Millennials, do financial service providers think you are dumb?


Betterment the Roboadvisor had an interesting product announcement – called Smart Saver. I was pretty psyched – was it a deposit account? Are they getting into the bank game?

I was sorely disappointed. The product is effectively

  • A bond portfolio of ETF’s
  • With its own expense ratios
  • and betterments expense ratio on top

However, the marketing of this product is a work of art. The key messages are

  • Banks are ripping you off
  • They lend your deposits and can only give you interest based on lending conditions (false: see MMT)
  • This product gives you a much higher yield than banks and is ultra safe
  • You obviously need to time the market – so these funds are available on hand and can be invested instantly! Why wait for 3-4 days for funds to show up from your checking account.
  • You don’t pay state taxes

Millennials, I think you are smarter than this. This product is not

  • FDIC insured
  • Has exposure to interest rate risk
  • And is really not that cheap

Goldman Sachs (Marcus) provides a nice vanilla high yield savings account at 1.85%. Why not just do that? No fees and its FDIC insured. Ah Rohit, but what about the tax advantages of the Betterment product. The math here again doesn’t hold up. The projected yield for the Betterment Smart saver is 2.03%. Subtract the 0.17% in expense ratios and the additional 0.25% betterment charges, your yield drops to 1.61% – again this is projected.

How does Marcus compare? Let’s see how this works out in California the highest tax rate state. For a single filer, the state tax rate is 10.3% for $52K-$268K of income. This translates into an expense ratio of 0.19% which results in Marcus yielding 1.66%. In my book 1.66%>1.61% and that too the 1.66% is RISKLESS.

Gotta hand it to betterment tho, they managed to add a nice fee to cash without calling itself a money market fund. Central bankers have been trying to do this for years post-2008 financial crisis – what was really missing was the marketing!!

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