The Rise of Robo Advisors – Betterment & Wealthfront At A Glance
Today we’ll compare two robo advisor titans in our Betterment vs Wealthfront breakdown. We’ll run through key features, investment performance, and our pick on best overall platform. If you’re considering Betterment or Wealthfront this article is for you!
What are Robo Advisors?
Robo advisors are investment management platforms that enable people to invest without having to turn to a financial advisor or DIY investing. Betterment and Wealthfront are two of the most popular robo advisors on the market. Both platforms help investors to craft diversified portfolios and use automated investment strategies to meet their goals. Similarly, Betterment and Wealthfront both offer a number of services like automatic rebalancing, tax-loss harvesting, and automatic deposits.
Who are Robo Advisors good for?
Betterment and Wealthfront cater to people that understand the importance of investing but want to invest in largely in a ‘hands off’ way.
It’s clear there is a market for this type of investing solution given robo advisors have been growing in popularity. According to Statista, U.S. assets under robo advisor management are anticipated to grow by 12.3% per year. Considering their low fees, reasonable account minimums, and friendliness for beginner investors, it’s clear that there’s no signs of stopping for the world of robo investing.
The next step of our Betterment vs Wealthfront debate is to take a quick look at important features like account minimums and fees. Let’s take a look as these important features to help you make the best financial decision possible.
Betterment vs Wealthfront – Quick Features
Betterment and Wealthfront played a role in making robo advisor platforms accessible to the average investor. Each platform has unique elements, and we’re going to take a closer look at both Betterment and Wealthfront to help you make the right choice. However, here are the main features and facts to know about each robo advisor:
|Minimum Initial Investment||$0 Digital, $100,000 Premium||$500|
|Fees||0.15% to 0.40% depending on account balance||0.25%|
|Account Types||Individual, joint, traditional, Roth, SEP and rollover IRAs||Individual, joint, traditional, Roth, SEP and rollover IRAs, and 529 college saving plans|
|Socially Responsible Investing||Yes||$100,000 account minimum for SRI|
|Best For||Beginner investors with lower account balances||Intermediate to higher net worth investors|
Betterment is a New York based robo advisor that was founded in 2008. As of April 2019, Betterment has over $16 billion dollars under management and is one of the largest independent robo advisor on the market.
To help investors make the most of their money, Betterment’s investment methodology is ETF focused. Specifically, Betterment selects “low-cost, highly liquid, index-tracking ETFs to ensure clients gain the desired asset exposure at the lowest total cost of ownership.”
What is an ETF? ETF stands for “exchanged traded fund”. An ETF is a traded investment fund that holds a collection of stocks and bonds. For instance, Vanguard’s S&P 500 ETF (ticker: VOO) is one of the worlds largest ETFs. It tracks the performance of the S&P 500 index (this is an index comprised of the 500 largest publicly traded US companies). ETFs are a wonderful low-cost way to get financial diversification as your investment dollars are spread across a number of companies.
Signing Up For Betterment
Getting started with Betterment is easy, especially since there is no account minimum for Digital Betterment accounts.
Betterment also streamlines the entire process. Users start by completing a short questionnaire that asks questions about age, annual income, risk tolerance, and investment goals. Betterment creates your portfolio from a mixture of funds, which include both stocks and bonds/fixed income investments. Each asset fund is an ETF, and you can view the list of current Betterment portfolio funds to get an idea of how Betterment invests your money.
The key with Betterment is their use of ETFs that are index-based. This strategy allows Betterment to easily diversify your portfolio, as well as greatly reduce fees.
Like Betterment, Wealthfront focuses on minimizing fees, lowering taxes, and managing risk for their investors. Wealthfront only uses 11 asset classes to create portfolios. However, Wealthfront emphasizes creating a diversified portfolio, and offers a more diverse range of asset classes compared to Betterment.
Specifically, Wealthfront uses asset classes such national resources and real estate trusts in their asset class mix, giving investors a wider range of asset classes to utilize.
Signing Up For Wealthfront
Unlike Betterment, Wealthfront requires a $500 account minimum to begin investing. Wealthfront asks similar questions as Betterment upon signup in order to create a portfolio that matches your goals and risk tolerance.
As with Betterment, Wealthfront utilizes index-based ETFs in their portfolio composition, selecting low-cost investment funds to help keep expenses low. Specifially, Wealthfront uses funds with expense ratios between 0.06% to 0.13% and charges no other account fees expect for an overall 0.25% management fee.
Betterment vs Wealthfront – Comparing Features
Spoiler Alert – We hate to disappoint but if you’re asking yourself which platform is objectively better there really isn’t a one-size-fits all answer. That said, for the majority of investors we believe Betterment will be the better option. They have lower minimums, a simpler investment philosophy, and a beautiful platform that users love.
But again, the Betterment vs Wealthfront debate can’t be solved for your unique situation without a better understanding of each platform. Both platforms have a lot in common – for instance, they both use a similar index-based ETF strategy to minimize fees and diversify portfolios. However, in order to find the right robo advisor for your needs it’s critical to understand the unique aspects of each robo advisor, as well as how their features stack up against each other. Let’s dive in!
