Motif Investing vs. Betterment Robo-Advisor
In a previous article, we talked about how robo-advisory firms aren’t doing anything that different from the service offering that most wealth management firms already provide. Robo-advisory firms have just taken the human element out of the equation. We then went on to take a look at Betterment, one of the largest (if not the largest) robo-advisory firm out there. We concluded that Betterment was actually charging fees that were reasonable considering the value on offer.
We often preach the merits of using the Motif Investing platform because this company allows you to buy a basket of up to 30 stocks or ETFs and then trade the basket for $9.95 a trade. We often create motifs such as the Nanalyze 3D Printing Stocks motif or the Nanalyze Synthetic Biology Stocks motif in order to invest in themes more easily. The question we have now is can we use Motif Investing to accomplish the same thing as an investment in Betterment? Let’s take a look.
The first thing we need to understand is Betterment’s strategy. The first thing to note is that between the ages of 21 and 48, the strategy is simply an allocation of 90% to equities and 10% to fixed income across a broad number of low-fee ETFs. With a fictional portfolio of $50,000, I would be paying Betterment $125 a year for their services based on the below fee schedule:
I can create the Betterment target portfolio using the Motif Investing platform. To avoid any trademark issues, lets call it the “Buttermint Motif”. If I then bought the below “Buttermint Motif”, I would pay a one-time fee of $9.95:
However, we need to take into account “portfolio drift” which is when the values of the ETFs in your portfolio start to change and consequently the weighting percentages change as well. Betterment automatically adjusts “portfolio drift” when it reaches 3%. If you want to understand Betterment’s rebalancing rules in greater detail, take a look at this page. Personally, I’d rather prefer the insights gained from seeing how the various ETFs are performing and rebalance myself. If we chose to rebalance our Betterment Motif 4X a year, we’re going to incur $39.80 in fees a year (4 X $9.95) but this still is better than paying Betterment $125 a year.
So what about when the actual allocations change? Once you hit the age of 49, Betterment begins to adjust your asset allocation to more fixed income as seen below:
As part of your quarterly allocation exercise, you could also adjust all your weights once a year to emulate this strategy and accomplish the very same thing Betterment is doing by using the Nanalyze Buttermint Motif instead. The decision whether to use Betterment or Motif Investing comes down to how much money you are investing as seen below:
There is a lot to be said though for being able to contribute to your portfolio monthly without incurring and trade fees. If you bought your Buttermint Motif every month, you would incur an additional $119.40 in transaction fees in addition to the $39.80 for quarterly rebalancing for a total of $159.20 in fees per year. In this scenario, the decision changes as seen below:
While this analysis takes into account transaction costs, there’s something to be said for Betterment’s ease of use and the whole “set it and forget it” approach. However, using Motif Investing gives you much more control over your portfolio if you choose, otherwise you can just mimic Betterment over time if you put in the work and pay less fees in some cases. For example, you could add 18 more stocks or ETFs to your Buttermint Motif with no additional transaction costs incurred.
One other thing to consider is what happens when you actually want to start withdrawing funds. Every time you sell a portion of your Buttermint Motif you would have to pay $9.95. Of course when that happens you won’t be buying anymore so the total transaction costs will be the same as when you were buying monthly. Betterment of course doesn’t ever charge transaction costs, just a fixed monthly fee based on how much you have invested with them.
If you want to take a closer look at Betterment, click here. If you want to take a closer look at Motif Investing, click here. Note that you can create an account with Motif and play around with their platform without having to deposit any money. We use Motif because of the diversification benefit and also because they charge just $4.95 a trade for single stocks and ETFs. We’re not currently using Betterment at the moment but it sounds like a great platform as well.