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What if you could increase your after-tax investment returns by 15% over 30 years? Betterment is claiming you can do just that with their Tax-Coordinated Portfolio. What’s more, they claim that it can even work across several accounts at the same time.

Interested? Read on…

Who is Betterment?

Betterment is a robo-advisor. In fact, it is the largest independent robo-advisor in the US, with more than 175,000 customers and more than $5 billion in assets under management.

As a robo-advisor, Betterment is an automated, technology-driven investment platform that creates and maintains a diverse portfolio for each of its investors. They do this by compiling what they believe will be the best mix of exchange traded funds (ETFs) in your portfolio. They use index based ETFs because they are both low cost and tax efficient (their low turnover minimizes the amount of short-term capital gains generated).

Learn More: Index Funds versus ETFs — Which is Right for You?

Your entire portfolio is constructed of just 13 different ETFs — six stock ETFs and seven bond ETFs — which essentially represent the global financial markets as a whole.

Betterment’s investment management method is based on Modern Portfolio Theory, or MPT. The theory holds that proper asset allocation is more important in portfolio management than individual security selection. This is also why Betterment uses broad based index funds in creating your asset allocation. The right asset mix will provide both a maximum rate of return while keeping risk to a minimum.

Your portfolio is constructed only after Betterment determines your investment horizon, goals, and risk tolerance. This will enable them to include the appropriate blend of both stocks and bonds to fit your investment profile.

Once your portfolio is established, it is fully automated – including regular rebalancing – so that you don’t need to get involved in the process at all. Your sole responsibility is to fund your account to help it grow.

Betterment offers both taxable and tax-sheltered (retirement) accounts, so that you can do all of your investing on the platform.

Betterment Fees

Best of all are the very low fees that they charge. They are just a fraction of what typical traditional investment advisors charge to perform essentially the same service.

The fee is based on a percentage of the amount of money that you have invested on the platform. It is a single, annual fee, as there are no separate charges for transactions or rebalancing. There are three fee tier levels, based on account balance:

  • Less than $10,000: 0.35% of your average annual balance. There is no minimum initial account balance required. However, you must commit to a $100/month minimum automatic deposit. You will be charged a flat rate of $3 per month otherwise.
  • $10,000 to $99,999: 0.25% of your average annual balance.
  • $100,000 or more: 0.15% of your average annual balance.

What is the Tax-Coordinated Portfolio?

Betterment’s Tax-Coordinated Portfolio, or “TCP,”  is based on the use of an automated strategy referred to as asset location. Within that strategy, they manage multiple accounts as a single portfolio. That includes placing assets that are taxed at higher rates into more favorably taxed accounts, like those for retirement. Betterment’s research has estimated that TCP can produce an average annual benefit of between 0.10% to 0.82%.

Using one generalized scenario, TCP boosted after-tax returns by 0.48% per year. After 30 years, this provided an additional 15% for retirement. That’s an impressive benefit, considering you don’t need to do anything extra in order to utilize its advantages.

Betterment came up with TCP through their team of quantitative analysts, tax experts, software engineers, designers, and product managers, who spent more  than a year building the service. They believe that they are the first investment service to offer such a product, and are now making it available to all investors on the platform.

How Betterment’s Tax-Coordinated Portfolio Works

The Tax-Coordinated Portfolio places high tax assets in tax sheltered accounts, such as IRAs. Lower taxed assets are then held in taxable accounts.

That means that high dividend yielding stocks would be held in an IRA to reduce what is called tax drag.Tax drag refers to the reduction in return on investment that comes from the tax liability generated by an investment.

In order to take advantage of TCP you need to have both a taxable account and either a tax-deferred account, like an IRA, or a tax-exempt account, such as a Roth IRA. The benefit will not extend to any non-Betterment accounts.

This means that if you want to take advantage of TCP, you will have to roll outside accounts into your Betterment account. That includes your taxable and tax-deferred investment accounts. Part of the reason that TCP requires at least one retirement account is that Betterment can make larger rebalances in such accounts without increasing your tax liability.

You will still have the ability to change your allocation in your TCP, right on the investment platform. However, any time you do, you run the risk of causing “taxable events,” so Betterment recommends against this. If you do make changes, you can use Betterment’s Tax Impact Preview feature (see below), which will show you a real-time tax estimate before you confirm any allocation changes.

TCP is available to all Betterment investors. However, it is generally not recommended for those whose federal tax bracket is 15% or less. You should also be aware that TCP does not have any impact on any investment accounts that you hold outside of Betterment.

Betterment Tax-Coordinated Portfolio Components and Tools

TCP is comprised of three major components, including:

Tax Impact Preview – This tool provides a real-time tax estimate for a withdrawal or allocation change, and you can use it before you confirm the transaction. It will show you the information you should be focusing on to make an informed decision, before you actually make the changes. It has the potential to lower your tax bill as a result.

