Betterment is a great option for those looking to start investing in the stock market. They make investing easier, affordable, and completely hands-off. They create portfolios tailored to your risk tolerance investing in passively managed Index Funds to keep your costs as low as possible.

The first time I heard about Betterment was in 2015 while listening to a podcast on my commute to work. At the time, I knew very little about investing and the only thing I was doing was maximizing contributions to my company sponsored 401(k). The more they discussed the benefits of their services the more I considered using them as an option for both taxable and non-taxable accounts.

After doing extensive research I became a customer of Betterment.

A taxable account was the first step. I was set up with an aggressive portfolio with an asset allocation of 90% stocks and 10% bonds using Vanguard’s ETFs almost exclusively. Total cost was a combination of the expense ratio of each ETF and Betterment’s 0.15% (annually) of assets under management. At the time, I thought this was a great deal.

Things would change in 2017 when Betterment decided to eliminate their three-tier pricing of 0.15%, 0.25% and 0.35% of assets under management (AUM) to charge a flat fee of 0.25% across the board.

I wasn’t too happy with the news and considered ditching them. This was especially true given that my confidence in implementing a DIY approach increased thanks to lots of readings and education on various topics related to personal finance, in particular investing.

In the end, we decided to stay with Betterment. We were quite pleased with the platform and the overall user experience. Everything was automated, the portfolio performed “relatively” well compared to the S&P 500, and tax-loss harvesting was ice on the cake.

But Things Changed …

The stock market has been gracious to most investors. There are tons of discussions and speculations about a correction being closer than we think but honestly, nobody knows. My investment philosophy is quite simple, control what you can control and set up an asset allocation that lets you sleep well at night.

Opening the Betterment account caused an inflection point on our journey to Financial Independence but a lot has happened since then.

Education and intentionality have become integral parts of our lives

We’ve maximized all tax-deferred vehicles including my company sponsored 401(k) and HSA, as well as our IRAs, via backdoor Roth conversions. In 2018, we also completed our first mega-backdoor Roth conversion for a total of ~$66,000 in tax-deferred savings.

Our investing options have remained simple focusing on passively managed low-cost index funds such as Vanguard’s VTSAX and Fidelity’s FSKAX. I recognized this is quite risky but despite the events at the end of 2018, and more recently in 2019, this works for us.

When looking at the performance of all the buckets in our portfolio, we couldn’t stop noticing the difference between the Betterment account and the S&P 500. The picture below needs little explanation.

The next graph is taken from Personal Capital for the same time period. I’m not sure why the numbers don’t match with Betterments’. Regardless, the reality is the same. The difference is quite significant.

Avoid Complacency

We have nothing but great things to say about Betterment. The user interface (UI) and user experience (UX) are second to none. If I were to choose two words to describe their interface we’d say “slick and sexy”!

After much debate, it was time to get out of our comfort zone. We really enjoyed the partnership with Betterment but it was time to take control of this part of our portfolio and eliminate the 0.25% extra cost.

Moving our Investments to Vanguard

Vanguard is the most popular firm in the Personal Finance community for various reasons. A few years back we decided to open our Roth IRAs and a taxable account at Vanguard so it just made sense to consolidate our investments with them.

A lot of people complain about their website. Yes, it’s not sexy but honestly, who cares. Low-cost offerings and great customer service beat sexy any time of the day.

There were quite a few articles about transferring IRAs from Betterment to Vanguard but none of them covered taxable accounts specifically.

Easier than I thought

The first step was to figure out options to move our investments out of Betterment without creating a taxable event.

We sent an email to Betterment’s customer service and they got back to us the same day. They mentioned we could 1) liquidate the entire portfolio and receive a check in the mail or 2) process and in-kind transfer to another taxable account at another firm.

Option 1 was obviously the easiest one; however, it meant having to pay taxes on capital gains in 2019. As a result, we went with option 2.

Betterment directed us to instructions on their site where they specify steps for in-kind transfers to other institutions.

At Vanguard, the process was straightforward and consisted of 12 steps.

Step 1: Investing>Rollover & Transfers>Account Transfer>Start your transfer online

Step 2: Documents you will need to complete the transfer

Step 3: Select Brokerage Firm, type of account (individual=taxable), account number, value, and whether or not you’re transferring the whole thing.

