incisive analysis.

    I’ve never given much consideration to these Roomba-visers since they seem to “solve” a bunch of investment problems with outmoded (and not so great) economics. Just like you point out.

    The transfer headaches are something I hadn’t heard before. But I can’t say it’s too surprising. A new trend seems to be afoot with “startups” these days: Bureaucracy and red tape (i.e., the very things they rail against) are, in their very own systems, starting to approach Soviet levels of dumb. The mantra seems to be “Don’t make it sensible when you can just throw some tech geeks at it.” Whose razor is that?

    Nice job here, and thanks!

    1. Haha, that’s priceless! Do you moonlight as a joke writer for a late night show?
      “Don’t make it sensible when you can just throw some tech geeks at it.” That’s got to be the “razor de luchador” in your honor. No love lost between you and the tech industry, eh?
      Thanks for stopping by!

      1. Ha! I love that – “Razor de Luchador”!

        I’m just kidding, though. I don’t have a problem with the tech industry; lots of tech companies do great things. After all, some of them paid me a lot of money for many years to help them. So there’s no philosophical issue or anything like that.

        But they sometimes run into trouble with the technology tail wagging the business dog. And that seems to be the case with a lot of these fintech groups…a tech “solution” looking for a business problem (and maybe not satisfactorily finding one). Or, at least, not finding one that also allows the business model to profit efficiently.

        It’ll be interesting to see how these robo-advisers do over the longer term – are they a fad or will they evolve into tools used as a suite of solutions by investors? I have some trouble envisioning a future where they remain strong standalone options for portfolio management. But it’ll be fun watching the story unfold.

        Thanks again for this thoughtful post.

  5. Thanks for the analysis ERN. I agree that to keep things sane, we should only do reviews and sign up for affiliates for things we use or recommend because they’re great. We are also DIY investors so we aren’t being charged any ongoing fees, and we’ll keep it that way forever (probably).


  6. Good analysis. It seems that the capital gain tax is the killer part here! I should start to add that to my consideration when I start to sell some funds in the future. In Belgium, for now, worst case it is 1,32 pct on the sold amount, no matter what the profit or loss is.

    With DIY, you have full control on what you want to do and when you plan to do it. That is one aspect I value a lot in the DIY approach… full flexibility to plan according to my needs!

    1. Thanks ATL! Yup DYI is the way to go. There are just too many ways the robot can mess up.
      Wow, I didn’t know they tax the transaction value in Belgium. Here it’s only the gain. And you can even work in the transaction costs to lower the taxable gain.
      Cheers, have great weekend!

  7. Thanks for posting this analysis. It is true that all these reviews by the blogging community sometimes make me wonder how big the referral fee is.
    To be fair, many of the reviews I’ve seen were limited to new capital and I don’t recall anyone transferring 300k$. I still, however, generally prefer to know how to do something myself before I ask someone to do it for me. Maybe an engineering bias.
    For now, I’m sticking to DIY low cost index fund investing. Too bad Vanguard doesn’t have a referral program 😀

    1. Thanks! True, the economics looks a bit better when investing new money. You wouldn’t be exposed to the bad tax bill upfront. But you still pay the 0.15% p.a. and some of the other beginner mistakes they make at Betterment.
      Thanks for stopping by!

  8. We’re happy with Fidelity too and haven’t been too tempted to switch, so it’s good to know that our laziness was actually a good decision. Thanks, ERN!

  9. Your logic makes sense. I do like the robo advisors for new money, and I am partial to Wealthfront because they are based here in San Francisco, where I’m from.

    I’m curious after reading your bio, how on Earth do you manage to stay in such a low tax bracket while working in finance in your late 30s?! A 15% Federal tax bracket has a household income limit of $75,000 and single income limit of $38,000. What is your secret?

    I worked in finance from 1999 – 2012 and was always getting crushed at 33% – 39.6%.



