The #1 PROBLEM with Betterment Investing

What's up you guys, it's Graham here.

So lately there's been a very big focus towards investment apps and high interest savings accounts that offer you a pretty substantial value for what it is. Like, at first we had a lie bank with their 2.2 percent interest rate on the savings account. Then we had Wealthfront, which blew that out of the water with their 2.57% interest rate on their savings account. That was the same day that I moved my money over from a lie bank to Wealthfront to get some of that sweet, sweet interest on their savings account.

But you know what? That didn't last long, because now we have Betterments, which recently raised their interest rate on the savings account to 2.69 percent. Which, let's be real, that's ridiculous! And I mean ridiculous in a good way. Like, the good—really like—it's ridiculously good! Until I did some digging. And you guys know me; anytime I research an app like this, I research it obsessively until I find some of the dirt that no one else finds.

And that I may have found, because when I saw this 2.69 percent interest rate, I knew it just sounded a little bit too good to be true. And you'll find out exactly what this is as soon as you smash that like button if you haven't done that already for the YouTube algorithm; it helps out tremendously. So with that said, thank you very much and let's get into the video.

First of all, let me explain what Betterment is for anyone who hasn't heard of it before. No, Betterment is what's called a robo advisor. It basically just asks you questions based off your savings and earnings and investing goals, and then they'll build you a portfolio tailored to your own situation.

Now I think that something like this is perfect for beginners who just easily get overwhelmed at all of the investment options out there, like BIC Connect, and instead just want a very simple, easy approach when it comes to having their money make them more money. Now in terms of exactly what Betterment invests your money into, for the most part, it's just a broad selection of Vanguard index funds and other ETFs that track the stock market.

Each of their investment options is going to be diversified a little bit differently depending on how aggressive you want to be, which is really just another word for saying how much volatility can you handle without pulling your hair out or going in the corner and crying. I gotta say, in terms of what they're investing in, I like Vanguard. Hey, you know I'm a big proponent of Vanguard.

One of the very few companies I talk about non-stop on this channel, and I wish they would just go ahead and sponsor my videos already because I have mentioned them so many times on this channel. So really, from this perspective, Betterment investing in Vanguard index funds gets a huge thumbs up from me and hopefully a huge thumbs up on this video as well if you haven't done that already.

Now, if all of this so far sounds like rainbows and sunshine and unicorns and butterflies, it's all fine and dandy. It is! Until you see how much this is going to cost you. And this is unfortunately where we get into the disappointing part of the video, which is that they charge you a 0.25 percent management fee on your money.

And as you guys, I'm sure are well aware, I am NOT a fan of 0.25% management fees, and that's because that fee is over six times higher than what Vanguard charges for the exact same fund. Like, almost in a way, you're investing in Betterment—then go take your money to invest in Vanguard while you're paying Betterment six times more money for pretty much just matching you with the fund.

This is almost like the Tinder of investing, if that is such a thing. You're basically just... Betterment is matching you with Vanguard index funds. It's basically that! That was the Tinder joke. I don't know if that was funny. Probably wasn't funny. I'm not gonna make that joke anymore, don't worry about that.

Now of course I will admit, because I do want these videos to be as even-cited and unbiased as possible, that Betterment does have one main advantage over Vanguard in that they do what's called tax loss harvesting. Now, without overcomplicating anything, this just means that Betterment will sell your losing stocks, allowing you to show a paper loss, and then that loss you can deduct on your tax return.

Then what they could do is buy back the stock at the lower price, allowing you to then lower your tax basis. It's almost like taking a small credit on your money right now that you might eventually have to repay in taxes whenever you cash out. So in all fairness, in a perfect scenario, the benefits of tax loss harvesting could potentially, maybe, might possibly pay for that 0.25% management fee and make it worth it.

But the thing is, tax loss harvesting could be fairly speculative, and you may or may not benefit from this depending on how the market does. So in a way, from my perspective, you're guaranteed to pay 0.25% management fee every single year, but you are not guaranteed to reap all the benefits of tax loss harvesting in order to compensate for that.

