On March 1, 2019 I got a fascinating e-mail from the marketing team at Betterment for their Betterment Smart Saver product.
The yield for Betterment's Smart Saver has changed to 2.19%. This means that the current yield on Smart Saver is 2.44%, which drops to a 2.19% net rate after management feesfor Betterment customers in a Digital account (0.25% flat fee).
Why did the rate drop? Smart Saver is made up of two Bond ETFs: SHV and NEAR. Yield from the US Treasuries (SHV) fund is 1bps lower, and Fed funds have stopped going up for the moment so this yield has stabilized. Yield from investment grade bonds (NEAR) is lower by 7bps, meaning that corporate credit yields are lower in the market.
Let us know if you have any questions, happy to send them to our investment team and get some answers.
In other words, Betterment charges a 0.25% flat fee on their Smart Saver account. To put it differently, Betterment really charges a 10.4% fee on your savings (0.25% / 2.44%)!
Find Higher Savings Rates Elsewhere
A 10.4% fee is the highest cash savings fee I've ever seen, especially when you can get a higher cash yield elsewhere with no fees.
Betterment reached out to me to clarify their Smart Saver account by saying, Hi there, it sounds like there may be some confusion. We don't have cash accounts, rather, Smart Saver is a low-risk bond account that aims for yields higher than a typical savings account.
But in my mind “Smart Saver” sure sounds like a savings account. If it is not a savings account, then Betterment has done a fabulous job making it seem like a savings account to earn the fee. Words matter. And their wordsmith probably is going to get a raise.
What's sad about Betterment's Savings account is that their low-risk bonds are not even beating online high yield savings account rates BEFORE Betterment's 0.25% flat fee.
Ally Bank and Synchrony Bank should have competitive rates as well.
Don't Use Betterment To Save Money
Betterment is a good solution for investing your money based on your risk tolerance. Their 0.25% fee is lower than conventional money managers who usually charge 1% – 2%.
However, don't keep a lot of cash in your Betterment account. That's not what Betterment is there for. Instead, optimize your cash savings in an online bank that has a higher rate with no fees like.
To be thorough, I asked Wealthfront whether they charge any fees on the cash clients hold with them, and they said no. However, you'll have to see for yourself what is the yield they pay on your cash as it's often changing.
The same advice goes for Wealthfront investors. Use Wealthfront to invest, not to store cash.
I'm sure the senior leaders at Betterment thought being able to charge a 0.25% flat fee on a savings account alternative would be a genius idea to make more money. If only we could all be Betterment shareholders instead!
Lucky for you you've read this article and are smart about how to best allocate your hard-earned funds. Fight on!
Update: Betterment changed their Smart Saver to Betterment Cash Reserve. The yields still aren't very high because the Fed slashed the Fed Funds rate to 0% – 0.25% in 2020. You can see my comprehensive Betterment Review for more information.