    1. Hi Financial Samurai! Thanks for stopping by.
      Yeah, I could see that for new money it seems like an idea for some. I like the Wealthfront TLH on the individual security level rather than index.

      But for us it’s a catch-22: We showed that we can’t shift existing assets. Putting in only new assets would be a disadvantage too:
      1) it’s too small and slow to really matter
      2) it interferes with the Tax Loss Harvesting we might be doing (but chances are slim because of our low tax basis)
      3) we’re mostly shifting new money in taxable account into other investment ventures now: Real Estate and Option Trading.

      Our current marginal rate is 35% federal. We intend to stay in the 15% bracket while in retirement (and also hope to move to a state with zero income tax, but that’s TBD). So, in 2018 we’re still in the high bracket and 2019 will be the first year with low marginal rates.


  10. Ah taxes.. Can’t ever love them but they will always exist! Great analysis and an overview of the downside of joining Betterment. I like that we can always take care of our investments ourselves, do it yourself can be the best way because I don’t want to pay money to get subpar results!

    1. Betterment shut down for a few hours – and as they manage when assets are bought and sold (not the customer) it was really irrelevant. Had you want to add or remove money because of brexit, it takes several days anyway.

  11. I was quite excited today to see Meb Faber ( well respected quant) has just launched his Cambria Digital financial advisor service. Clicked through to his site and it is a front for…..


  12. Disclosure: Betterment fan boy here. Blogger too. (But no affiliate links or financial incentives to promote Betterment.)

    Even those like me who advocate for betterment as a worthwhile product for taxable investment accounts would never advocate for rolling over a taxable account with significant gains into Betterment. That would be stupid.

    1. Hi Alex, thanks for stopping by. Glad that you are recommending transferring only money without capital gains. (I.e., new savings or existing savings without capital gains, or tax-deferred assets)
      Any other way would defeat the purpose of tax loss harvesting.

  13. Even if you want to be a hands off investor and don’t want to DIY manage, I can think of few scenarios where a robo makes more sense than, say, balanced fund, like the Vanguard LIfeStrategy series. The whole robo scene kind of reminds me of new luxury cars. They’re fine, they have excellent marketing, but does anyone really need to pay extra for the service they are offering?

    I believe that the robo’s algorithm’s just aren’t smart enough to evaluate at the individual level. They don’t look at someone’s tax bracket, they will just put everyone in MUB in thier taxable account whereas many of their user-base might be better off in AGG/BND, but the robo’s software doesn’t take that into account or give the investor the option to instruct them on that. IMO, the robo’s just aren’t smart enough yet. I assume they’ll get there eventually, but who knows.

    When I used Betterment, I basically had to micro-manage my robo and invest my bonds elsewhere…which defeated the whole purpose of using a robo in the first place.

    1. Haha, great analogy: Betterment vs. luxury cars.
      Agree, as you pointed out the algorithms are pretty basic and don’t even take into account what income tax bracket you are in, hence, the potential misallocation MUB vs. AGG/BND/LQD. That’s such a beginner mistake! I’m glad you were able to “hack” the dumb robot, but maybe not everybody knows how to do that.
      Cheers and thanks for stopping by!

  14. You evidently made a good choice by not switching. We’ve been managing our investments since we started investing 10 years ago and wouldn’t change a thing. If I were to start investing today and didn’t want to get involved managing I’d just choose a target date fund and call it a day. Great post!

    1. Yes, DIY is the best way to go. I also like Target Date Funds to get a general sense of what’s the “right” asset allocation. But for tax loss harvesting in a taxable account it would still be best to implement the Target Date Fund weights by holding individual index ETFs. Also put the bond funds into the tax-deferred accounts for tax efficiency.

  15. what if you have a brokerage acct already, with lets say schwab, and you want to switch to schwab robo?

    1. I’m not familiar with Schwab Robo, so I would check with them about two issues:
      1: would the transfer be done in-kind (i.e., transfer shares without selling them)
      2: Once transferred, will the Robo program always sell only shares without capital gains (short and long-term!!!)? Will the rebalancing be done only through the tax-deferred accounts and/or tax lots with losses in taxable portfolios?

