It’s Time to Kill the Monthly Fee for Small Accounts
Adam Nash
26210

Betterment sets the record straight

In a marketing ploy designed to bait us to respond and thereby invite the press to pay attention to them, Wealthfront made knowingly inaccurate statements about Betterment. Some press love a good hatchet job, so much that they occasionally gloss over the facts — much like Wealthfront. I have faith that careful readers and reporters will see Wealthfront for what they are: spin artists. I’m loathe to play this game, but my PR team insisted that I set the record straight.


Some context

Betterment, the first automated investing service, has more than doubled assets under management in the past 6 months, from $1.1B to more than $2.3B. Wealthfront has not been growing as fast. Betterment has more than 3x the customers of Wealthfront, and the gap is widening, according to recent public Form ADV filings. Wealthfront just announced it would decrease its account balance minimum to $500. In a post timed to promote this policy change, Wealthfront’s CEO knowingly made inaccurate statements about Betterment. These misstatements are cited and rebutted with facts below.

Betterment has always been accessible to all investors, and will continue to be. It’s part of our mission. We have no minimum, so that anyone can try our services. Among many firsts, we were the first automated investing service to offer fiduciary advice to anyone, regardless of balance, the first to offer free trades, and the first to make tax-loss harvesting available to all customers. As a fiduciary advisor, we are aligned with our customers, and it is at our core to put their interests first.

We’d welcome anyone to try both services, and see for yourself why the overwhelming majority of customers (more than 3 of every 4) choose Betterment.

Inaccurate statement #1: “[Almost one-third] of [Betterment’s] revenue comes from this $3 fee.”

Facts: More like one-third of one-third. Currently, we earn just over 10% of our revenues from $3 monthly fees. This percentage drops every month as we earn more deposits from existing customers and attract higher-balance customers.

Inaccurate statement #2: “Betterment has decided to build their business preying on those who can least afford it.”

Facts: The average net worth of a customer paying us the $3 monthly fee is $110,000. The $36 per year this customer pays is 0.03% of their assets, or 3bps. Hardly preying on those who can’t afford it. The average income of these same customers is $79,000. This average customer is clearly making enough money to invest $100 per month, which is what we encourage them to do, repeatedly, with the clear, stated incentive of lowering their fees. The vast majority of these customers are in trial with us, and we want them to commit more of their assets to us. We believe in the power of behavioral finance, and reducing fees has been shown, by our own data and by many academic studies, to be a powerful motivator.

Sample email from Betterment’s onboarding email campaign, designed to encourage customers to deposit more and thereby pay lower fees.

Inaccurate statement #3: Citibank, whose Citi Ventures Fund invested $3mm of the $105mm total raised from investors, influenced Betterment’s fee structure.

Facts: We set our current fee structure more than three years before Citi Ventures invested. Citi and their fund do not have a board seat, nor even observer rights. They have no say over fees or other decisions at Betterment. Citi Ventures invests in many popular and fast-growing financial services, such as Square.

Inaccurate statement #4: Betterment “brags” about making money on those who can least afford it.

Facts: What we brag about is our alignment with our customers. That we have a unique opportunity, starting from a place of alignment, to build a different kind of financial service, one that puts customer interests first. The market size for such a service and the opportunity ahead of us excite those who understand our industry. They understand the efficiency gains that we have pioneered and solely own and the conflicts that plague others in our space. We brag that our costs are lower than anyone’s because we built a vertically integrated model, one that’s more efficient to operate than others, and that we pass the savings on to our customers.

Slide from Betterment’s investor pitch deck about vertical integration, a unique competitive and customer advantage

Wealthfront seems to be trying to mimic our mission, perhaps to confuse customers or investors — they have a habit of badly mimicking what we do — but they don’t have the efficiency that we do, nor a claim that they started in the right place. We remember that Wealthfront started as a service called KaChing, charging customers up to 3% per year for active management. Not visionary, not customer-aligned, not evidenced-based, and not efficient.

You should see how our investor deck starts out. It goes into detail about our roots and why we care so much about customers — because we relate to them, because we are them. The first slide is a Boy Scout merit-badge I earned when I was 13, for “Personal Management.” When I found this badge recently in my childhood closet (my parents were cleaning house), I looked it up on the Boy Scout website. It says: “Personal Management is about mapping a plan for your life that will involve setting short-range and long-range goals and investigating different ways to reach those goals.” I smiled, because this is what we’re doing today at Betterment — helping people set and reach ambitious goals.

The first slide from Betterment’s investor pitch deck

Inaccurate statement #5: Betterment does not clearly disclose the $3 monthly fee for accounts with less than $10,000 deposited and less than $100 monthly deposits.

Facts: This fee is clearly disclosed on our pricing page. See pricing page screenshot below, or go the pricing page, where this same image has lived for months, and have a look for yourself: betterment.com/pricing/. What’s more, and not obvious to a casual observer, is that before customers pay us anything, we send them multiple reminder emails to encourage them to set up auto-deposit, or to deposit more funds, to pay lower fees. Our interest is in building life-long customer relationships, with customers who love what we do for them. Again — alignment is at our core.

Betterment’s pricing page: betterment.com/pricing

Inaccurate statement #6: Equating the real cost of fiduciary advice with overdraft fees.

Facts: I am well familiar with the outrageous overdraft fees charged by some banks. Avoiding these kinds of practices is one of the things that led me to start Betterment — to start a financial services company from a place of customer alignment. You’ll see bad industry fee practices called out in our investor deck — and how we are a reaction to them, designed from the beginning to align with customers. We do not charge accounts with zero balances — you can’t overdraft or go negative here. Again, we started from a place of alignment, building the service we would want for ourselves.

Another slide that has appeared in investor pitch decks: As a consultant to banks, I saw many bad practices, including hiding fees. Betterment is, in large part, a reaction to those experiences, a company starting with customer alignment.

We should pay for good advice.

Our belief is that if you don’t know how you’re paying for advice, you should be concerned. Good, un-conflicted advice and service should never be free, because they cost money to provide. If you aren’t paying your advisor, who is? “Free” is a gimmick: a marketing expense that leaves an organization in pursuit of revenue from someone or somewhere else. Cash allocations, getting paid for order flow, selling your data, and other shady practices — that’s how things become “free.”

We are proud to let anyone use our service, and we introduced the $3 monthly fee to let those who want to trial us do so. $3 per month is the cost of a cup of coffee. Account opening and our high-quality, 7-days-a-week customer service are the most expensive part of our relationship with our clients, and every client covers those costs. If you commit to a $100 or greater auto-deposit, we know you’re a serious investor, and we can amortize our costs over time, and so we can charge even less. We have seen that the motivation to reduce fees powerfully influences behavior, so giving a customer a strong incentive to auto-deposit (in the form of lower fees) causes most customers to deposit more.

Finally, we offer valuable services beyond asset allocation, portfolio management, and features like tax-loss harvesting. Everyone who uses our service knows why it’s the industry-leading service — and the only “robo-advisor” worthy of the label. We give you an executable plan to help you reach your goals, whether they be retirement, college savings, building wealth, or something else. We give you advice on how much you should be saving and let you know if you are on-or-off track to meet your goals.

If you’re off-track, we give you advice on how you can get back on-track. We include your external accounts, pensions, and social security in our analysis.

We offer fractional shares: the only way to build a globally diversified, fully-invested portfolio for any amount of assets. Wealthfront does not do any of this. No other company offers this level of service at our prices. I couldn’t be prouder of what we’ve accomplished to date, and it’s just the start of more great innovations to come. When you start from a place of customer alignment, it’s amazing what you can build.

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