Betterment introduces investor solution for rising interest rates

Smart Saver intends to help investors use extra cash to take advantage of rising interest rates

Aug 17, 2018 @ 5:36 pm

By Ryan W. Neal

Betterment has a new, low-risk portfolio aimed at helping clients take advantage of rising interest rates.

The new Smart Saver feature, quietly announced on the robo adviser's blog, lets Betterment investors move extra cash sitting in checking and savings accounts into a selection of bonds — 80% U.S. short-term treasury bonds (SHV) and 20% U.S. short-term investment bonds (NEAR).

Betterment projects the Smart Saver portfolio will yield 2% before it collects its management fee, and roughly 1.8% after fees. Certainly an improvement over the unwavering low interest rates many bank accounts deliver.

On social media, some pointed out that the yield is still lower than interest rates at several high-yield bank accounts. Marcus, the new high-yield savings account from Goldman Sachs, offers 1.85% rates.

Betterment's director of behavioral finance and investments Dan Egan responded that unlike bank accounts, which likely won't increase rates over time, the bond yields in the Smart Saver portfolio are structured to increase along with the federal funds rate. And because the underlying funds are U.S. government bonds, the earnings are not subject to state and local taxes.

(More:U.S. regulators falling behind in supporting fintech innovation)

"There is a zero-sum game between you and your bank with interest rates," Mr. Egan said, adding that Betterment is incentivized to deliver the highest yield possible with lowest risk in Smart Saver accounts.

Meb Faber, the co-founder and chief investment officer of Cambria Investment Management, tweeted that he loves the idea and that it "more than makes up for the management fee."

"It may not be peak optimal but I think it's 10x better than what 90% of people currently do, which is to get 0%," he said.

Smart Saver is a taxable account that is not FDIC-insured like a bank account. But Mr. Egan said that because all of the products in the portfolio are bonds issued by the U.S. Treasury, both rely on confidence in the solvency and stability of the U.S. federal government.

Others pointed out that Smart Saver is a clever way for Betterment to keep client assets on the robo-adviser platform if they decide to pull out of the stock market.

(More:8 ways advisers are preparing clients for the second half of 2018)

It's an increasing area of focus for digital financial startups as the bull market gets longer in the tooth. SoFi launched Money, a hybrid checking and savings account, while Wealthfront reportedly surveyed users to gauge interest in cash accounts.

The feature will also be available on the white-label version of the robo-adviser, Betterment for Advisors.

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