      I am 99.99% sure #1 is ok. They should do the in-house transfer without selling securities.
      I’m not very sure they will satisfy #2. Either because the Robo is too “dumb” or the Robo program works only for certain ETFs and if you happen to own an ETF not on the list, it might be sold and replaced with one of the ETFs on their list.

      Also make sure that the initial rebalance to the target portfolio doesn’t trigger any taxable gains. So, even if you own all the “right” ETFs but in the wrong proportions, will they sell taxable lots to rebalance to target? If so, it defeats the purpose of the Robo program.

      I would want to get that in writing from Schwab before committing any money to them!


      1. Much appreciated. Kind of unbelievable that with all the roboadvisor articles I’ve read I havent run into the tax implication discussion, but it makes sense. For those who already have taxable accts established doing the robo thing can be a mine field it seems.

        I will get answers to those questions b/f making a switch. Thx!

      2. Schwab Robo liquidates everything even if it’s a Schwab to Schwab transfer and even if you own the same funds used in he robo portfolio. I couldn’t believe it when they told me that.

  16. To someone who doesn’t have investments to roll over, or have $10k+ to start with, is Betterment a bad idea? A few people I work with have Betterment accounts and it was suggested that I could start small with just a couple thousand. Keep adding, with at least $100 a month going in and once I get to 10k, switch it to Vanguard. Is there a better way to do this? I am a late starter to retirement planning and I am trying to do all I can to get where I need to be. I am maxing out my 401k contributions and lead a very low expense life, with almost no debt, besides my income property.

    1. Good point. Obviously, investing only fresh money avoids the big tax impact we pointed out in the post. There’s also an advantage that you don’t pay any of the commissions for the ETFs for your small trades. But you still face a number of other challenges and quirks that they built into their Betterment sample portfolio, outlined here:
      and here:
      Of course, Vanguard also has its challenges. I think they charge you $10 per quarter for small accounts with holdings below $10,000 in each mutual fund. So, yes, it may not be such a bad idea to go with the Robo advisers. Wealthfront, I believe, manages the first $10,000 for free. That might be attractive for a small account you just start with.
      Best of luck and thanks for stopping by!

    2. Good job! Better not to max out 401k bcuz taxes will be too high on harvest . Smarter to pay taxes on seed . Only contribute up to what employer matches to get best value . Fund an IUL from Nationwide with the remaining monthly balance to grow a tax-advantaged savings that can be accessed with greater flexibility for age and purpose as needed with zero risk to principal plus added benefits of life insurance to prevent outliving your savings!! 💡

  17. Living here in SF and meeting all the management and many employees of Wealthfront etc, I really think they are doing a service to many folks who would otherwise NOT invest. A lot of people I’ve spoken to are cashed up and don’t know what to do. In the long run, it’s probably better to pay 0.25% a year in AUM and have investments than just hold cash.

    And for folks who are already paying 1-3% to the traditional brokers, the robo-advisors offer an alternative.


    1. I personally recommend Wealthfront and Betterment only to my financially “uninitiated” friends/neighbors/relatives. If they currently pay 1-1.5% annual fees for a financial adviser then, by all means, go ahead and switch to the Robo-Adviser. Or if folks are too afraid to invest and currently hold 100% cash and Wealthfront makes them comfortable to invest, sure, go ahead.

      But I can’t recommend the Robo-Advisers, in good conscience, to folks in the FIRE crowd.
      There is the borderline financial malpractice of recommending account transfers, despite the potential $42,000 loss mentioned here in this blog post.
      There is the laundry list of beginner mistakes and inefficiencies in their recommended allocations (https://earlyretirementnow.com/2016/04/03/why-we-dont-use-robo-advisers/) apparently due to a Mental Accounting bias in their models (https://earlyretirementnow.com/2016/08/10/beat-behavioral-bias-mental-accounting/).