1. Minimums & Cost
Your account balance determines which robo advisor option is ultimately cheaper, so doing the math is important on this one!
Wealthfront – $500 minimum to open an account. There is no minimum initial investment to open an account. Users pay 0.25% as an account management fee regardless of total balance.
Betterment – There is no minimum initial investment to open an account. $500 minimum to open an account. Fees vary between Betterment’s Digital and Premium account types.
- Digital: 0.25% for accounts under $2 million, 0.15% for accounts over $2 million.
- Premium: 0.40% for accounts under $2 million, 0.30% for accounts over $2 million.
Premium Betterment accounts include all of the features from Digital accounts. This account also allows investors unlimited access to certified financial planner guidance, as well as advice on investments outside of Betterment, such as a 401(k) or real estate.
Verdict – Betterment. Betterment has no minimum initial investment compared to $500 for Wealthfront. For most investors, management cost is identical. Betterment is a cheaper robo advisor for higher net worth investors.
2. Account Types
Both Betterment and Wealthfront offer a solid range of account types you would expect from industry-leading robo advisors.
Betterment account types include:
- Individual accounts
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- Inherited IRAs
- Trust accounts
- Joint accounts
Wealthfront account types include:
- Taxable accounts (personal, joint, trust, and corporate accounts)
- Roth IRA accounts
- SEP IRA accounts
- Traditional IRA accounts
- 529 college saving plan accounts
Verdict – Wealthfront. This one is a near tie as the account types are fairly similar between each robo advisor and will suit the needs of most all investors. The 529 college saving plan is a nice added touch for Wealthfront and thus gives it the edge in this category.
3. Portfolio Composition
Your risk tolerance and goals influence your portfolio composition on Betterment and Wealthfront. However, as mentioned, each robo advisor takes a slightly different approach in their investment philosophy.
Here are the key points to know:
- Low-fee funds – Both platforms rely on low-fee funds to keep costs down.
- Index-based ETFs – Asset allocation uses index-based ETFs to minimize cost while also adding diversification.
- Based on Modern Portfolio Theory – Portfolios aim to maximize returns based on levels of risk tolerance.
- Philosophy – Betterment largely sticks to a tried-and-true core strategy of stocks and bonds popularized by industry leaders like Vanguard. Wealthfront expands upon that approach and focuses more heavily on diversification via other asset classes (e.g. natural resources) and a greater emphasis on dividend paying stocks.
- Diversification – Unlike Betterment, Wealthfront includes REITs, natural resources and energy in their asset classes.
Verdict – Betterment. When it comes to investing, complexity is typically not your friend. While both platforms are grounded in low-cost index fund investing, awe prefer sticking to a simpler philosophy of stocks and bonds versus allocating capital into natural resources and specialty ETFs like dividend focused funds. We’re splitting hairs here to some degree and would be comfortable in either robo advisor but prefer the simplicity of Betterment.
4. Tax-Loss Harvesting
Tax-loss harvesting involves selling a security that has experienced a loss in order to offset taxes on gains and income. Securities that are sold in tax-loss harvesting are replaced by similar securities in order to maintain the same asset allocation in a portfolio. Betterment and Wealthfront both offer tax-loss harvesting, and this is a major strength of using most robo advisors (since the process of manually doing this is incredibly time consuming).
However, Wealthfront also offers stock-level tax-loss harvesting. This enhanced version of tax-loss harvesting analyzes individual stock movements to harvest more tax losses (which can be counted against more capital gains). In order to do this, Wealthfront actually buys individual stocks instead of using a single index fund, allowing them to act upon individual stocks instead of entire funds.
The only catch is that stock-level tax-loss harvesting is only available for taxable accounts of $100k or more.
Verdict – Wealthfront. Wealthfront wins out on tax-loss harvesting for accounts over $100k.
5. Socially Responsible Investing
Socially responsible investing (SRI) is an investing approach that aims to limit portfolio exposure to companies that have a negative impact on society or the environment. This includes companies that are thought to overly pollute, profit from unethical labor standards, or are involved in certain sin categories, such as alcohol or gambling. Additionally, SRI investing prioritizes companies that are socially responsible, green, and progressive.
Here’s how Betterment and Wealthfront compare in terms of SRI availability:
Betterment – SRI investing is available and uses Betterment’s standard low-fee approach while increasing investment to companies that meet SRI standards. Betterment replaces U.S. large cap stocks and emerging market stocks asset classes with a SRI ETF alternative.
Wealthfront – Requires $100K minimum in order to leverage stock-level tax-loss harvesting to buy individual stocks in companies meeting SRI standards.
Verdict – Betterment. The ability to do SRI (similar to ESG investing) makes Betterment is the clear winner for socially responsible investing.
The entire point of investing is to put your wealth to work. Investing in fractional shares is an efficient way to ensure that your entire portfolio is utilized and that you don’t sit on idle cash.
Betterment – Can invest as low as 1/1,000,000th of a share, meaning your entire portfolio is put to work.