Tax Impact Preview will consider if the benefits of the change will outweigh the costs, or if you might consider waiting in order to avoid short-term capital gains. It may also ask you to consider if there is another source of funds you can access that will not have any impact on your tax liability.

TaxMin – This tool will help you select the most tax-efficient lots, selling losses first, and short-term gains last. TaxMin considers the cost basis of the lot, realizing all losses for any gains, regardless of when the shares were purchased.

Lots are sold in the following order, so as to minimize the tax impact:

  • Short-term losses
  • Long-term losses
  • Long-term gains
  • Short-term gains

The algorithm exhausts each category before moving to the next. Within each category, lots with the highest cost basis are sold first. With a gain, the rule is as follows: the higher the basis, the smaller the gain. This results in a lower tax burden. In the case of a loss, the opposite is true: the higher the basis, the bigger the loss. This can, of course, offset gains.

Tax Loss Harvesting (TLH) – This service is available on taxable investment accounts only, since tax-sheltered accounts don’t need it. According to Betterment’s Tax Loss Harvesting White Paper, Betterment’s TLH service generates as much as 1.94% in annual tax offsets. This compares to 0.95% by other automated investment services.

In general, tax loss harvesting involves selling securities that have sustained losses, then buying correlated assets – those that provide similar exposure – to replace the securities that have been sold. The strategy generates capital gains losses, but keeps the portfolio consistent with its intended target allocation mix.

Should You Invest With Betterment Tax-Coordinated Portfolio?

What can you say about a service that has the potential to improve your investment performance by an average of almost 0.50% (OK, 0.48%) per year? Oh, and it charges no extra fee for the benefit.

With the growing popularity of robo-advisors, and Betterment being the largest in the field, TCP  makes the case for using this platform more compelling than ever. This is one of those rare situations in your investment life where you will have nothing to lose, but much to gain.

Betterment offers a compelling combination of automated professional investment management, along with TCP. It also has one of the lowest fee structures in the industry. And you can invest on the platform with both your taxable accounts and your retirement accounts.

You owe it to yourself to check Betterment out.



In case you didn’t know, today is National Online Bank Day! Exciting, huh? (Don’t worry, I didn’t have it marked on my calendar, either). Some online banks are offering promotional discounts and interest rates to celebrate, with Ally being one of them.

Ally Bank is one of the more popular online banking institutions, offering a range of checking, savings, and money market accounts, as well as a number of CD options. And to celebrate National Online Bank Day, they are offering a promotional CD rate for the next few weeks.

From now until November 7, 2016, you can get a 15-month select CD with an appealing 1.25% APY. After the initial 15 months are up (around January 2018), it will automatically renew into a 12-month High Yield CD. In case you were wondering, Ally’s High Yield CDs are currently earning 1.05% for the 12-month term version (as of 10/11/16).

The promotional 15-month CD also includes Ally’s Ten Day Best Rate Guarantee. All you need to do is fund your CD within 10 days of opening. Then, Ally will automatically give you the best interest rate for your term and balance tier. This ensures that you’ll get the best rate available, even if it goes up between when you open your CD and when you fund it.

Of course, as with all Ally CDs, your deposits are insured by the FDIC up to the maximum amount allowed. Your interest is also compounded daily, ensuring that your money grows even faster.

Lastly, make sure to note that if you decide to pull your money out before the 15 months has passed, an early withdrawal penalty will apply. Ally does offer a No Penalty CD, if there’s a chance you’ll need your money before the term ends. However, the promotional interest rate mentioned here does not apply.

If you’d like to open one of these promotional 1.25% CDs, you can visit Ally here and sign up.


If you’re unhappy with your 401(k), rest easy… you’re not alone. In fact, on August 19, over 60,000 employees joined up and filed a class action lawsuit against their employer, Morgan Stanley. Their reason: questionably managed and poorly performing 401(k) plans.

It’s one thing to ask workers to stay late or forget to restock the break room. Messing with their retirement plans, though? That’s a whole different animal.

The filed suit alleges that Morgan Stanley, a company with over $8 billion in 401(k) assets, chose to invest employees’ money in its own funds in order to maximize profits and benefit itself. Using only in-house investment funds would have been a questionable practice on its own. The unfortunate and compounding fact, though, is that these funds have also been grossly underperforming.

In fact, its Morgan Stanley Institutional Small Cap Growth Fund IS Class was 99% less profitable than other small cap growth funds in 2014. It didn’t get much better in 2015, where the fund performed worse than 95% of the others.

So, why would the company continue to toss 401(k) funds into obviously poor choices such as these? Self-promotion and siphoning profits for themselves are two potential reasons. The class action suit last week alleges that these were indeed the motivating factors, but it gets better.