      So, I personally take a very, very dim view on the Robo-Advisers. I met some of the Robo-Advisor senior execs, too. They might be very technically savvy but there is a severe finance and asset allocation ineptitude that’s a complete deal-breaker for me.

  18. Hi ERN,

    I’ve got to say, I’m really surprised so many people find this “analysis” “insightful” – you are basing everything on a rather shoddy premise – namely that Betterment is somehow responsible for your tax liability. It’s true that after tax returns DO matter – but far too often we see people letting fear of paying taxes irrationally drive investment decisions. The fact is there are really only two ways to avoid paying those capital gains taxes: dying (and getting a step up in basis) or waiting until your winner becomes a loser and taking the loss then. And yes, you COULD wait until you were in a lower income year and do some tax planning as to when to realize your gains to minimize your taxes, but you could realize the same benefits by sending money into a robo-advisor at the same time you would have realized the gains otherwise using the plan you described: “If we were to keep the money with Fidelity and wait until 2019, the first year after retirement, we could realize those gains tax-free because we intend to stay in the first two federal tax brackets in retirement and also move to a state with zero income tax.”

    The same tax liability that you use to unfairly hobble a robo-advisor in your analysis would do the same damage if you ever wanted to rebalance or chose another fund. In fact, you probably would have benefited from doing some “gains harvesting” during lower income years to reduce your unrealized gains – but that’s neither here nor there.

    You are also comparing a completely self-managed account with a managed account (Betterment) -not an apples to apples comparison at all. If you were currently invested with a run of the mill advisor you’d be paying 1% plus in fees and be in the same situation – plus if the advisor had discretion over the account he could STILL choose to sell your funds and realize those gains at any time anyway.

    A robo advisor is a great choice for the average person who is either new to investing or overpaying for some MS, ML, or WF type “advisor” to stick them in a random assortment of overpriced mutual funds. A person’s tax consequences are unique to their personal situation and it’s incredibly misleading to slam the whole robo advisor industry because blindly sending all your money to them wouldn’t be the best idea in YOUR situation. Not to mention the fact that most people would be using those type of services for tax-deferred money (IRAs) in which case none of your tax related issues would apply.

    Your own analysis, minus your $42,000 unfair handicap, concludes that the robo-advisor is the better option.


    A Registered Investment Adviser and Certified Financial Planner(TM)

    NOTE: I am not employed by, nor do I receive any compensation from, Betterment or any other robo-adviser. It just galls me seeing people use shoddy logic to unfairly slander a whole industry which is working to democratize investment management and drive down costs – saving the end client thousands.

    1. Wow, where do I start? OK, I say something nice: Thanks for stopping by and leaving a comment. But let’s get to business:

      1: There is no need to put the word analysis in quotation marks when referring to my work. I hold a PhD and the CFA charter and I do investment analysis for a living. If you like to share what analysis you do in your RIA/CFP business and what insights you post on your site, please provide a link. I am absolutely fine with people putting links even for blatant self-promotion. Until you show us your work, maybe hold back with that kind of insult, right?

      2: The Betterment post here was the second most popular, even though our new work on safe withdrawal rates is quickly catching up.

      3: If Betterment sells my assets and realizes a tax bill that I would have avoided by deferring the sale 3 years (and realizing the gains when I’m in a much more advantageous tax bracket), yes, then I most definitely can blame Betterment for the tax bill. Blaming me for the tax bill and not Betterment would be the epitome of shoddy logic.

      4: I manage my assets myself. I don’t have to compare the unnecessary tax bill that Betterment would have created to hiring an unnecessary CFP who charges unnecessary 1% of AUM. More shoddy logic from you.

