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Betterment vs. Building Benjamins

Betterment vs. Building Benjamins

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Building Benjamins is the latest edition to the ever growing robo-advisor market. The service, which is powered by Tradition Capital Management, a wealth management firm in Summit, New Jersey, prides itself on offering stronger portfolios with wiser diversification. The surging market of robo-advisors has many new entrants but one of the biggest names is Betterment. Let’s take a look at the new Building Benjamins compared with Betterment. With that in mind, we would like to point out a few key differences between the two services which may make one or the other a better fit for your particular needs and situation.

Building Benjamins’ main distinction is the extensive diversification they offer – especially for a robo-advisor. While Betterment utilizes purely ETF-based portfolios focused almost exclusively on index fund allocations to U.S., Developed World, and Emerging Markets stocks and bonds, Building Benjamins is different.  Building Benjamins combines low cost index and smart beta funds with less correlated diversifying assets to construct powerful portfolios that increase diversification and thereby lower portfolio risk. In addition to U.S. and international stocks, our portfolios feature diversifying assets including variance risk premium harvesting, reinsurance, alternative lending, real estate, and real assets. The idea behind this design is to achieve higher expected returns in the long run but at a lower level of risk than in a typical stocks and bond portfolio.

As these diversifying strategy funds are more complex and costly to execute, they can tend to have higher management expenses than the dirt-cheap indexed ETFs, which are much simpler to manage. However, we feel that even despite these higher management costs included in the funds, the net after-fee performance and portfolio risk-reduction benefits more than justify expense tradeoff.

In addition to the fund-level expenses discussed above, which are paid to the fund companies, there is also the cost of the overall management of the accounts. Here, Betterment now has two pricing options, 25 basis points (0.25%) for their standard digital plan or 40 basis points (0.40%) and a minimum account size of $100,000 to gain access to financial planning advice from one of their financial advisers.  Building Benjamins, on the other hand, charges 45 basis points (0.45%) for our stronger portfolios with wiser diversification and offers a few optional add-on plans to receive personalized financial advice or financial planning from a CFP® professional – with a lower minimum account balance of just $50,000.

An interesting facet of the new Building Benjamins service is it mixes the benefits of traditional advisory services with the best features of new robo-advisors. Many people’s hesitancy when dealing with most robo-advisors is that it is slightly unnerving to have your hard-earned life savings managed primarily by computer algorithms. Building Benjamins uses technology to increase efficiency in order to be able to offer the benefits of our services to a broader array of clients, and with lower minimums – but your investments are never managed in a fully automated fashion. Experienced investment professionals oversee all aspects of the process to ensure we always act in the best interests of our clients. As market conditions change, the opportunities and risks of the market will evolve, creating a need to alter strategies to meet those conditions. In addition, changes in market values will cause your actual portfolio allocations to migrate from the initial targets. Some argue that professionals are needed to make these adjustments while others claim the online services have algorithms to make the adjustments. Regardless, while Betterment almost exclusively relies on their program, Building Benjamins has human advisers reviewing all trades and rebalances to determine the best course of action. Building Benjamins, as a hybrid human-integrated robo-advisor, employs alternative investments and active management where less efficient asset classes make this diversification technique beneficial.

A stronger aspect of Betterment is their goal-based planning. Depending upon your goal or general outlook for the future, using asset-liability management, Betterment manages risk tailored to you. This feature gives clients concrete marks to reach so their bigger goals can be met. This feature is very appealing and unique since it can give personalized advice to thousands of clients automatically which enables the growth and prosperity of Betterment. Building Benjamins also has a risk based portfolio selection tool that is built around goals, risk level and time horizon. It is very intuitive and allows clients or prospective clients to review possible outcomes over both average and poor market conditions.  Additionally, Building Benjamins offers online access to eMoney – a powerful account aggregation and financial planning software for free to our clients.

Again, due to Betterment’s size, they do not have a minimum investment amount compared to Building Benjamins $50,000. Betterment’s focus is to get people to start saving. While Building Benjamins’ is designed for investors that have already built up some savings and are focused on improving the expected risk-adjusted returns. Both Betterment and Building Benjamins will require the liquidation of all holdings that do not fit their recommended portfolio.

Staying on the topic of liquidity, Betterment offers portfolios that are fully liquid all of the time while Building Benjamins has portfolios that are typically 60% daily liquid with the remainder being quarterly liquid. Both of these designs are advantageous for different types of people. For investors with little savings, Betterment treats their portfolios more as a savings account with immediate access. Conversely, Building Benjamins liquidity approach is better served for people looking to invest for the long term. Many of the diversifying assets we use are not as liquid, so we ask for notice 3 months in advance of a change so we can obtain the desired liquidity. The benefit in the long term is, the investor may wind up reaping returns from this illiquidity in what is known as the illiquidity premium. Since liquidity is more valuable, in keeping the price constant, you receive higher expected returns for more illiquid assets. Essentially it is a trade-off and depending upon what you are looking for, Building Benjamins or Betterment may be the better option for you.

Betterment’s cost, very low minimums and integrated goal based planning is great for the beginning investor, but Building Benjamins has higher risk-adjusted expected return profiles and turbulent market resilience that is attractive to larger investors with a longer time horizon.

 

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