The lawsuit also claims that on top of these 401(k) plans earning less than they could have with 99% of the other options out there, the costs were also exorbitant in comparison. It accuses Morgan Stanley of charging its own employees higher mutual fund fees than it charged outside investors.

These fees are also higher than those that other funds on the market currently carry. For instance, Morgan Stanley was apparently charging a fee of .98%, whereas a similar fund from Vanguard charged a mere .07%. The effects of this percent difference on a retirement account could be astronomical!

Of course, this would not only be shady business practice, but is potentially illegal. The federal Employee Retirement Income Security Act (ERISA) of 1974 places a fiduciary obligation on companies to act in the best interests of the plan participants. Managing funds in a way that primarily benefits the company, instead, is a potential violation.

Seeing how 401(k) plans play such a large role in the retirement savings of today’s working class, this sort of practice would have detrimental effects on the future financial security of each of their employees. Most of us pay into retirement plans and give blind faith that our employers are managing our money with our best interests in mind. Morgan Stanley, it would seem, has let a lot of people down.

It will be interesting to see how this suit plays out in court. It has the potential to be a harsh reminder of companies’ ethical and legal obligations to their workers. The class action suit is seeking damages of $150 million on behalf of its approximate 60,000 proposed participants. Morgan Stanley has not yet responded to requests for comments on the suit.

Have you worked for Morgan Stanley? Leave a comment to let us know your thoughts on their 401(k) plan and the class action lawsuit.


Illustration of a woman confronting different paths forward

iStockphoto illustration

Saving for retirement is a long game, but the idea of preparing for something decades away is counterintuitive for many of us.

However, consistent saving is crucial for retirement planning. Here’s expert advice for how to prepare in your 30s, 40s and 50s.

Your 30s

Saving for retirement really should begin in earnest during your 20s. But with the average college debt now soaring to more than $35,000, saving money early is out of reach for many recent graduates.

In your 30s, your career and income likely will grow but so will your financial responsibilities, which makes this a critical time to kick-start your retirement savings. If you didn’t begin in the previous decade, ramp up your savings and put away at least 10 percent of your earnings each pay period into a company-sponsored 401(k), traditional IRA or a Roth IRA that you open on your own. Also take advantage of any company match to maximize your retirement savings.

“The younger you start, the better,” says Bruce Elfenbein, a retirement planning expert and president of SecuRetirement Incorporated in South Florida. “There’s no substitute for compound interest and the effect it has. It’s incredible how a small contribution can turn into a great deal of money down the road.”

Elfenbein says you also should sign up for a permanent life insurance policy, establish an emergency fund and save four to six months worth of expenses. He recommends a money market account for this purpose, because it often pays a higher interest rate than a typical savings account.

Your 40s

In your 40s, it’s crucial to focus on increasing your contributions and the best way to do this is to pay off any debt.

Student loan and mortgage debt is one thing, but high-interest credit card debt can cripple your long-term financial plans. Pay off as much of it as you can and reallocate these funds to retirement. Also spend more time managing your portfolio. Talk to a financial planner and review your investments and savings to ensure your money is in the right vehicles and aligns with a level of risk you’re comfortable with.

Elfenbein says it’s important to put money in vehicles, like a fixed-index annuity, that will give you secure and guaranteed income. A fixed-index annuity provides tax-deferred growth and can protect you from downturns in the market. Anything left over should be invested to combat taxes and inflation, Elfenbein adds.

In your 40s, also consider how much you need to cover your health care expenses in retirement. If you haven’t already, open a Health Savings Account (HSA) to save for this cost. HSAs are a great option (link to previous article here) because any contributions you make are tax deductible and roll over from year-to-year.

Your 50s

In your 50s, your retirement strategy should “shift from accumulation to preservation,” Elfenbein says. People tend to become more risk-averse as they age, and this is no different as you approach retirement. In this decade, stay away from variable products and shift more of your money away from stocks and into secure vehicles like high-quality bonds or annuities.

Also use the savings options the government provides — like a 401(k) or IRA — to make catch-up contributions that will maximize your retirement income. In 2016, you can contribute $6,000 above IRS limits for 401(k) plans.

If you’ve already started funding an HSA, look into insurance plans for long-term care, which can help cover your ongoing health care, assisted living or nursing home costs later in life.

When it comes to retirement planning, the main question you need to ask is what kind of lifestyle do you want to live in your later years? If you expect to maintain or exceed your current standard of living, you need to save more — and start early. Being consistent and actively managing your portfolio will pave the way for a secure retirement.

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Throughout the last year, I’ve been participating in a friendly competition among friends. We each placed $1,000 in an investing account (or multiple investing accounts) at the beginning of the year, chose an investing strategy, and tracked progress throughout the year. I gave the initial details in the beginning of 2014. My strategy was to […]

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