      5: If you had read the post all the way to the end you would have read this:

      “Robo-advisers can be a good alternative for folks who don’t want to deal with their personal finances: Folks who don’t want to implement the TLH themselves. Still, they should invest only new savings or transfer existing investments that have zero (or close to zero) capital gains or even capital losses. Never, ever transfer existing taxable accounts with sizable capital gains! The tax implications could be so disastrous, you will never recover the initial loss, even under the most optimistic tax loss harvesting assumption.”

      So we are in agreement: Robo advisors are potentially a good option for newbies. But not for sophisticated investors especially not for those who could potentially shift existing assets over to Betterment without knowing about all the tax implications. Hence, I wrote the post to warn others.

      6: You say “plus if the advisor had discretion over the account he could STILL choose to sell your funds and realize those gains at any time anyway.” Uhm, I won’t ever hire a CFP, and you just provided the reason. Why would anyone sell a highly appreciated asset three years before going into a zero tax bracket? Unless I knew the asset will decline by double-digit %. I could maybe, maybe, maybe understand that point if someone had 90% of their net worth in one single stock, then it is a good idea divest and diversify. But the Fidelity account in question is only 10% of my assets, and it’s all invested in broad, low-cost index funds.

      7: I saved the worst for last: I never ever, ever, ever, ever, ever have a reason to rebalance that Fidelity account:
      a) I save about 150,000 per year. If I feel that the asset mix is out of balance I simply put that new money into the underrepresented assets. I would never have to realize taxable gains in the taxable account to accomplish that rebalancing (unless I suddenly wanted to set the equity target weight to zero, which is not the case, ever)
      b) I can rebalance inside my tax-deferred accounts if method a is not enough. Tax-free. Why would I touch the taxable gains?
      c) Even if for some obscure reason I decide to rebalance inside the Fidelity account, the rebalance would be done to undo a few %-points of style drift. I would never ever have to sell all assets and buy different funds.

  19. Thank you for writing this critical review! It’s nice to see someone taking a close and critical look at these options. I checked them out a while back, but I just couldn’t justify investing with them for little if any additional value over a simple index fund like VTI / VTSAX.

  20. Thank you. Our assets are in Vanguard low-cost mutual funds and the Federal Thrift Savings Plans. At Vanguard, we get FREE personal financial planning services with a human being AND free access to Financial Engines for fine tuning suggestions when the time comes for rebalancing. Granted, we had to accumulate and roll over savings there to get to the threshold for which we qualify for these services. But, now that we are there, it seems silly to pay robots for these so-called “benefits.” Thank you for giving me another reason to remain on the Valley Forge, PA vessel. Just call me Admiral.

  21. Great post about Betterment. It is important to always know where your adviser’s (even robo advisor’s) interests are. Of course they want you to trade so they can make money off of the trade fees and increase their AUM. I had an instance in the past where I had to liquidate mutual funds to move from a high fee brokerage down to my current brokerage. My amount was about $10,000 and the fees were minimal compared to moving your investment fund to Betterment. Your math says it all and i really don’t need to repeat that in the comment.

    Good thing you did the math and figured out that this was not right for you. Thanks for the analysis as well for anyone else considering Betterment.

    Bert, One of the Dividend Diplomats

  22. Didn’t get hit with that one, but did hire a financial advisor. Only a small taxable account went to him, along with a couple of IRAs. Fees, fees and more fees not to mention the tax consequences. Not a good decision in any sense of the word.

    1. Oh, no! Sorry to hear that! But Ihope you saw the light and you went with inexpensive index funds and self-manage the whole thing for no cost at all after that. Best of luck and thanks for stopping by!

  23. It was years ago now when I did my first rollover 401k to Vanguard IRA, and they’ve been great. I looked at the robo-advisors, but decided it didn’t make sense compared to Vanguard.
    I looked info up for a friend you can open a Roth for $1000. I recommend Vanguard to my friends, but it seems like Fidelity offers good products as well.
    P.s. When I read your name Ern, it makes me think of the bus driver in Harry Potter. 🙂

    1. Completely agree! Especially for retirement accounts (you can’t do tax-loss harvesting) you’re better off just implementing with low-cost Vanguard/Fidelity funds and not going with the Robo guys. Just get the recommended weights and DIY. Save 0.15-0.35%! Great point! Thanks for sharing!