So I almost think to myself, why guarantee paying for something when I am not guaranteed to necessarily benefit from it? Especially when other services are completely free, guaranteed, without any fees. So I think in terms of their investment account, I am not personally a fan unless you're someone who has zero interest in investing, you can't bother to spend 20 minutes of your own time doing any amount of research, and you can't bother to download any one of the other multitude of apps that just charge a little bit less money.

If that's you, then by all means, Betterment is better than doing nothing! Get it? Like Betterment? It's better than doing nothing. Except it's better mint than doing the out. I'll stop! Anyway, if it gets people investing in the first place who otherwise wouldn't have invested at all, then by all means I fully support it, even though I do not like the 0.25 percent management fee.

But let's move on from that and get into the part that everyone wants to hear about, and that is what is the deal with the 2.69 percent interest rate on the savings account? Because that looks absolutely amazing compared to every single other offer out there that you could possibly get. What's going on with this?

Now here's what Betterment has done: they've opened up a savings account that you can link with your investment account that offers you a whopping 2.69 percent interest rate. That's higher than any other savings account I have seen; that's even higher than Wealthfront's 2.57 percent interest rate, which gained a lot of attention recently. And with this savings account, there is zero fees and also zero minimums. Money in this account is also FDIC insured up to $1,000,000, which they're able to do by spreading your money throughout several partner banks. And overall, this sounds like a really good deal until you see this.

Now here's the thing: the normal interest rate you're going to get on this account is 2.43% in interest. Now don't get me wrong, that is a very good rate! That is a very incredible rate compared to pretty much what any other bank is offering. It may not be as high as Wealthfront's 2.57%, but you know what? 2.43 percent is still insanely good.

So in order to unlock the 2.69 percent interest rate, you will need to put in your email address to sign up on their wait list to get their checking account. Now on the surface, this seems like a really good offer, and their checking account for the most part from what I've seen so far seems really good. And according to their website, they say that all of this is zero fees—you read that right! With Betterment, every day checking gets ATM fees reimbursed worldwide with no account fees, overdraft fees, or minimum balances. And that's all great!

But for the 2.69 percent interest rate, it wasn't until I read the fine print that it made it very clear that this was just a promotional offer until December 31st, 2019. This means that pretty much by the time I post this video, you can only get about five months' worth of this interest rate before there's a chance they will discontinue this promotion and lower it to something lower. Lower it to something lower. Yes, that makes sense!

Now, of course, they do make it very clear that this interest rate is not guaranteed and may change at any time. And in their defense, Wealthfront can also choose to lower their 2.57% interest rate at any time they choose to do so, as can any other bank. So if you do decide to move your money over to Betterment to get the 2.69 percent interest rate, do just understand that this is not permanent, this may not be guaranteed, and to at least manage your expectations.

Plus there's always a chance Betterment may just end up keeping this rate to further retain customers even longer. So at this point then, keeping this rate beyond December is really just cautious speculation. And really, overall, I just see this as a decent move from Betterment to increase attention to their platform.

And if people move their money to the savings account, then they're that much more likely to then invest with them as well. And from that, Betterment is going to be receiving the 0.25% management fee to then offset that cost. And really at the end of the day, all of this is just about customer acquisition. In order to compete with all of the other dozens of investment apps and options out there, they have to do something that gets attention, which in this case is offering a 2.69 percent interest rate on the savings account.

But just remember, in my own opinion, paying a 0.25 percent management fee is too high compared with a lot of the cheaper or free alternatives out there. And the 2.69 percent interest rate is absolutely incredible but not guaranteed to last beyond their promotional period and may decline at any time.

And I think that small difference is something very important that everyone should understand if even just to manage their expectations of what it means going forward. So with that said, you guys, thank you so much for watching. I really appreciate it! If you guys have not already subscribed to the channel, make sure to subscribe. I post three videos a week, every Monday, Wednesday, and Friday. So if you want to be a part of that, feel free to subscribe.

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Now you could see videos from me every single day! Which, there we go, we did it! That we've advanced as a society enough that now you can watch my videos every day. So there you go! Thank you again for watching again, and until next time.