Sometimes, it’s worth reading the fine print — especially, when it comes to financial products.
I was interviewed by Mint.com recently about my thoughts on Betterment, a startup that performed pretty well at recent tech conference, TechCrunch Disrupt (see, Betterment wants to be your new, higher-yield savings account).
What is Betterment?
Well, it’s really an investment advisory service that masquerades as being a better savings account. By removing much of the jargon (the site doesn’t even mention securities by name), Betterment removes many of the barriers to putting money in the market. As I said in the Mint interview:
For most people, opening an online trading account and figuring out what to buy and who to listen to, there’s so much noise out there.
And that’s true: how many individuals really understand asset allocation, diversification, risk when professionals have such a hard time defining them? It’s kind of like I know it when I see it. Betterment provides a usability layer that requires only one decision point: what percentage of my money do I want in the market? That’s it.
Removing the confusing jargon and the pain points associated with complicated concepts is ultimately a good thing. I can just picture my grandparents trying to navigate an E*Trade account trading screen.
Oops, it’s not actually a bank account
While pursuing a noble end (making investing easier for the mass majority), Betterment stumbles when it positions itself as an alternative to a savings account. It is most definitely NOT a savings account. Money in Betterment is split between Exchange Traded Funds (ETFs), one of which will include U.S. Treasury Bonds if you allocated to that. That means, an account holder
- risks losing some, if not all, his money
- will see fluctuations in the account
- will have investment-level taxes on gains
I was quoted in the interview:
“They took a process that’s inherently scary and overwhelming for people and used technology to simplify it,” says Miller. “I think that’s an honorable thing. But to market it again and again, to talk about a savings account, is just disreputable. It’s scary, actually.”
Though it appears that they’ve toned it down recently, there’s still just too much talk/discussion on the Betterment website about safety and savings. Betterment may be a great product to *invest* spare cash just sitting in a savings account (much like ShareBuilder used to be).
Just don’t compare it to the savings account. At 90 basis points (.9%), it’s also expensive.
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A Better Savings Account? (Mint.com Blog)