      PS: Yeah, that’s a good one, I like the bus driver character. I always liked Big Ern from the movie Kingpin. 🙂


  24. Everyone’s situation is different.

    The author’s analysis on their situation is accurate – the large tax hit moving to the ETF based robo-advisor offsets any benefits. This would also be true if they wanted to self-implement an all ETF portfolio. Better to just hang on to Mutual Funds – even with higher fees – until their tax situation changes. Note that if they rebalance this portfolio, taxable gains might still occur, though certainly not as much as liquidating everything.

    For everyone else, it depends on your circumstances. If your gains are smaller (possibly offset with other losses), then it might be worth the move to get your fund costs lowered and your management automated (especially if you’re not really interested in managing it yourself.) Of course, if the assets are in a retirement account, then you can move them without tax impact.

    My experience with Wealthfront worked out fantastically. My observation is that they are far more able to accept your existing assets rather than liquidating and sending cash (even if they eventually sell them.) As the account I moved wasn’t that old and already followed the passive index ETF methodology, it fit nicely into Wealthfront’s model. I was fortunate to have moved just prior to a major pullback in the market and Wealthfront initiated tax loss harvesting resulting in a huge taxable loss which I’m going to be able to use over several years. I could have managed the ETF’s myself and created the tax loss event, though I don’t think I was knowledgeable enough then.

    In the next tax year, I plan to move some more ETF’s to Wealthfront. While these funds fit their model, they will throw my allocations out of balance and selling them will create tax gains I don’t want. Wealthfront allows me to specify during the transfer that I don’t want the gain. As a result, I’ll just be out of balance until enough future deposits and dividends allow them to shift back into balance. Additionally, whenever an opportunity to tax loss harvest come up, they’ll be able to sell some of my funds with gains to get me closer to my target allocation.

    1. Thanks for sharing. I wasn’t aware that Wealthfront has the option to override the rebalance and keep the allocation away from target if you transfer a portfolio of ETFs that’s in their universe.
      I presume they will slowly get closer to the target allocation through new flows and dividend reinvestments.
      Thanks for the update!

  25. Very interesting post. I always enjoy reading the other side of the argument. So many have posted about the benefits of robo advisors, myself included. I use Wealthfront, although I never transferred over from an existing account. I’m more curious to see if their tax loss harvesting is actually worth it. So far I am a fan (I don’t earn any commissions from them), but I’ve only had an account since last spring.

    I think robo advisors are a great way to diversify your portfolio if you don’t want to spend the time doing it yourself and don’t want to pay the high fees of a regular advisor. I have the knowledge to be able to do it myself, but I’d rather not spend the time researching as at this point I can better spend it elsewhere.

    Thanks for sharing!

  26. Help! I currently use a robo-advisor and am trying to figure out how to move towards a self managed portfolio. Any advice? I have a brokerage account and an IRA with them.

    1. Don’t panic! You can use the same ACATS system to move assets in kind from the Robo-advisor back to a Fidelity/Vanguard/Schwab account. This ‘in-kind’ move is especially important for the taxable account because you don’t want to realize capital gains in the process.
      But: I’ve heard from folks that most Robos will fight tooth and nail to keep you there and will come up with excuses and delays. But they are required to let you move the money. It’s YOUR money, not theirs! 🙂

      1. THANK YOU! So essentially I’ll move my current positions over to Vanguard “in-kind” and then can re-allocate or switch funds once moved over?

  27. Betterment fan here too; but i think it is good for fresh new money rolling over on taxable account does not make

    1. I’d fully endorse people start with Betterment/Wealthfront up to the free portfolio management limit (used to be $10k or $15k, not sure if they still do that). But once your account grows above that it’s time to transfer to a Vanguard account, in my opinion. 🙂

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