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I’ve long been an avid supporter of Betterment as a great, hands-off, effective investment vehicle. I’ve referred ten people, five of whom have funded their accounts, and two tell me they intend to. I’ve put nearly all of my eggs in this one basket because the way they invest your money is to spread it into as many carefully selected buckets as possible.
Earlier this morning, they announced a new pricing plan, effectively immediately for new customers, and June 1st, 2017, for existing customer.
Betterment’s Pricing Structure
Until now, their pricing structure was very simple, with benefits to putting in more money, as follows:
- An account balance less than $10,000 cost 0.35% annually (or $3/mo if they don’t have a recurring fee)
- Accounts with between $10,000 and $100,000 cost 0.25% annually
- Accounts over $100,000 cost only 0.15% annually
Their new pricing is much simpler, and charges more for human advice:
- Accounts of any balance costs 0.25% annually
- The privilege of receiving advice from their experts costs between 0.40% or 0.50%
This benefits users who were previously in the 0.35% bucket, and obviously doesn’t affect those in the 0.25% bucket. But for what was once the premium tier of customers, prices just went up by 66%.
What’s the big deal?
If you have $100,000 in your Betterment account at the end of May of this year, you’ll be paying around $150 per year in fees; the next month, when the new pricing goes into effect, this will jump to $250. That means you’re paying $100 extra as a customer once in their most valuable tier.
Further, they have a post about how important expense ratios are when choosing funds, comparing a 1% fee to Betterment’s 0.15% plus the underlying expense ratio of about 0.11%.
Assuming an average annual return of 7.1%, their new pricing structure will end up costing $1,823.06 more over ten years for accounts starting with $100k (source: begintoinvest.com). Over twenty years, the difference will be a whopping $7,105.78. And remember: this doesn’t include the expense ratio you’re already paying to the funds Betterment holds for you.
Why this doesn’t make sense
Enough of why this sucks. Betterment needs to make money just like the rest of us, right? And as prices of things go up, it’s only natural that they charge more money for their services. Right?
Well, not quite. For three reasons:
- As inflation goes up, their real prices go up. So there’s no need to periodically increase the percent cut they take
- They are indeed increasing the value of their service, with new (and awesome) features like tax loss harvesting, but that increases their earnings too
- This ironically punishes the customers currently most valuable to them
Let’s look at those one by one.
When I reached out to Betterment support earlier today (which replied almost immediately), the first reason for their change was: “Our pricing was last updated over four years ago.”
Lots of service cost more money over time due to inflation. This makes perfect sense! Except in this case, it doesn’t. Betterment is already charging a percentage of the account balance. So as inflation goes up, the account balance goes up. And as the account balance goes up, their real earnings go up. So if they’re currently making $150/yr on my $100,000, and inflation goes up 3% this year, next year my balance will be $103,000 (hopefully more), which means they’d be making $154.50. In contrast, with this new change, they’ll be making $257.50.
The value of their service
Further to their explanation that their pricing hasn’t changed in a while, Betterment support cited new features as justification for the price increase:
In addition to expanding our offerings to include joint accounts and trust accounts, below is a partial list of all the features we’ve added since then for all of our customers. Even though our fees have increased, we believe the value that we provide to our customers has increased even more through our features [such as RetireGuide, Tax Loss Harvesting+, and Tax-Coordinated Portfolio]
While this is absolutely true, and I completely agree that these new features have brought more value to their service, it’s important to point out that as I make money, they make money. Remember: they earn money as a percentage of my account balance. So as the value of my money increases, so does their cut. So even if you forget that fact that they should improve their value over time in order to stay competitive (you know, with investing in those same funds directly), their doing so is valuable to them as much as their customers.
Punishing those most invested
The final point for why this doesn’t make sense is the one that I take the hardest. I’ve had money in Betterment for years. It’s taken me quite a lot of aggressive saving, including several rollovers, to reach their top tier, reserved for those with $100k or more. In fact, I rolled over a beefy 401k earlier this month and put in a few thousand more to finally reach that long-awaited $100k benchmark. And not a month later, after having reached the top tier, they effectively bumped me back down.
This change will likely get them more customers in the <$10k range, because the pricing is lower, and won’t make a difference to those in the previously-middle tier. Further, it simplifies their pricing and focuses their offering on their human services in the form of advice. I have no idea what percent of their customer base was in that top tier before, but I will say without a doubt that it affected my relationship with Betterment deeply when they rewarded my loyalty with a price increase which they did not give to those with a lower investment.
Where to go from here
It’s realistically unlikely that I’ll change my investment strategy. Betterment still has the best returns, the best ease of use, and the most transparent practices. But this change isn’t insignificant: already, I had to convince myself (and others) that their fees were worth paying so much more than the expense ratios in the underlying funds, and I’ll soon need to re-evaluate. And I can’t help but feel burned, knowing that they punished those most invested in them, and rewarded those least.