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Portfolio > Mutual Funds

Betterment Rebuffs Buffett, Says Sage’s Advice ‘Doesn’t Work Anymore’

By Janet Levaux

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Warren Buffett’s track record at Berkshire Hathaway is stellar.

But the CEO of rising robo-advisor Betterment says Buffett’s advice to most investors — that they should buy S&P index funds and hold them — “doesn’t work anymore.”

In fact, “It’s not actually making the most of your money. You can do a lot better than that,” CEO Jon Stein, said Sunday on CNBC’s “On the Money.”

The Oracle of Omaha has a strong track record. The market value of the company’s shares has roared ahead at a compound annual growth rate of 20.8% since 1965 — more than double the S&P 500’s 9.7%.

In 2016, Berkshire shares soared 23.4%, beating the S&P’s 12.0% improvement. A year earlier, the shares dropped 12.5%, while the S&P gained 1.4%.

But not everyone can afford Berkshire shares or to invest as it does. So the Oracle of Omaha frequently advises investors to consider Vanguard’s “ultra-low-cost index funds,” as he described them in his latest letter to shareholders.

The funds have netted company founder John Bogle “only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing,” he explained.

Not So Fast

Stein disagrees, arguing that Betterment portfolios can top S&P 500 Index funds via tax-loss harvesting.

While he described the performance upside tied to such strategies as around 1- 2% a year, a white paper issued by the robo firm said its tax-loss harvesting service can add 0.77% to yearly performance.

Betterment also says that using its technology to coordinate if assets are held in taxable vs. tax-deferred accounts can result in a separate 0.10-0.82% annual upside.

“We maximize money for you in ways that traditional financial firms cannot, because they do not have the right technology or products to help investors,” Stein said.

“The industry is dominated by mutual funds just trying to sell you what is on their shelf or brokers selling whatever makes them the most money,” he explained. “No institution is standing up for customers [and] what is best for them.”

As for Vanguard, Stein insists, it is “not fighting for you.”

The fund family says “invest in our funds,” he adds. “That’s the old way of thinking – just buy an index fund. That doesn’t work anymore. You can do a lot better than that.”

— Check out Buffett Backlash: Fund Execs Criticize Sage’s Grim View of Active Investing on ThinkAdvisor.

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