Step 4: Select the type of investments. In our case ETFs.

Step 5: Depending on your situation select Yes or No. For us, It was No for both options.

Step 6: Indicate the receiving account at Vanguard. We chose an existing brokerage account; however, you’ll be given the option to create a new one.

Step 7: Review and e-sign. Once you press submit, you’ll receive an email from Vanguard with an attachment that includes all the forms you need to send via mail.

Step 8: Vanguard requires all paperwork be medallion signature guaranteed. Go to a brick and mortar bank (you do business with) and get your two copies stamped with a medallion signature.

Step 9: Review the forms and provide additional information (if needed). Print your last statement from Betterment and attach it to Vanguard signed forms. Proceed with sending via mail to Vanguard.

Step 10: Similarly to step 9. Print one copy of your last Betterment statement. Attach it to Vanguard signed forms and send it via mail to Betterment.

Step 11: Wait for funds to hit your Vanguard account. The process should take approximately 4-6 weeks.

Note Betterment provides its customer with the flexibility to invest in fractional shares. As a result, they will only transfer whole shares. Fractional shares will remain at Betterment. We were advised to liquidate the remaining funds but we still haven’t pulled the trigger on it.

Step 12: Request Cost Basis from Betterment and request sending it over to Vanguard (update to the original post)

Well as it turned out we made a mistake during this process. It was certainly an inconvenience but definitely not the end of the world. Long story short, Betterment DOES NOT automatically send over cost-basis information related to an in-kind transfer. Why? beats me.

If you plan to do an in-kind transfer from Betterment have them send over the cost basis information to Vanguard and where ever your funds will be transfered.

But how did we miss this? … the answer is one risky word … assumption.

As we started to simplify our portfolio at Vanguard we did notice we were missing the cost basis for the transferred positions along with purchase dates. This was kind of a red flag; however, we didn’t pay too much attention and I’ll tell you why.

Betterment’s platform includes automated reporting and one of them is specifically related to cost basis. When the transfer was completed I downloaded the report as a .csv file and the used Google sheets to identify and track the number of shares we could sell without realizing short term capital gains. Vanguard also uses FIFO (first in, first out) which guarantees the sale of your shares start with the oldest to the most recent.

For the most part, we sold positions in the long-term category; however, we did sell some we knew would trigger short-term gains. We estimated the tax hit and it wasn’t too bad. Yes, we could have held off but simplification was something we really wanted sooner rather than later. In hindsight, we should have waited.

In April of 2020, we received tax form 1099-DIV and 1099-B from Vanguard and that’s when we realized Vanguard had never received the cost basis information from Betterment. The implications can be significant as the transactions we executed on had a 100% realized gain.

We immediately called Betterment and confirmed they DO NOT provide this information to any receiving institution of an in-kind transfer unless specifically directed by the customer. I was both shocked and surprised; however, my focus was on working on a solution.

Betterment customer’s support said they would send over the information and Vanguard confirmed the delivery within ~48 hours. In the end, we had a corrected 1099-B that same week.

Final Thoughts

• Betterment is a great option for investing in the stock market. This post was not meant to be an extensive review of their services but if you want to know more simply google “Betterment reviews” or visit this link as a first start.
• A lot has changed since we started our journey to Financial Independence. We continue to educate ourselves and live an intentional life.
• Investing in the stock market is not rocket science and there are ways to keep things simple. Whether you use a service like Betterment’s or decide to be more hands-on, consider using passively managed low-cost index funds.
• Being complacent did not go well for us. We could have done better by simply investing in a total stock market index fund like VTSAX, FSKAX, or VFIAX. It’s always hindsight 20/20 but it’s confirmation that owning the market is the way to go (at least in my opinion).
• The process for an in-kind transfer from Betterment to Vanguard may seem intimidating but it is not that hard. It requires a little bit of work but overall it straightforward.
• Being DIY and controlling what we can control (aka fees) works for us. If you’re not interested in this topic or simply want to be hands-off, consider a service like Betterment’s (or other robo-advisors in the space) or invest in target-date retirement funds without having to pay management fees.
• Ask Betterment to send the cost basis to Vanguard that way you’ll have everything you need to start simplifying your portfolio understanding tax implications.

Until next time … JJ