Betterment raises fees on small investors

Betterment advertises itself as an option that allows investors to get started with as little as $10, but now the company is raising fees for many of those customers.

For investors with less than $20,000 with Betterment across investment, cash and crypto accounts, the robo-adviser will now charge a $4 monthly subscription fee for investment accounts rather than the 0.25% of assets under management traditionally charged. The monthly fee, which totals $48 annually, would come out to 48 basis points for someone with $10,000 invested at Betterment, nearly double price that it had offered for years.  

The cost increase only gets steeper for smaller investors. Someone just getting started with $1,000 would now be facing a 4.8% annual management fee, said David Goldstone, manager of investment research at Condor Capital.

"When a subscription fee is introduced to an investing product with little to no minimum balance requirement, I immediately have concerns about whether the product is suitable for smaller account holders,” Goldstone said in a statement. "I hope that Betterment either waives the subscription fee below some type of reasonable threshold of account size or raises its minimum."

The company emailed impacted customers to inform them of the price increase and options available to avoid the monthly subscription fee — by maintaining $20,000 across accounts on the Betterment platform or setting up recurring deposits of at least $250 per month. The price increase won't impact cash or crypto accounts, premium investment accounts (which include access to a human financial adviser), or 401(k)s and health savings accounts offered through Betterment for Business. There is also no change of price for Betterment for Advisors.

“We are making a modest change in our pricing structure for the first time in nearly six years to ensure that we balance the cost of serving our customers with the value we provide,” a Betterment spokesperson said in an email. “Betterment can still be a great platform for first-time investors, and our low monthly pricing is designed with these customers in mind.  We do believe that the best outcomes can be achieved if customers interact regularly with the Betterment platform through activities such as recurring deposits.”

However, some customers weren't happy about the price increase on small accounts, noting that even $250 per month could be difficult for some investors just getting started. Several threatened to withdraw assets and move them to another service.

Others pointed out that the company is raising fees at a time when many have lost money in their portfolios due to volatile markets. A Betterment account opened by Condor Capital was down more than 20% in 2022, according to the firm’s latest Robo Report.

The company said a minority of customers are affected by the change in pricing but did not specify a percentage. The spokesperson declined to comment on average account size.

“We provide multiple ways for them to reduce their effective fee, including depositing funds into our no-fee high-yield cash account if they seek a more conservative and liquid cash management option,” the Betterment spokesperson said.

Betterment manages a total of $33.8 billion across more than 910,000 accounts, according to a Form ADV that was updated Monday. In Part 2 of the ADV, the company says it managed $30.7 billion from more than 730,000 clients as of August 31. The former figure averages to about $37,000 per account, while the second averages to roughly $42,000 per client.

Either figure means the average Betterment customer — and, according to the firm, the majority of its customers — is paying more than $4 per month based on the traditional AUM fee. So why is the company raising costs on small investors?

The Betterment spokesperson didn't answer the question, saying only that affected customers have ways to opt out of the monthly fee that the company says will benefit them in the long-term.

The change speaks to the challenge consumer-facing robo-advisers have in generating revenue out of their target market of small investors, Goldstone said.

"I believe this speaks to the difficulty of profitably serving clients with account balances of just a few thousand dollars or less,” he said. “I think it is also indicative of how the industry is maturing and management teams are switching focus to profits instead of user growth.”

Betterment has been open about its ambitions to eventually file for an initial public offering. A $160 million fundraising round in 2021 valued the company at $1.3 billion, and many saw the move to replace founder Jon Stein with Sarah Levy in the CEO position as a step toward an IPO. However, companies across industries have put IPO plans as they wait out the current market and economic conditions.

The company did not respond to questions asking if the pricing change was driven by investors or its IPO plans.

[More: Betterment’s crypto portfolios include allocations to Dogecoin]