Wealthfront – No fractional shares.
Verdict – Betterment. The ability to invest in fractional shares means Betterment comes out on top in terms of minimizing your cash balance.
7. User Experience & Ease-Of-Use
On some platforms (ahem: Vanguard) the user interface leaves a lot be desired. It’s overly complicated and difficult to view the information you want to see. The good news is both Betterment and Wealthfront do quite well with user experience. These platforms were designed to be user friendly and not be intimidating for new investors. That said, Betterment really shines here and think they are the clear winner when it comes to Betterment vs Wealthfront user experience.
Verdict – Betterment. The Betterment platform is awesome. It’s smartly designed and allows for an amazing user experience. We wish all investor platforms were this easy. Again, there is some personal preference here but we find Betterment more intuitive, visually pleasing, and more helpful than Wealthfront.
Betterment vs Wealthfront – Investment Performance
Robo advisors create portfolios largely based on your personal investment goals and levels of risk tolerance. Therefore, there isn’t a single explanation or expected rate of return for Betterment or Wealthfront.
However, each robo advisor lists their historical returns since inception. These data sets are the most fair way to compare Betterment vs Wealthfront.
According to Betterment’s historical performance page, Betterment “would have outperformed the average investor with an investment advisor in 88% of all periods over the last decade.”
This is an undeniably bold statement. Betterment supports this claim with data from Asset Risk Consultants, an independent investment consulting group. Asset Risk Consultants analyzed more than 30,000 time periods, comparing Betterment portfolios to advisor-managed portfolios.
Betterment compares their low-cost, ETF-focused investment strategies to more actively managed, higher-fee portfolios in this example. DIY investors are free to purchase their own low-fee ETFs, of course, and the overall comparison of Betterment vs. actively managed funds isn’t a level playing field.
Regardless, Betterment lets users view the historical performance for different portfolio compositions stretching back to 2004. However, since Wealthfront only provides data from 2011, this is the time frame shown below:
For comparison, the S&P 500 has seen an approximate 11% average annual rate of return in that same time. The question is, how does Wealthfront compare?
Wealthfront also shares historical performance data. Investors can select different risk scores to alter portfolio composition and view the impact it would have on returns. According to Wealthfront: “The risk scores range from 0.5 to 10 in half integer increments, for a total of 20 different risk profiles, with each risk score having a different target asset allocation comprised of a broad set of asset classes.”
Again, Wealthfront focuses heavily on low-fee ETFs, diversification, and dividends in their portfolio composition. The results shown below are of a 8.0 risk score portfolio, which contains a similar mixture of U.S. stocks and international/developing market stocks.
Taxable portfolios with a risk score of 8.0 would have seen a 8.43% average annual rate of return since October 2011. This estimate also reflects daily tax-loss harvesting. Additionally, as Wealthfront states in their disclosure, “past performance does not guarantee future results. Costs associated with trading could impact actual client performance. Future performance may also deviate from past results due to changes in recommended asset allocations, as well as differences in future market returns.”
The Bottom Line
Unfortunately it is impossible to compare identical portfolios between Betterment and Wealthfront as each robo advisor uses a different strategy and risk profile to create portfolios. Further their websites don’t make it easy to see historical performance at certain risk levels or asset allocations over time. So we have no clear winner here. However, it is clear that both platforms leverage low-cost ETFs and historically strong index funds to keep fees down and generate a solid return for investors.
Your level of risk tolerance and investment time-frame will be the main factors that influence your investment performance. While the added fees are greater than DIY investing, the added benefits such as tax-loss harvesting may be worth the added cost.
Betterment Pros & The Ideal Investor
If you’re on the fence about the Betterment vs Wealthfront debate, the following list of pros for each robo advisor may help with decision making.
- $0 Minimums: There is no barrier to entry to invest with Betterment.
- Human Advisors: Betterment Premium investors have access to advice from certified financial planners.
- SRI Investing: It’s easy to start a SRI account with Betterment.
- Fractional Shares: There’s no need to worry about carrying a hefty cash balance.
- Smart Deposit: This automated investment tool puts your excess cash to work to maximize your returns.
- Smart Beta: Betterment has extended access to Goldman Sachs’ Smart Beta Portfolio Strategy which aims to outperform the market by taking on additional systematic risks.
Betterment is perfect for: Lower net worth individuals and SRI investors.
Wealthfront Pros & The Ideal Investor
There are plenty of reasons for Wealthfront to be the second most popular robo advisor on the market.
- Stock-Level Tax-Loss Harvesting: This feature is incredibly powerful for accounts of $100K or more.
- College Saving Plans: This added account option is perfect for younger investors or parents planning to send their children to school.
- Smart Beta: Accounts of $500K or more gain access to Smart Beta. This feature weights securities in your portfolio more intelligently in order to increase returns.
- Simple Fee Structure: Pay 0.25% for account management regardless of account balance.
- Path Financial Planning: Wealthfront’s smart retirement planning tool helps outline a saving and investing path.
Wealthfront is perfect for: Higher net worth individuals who can make use of stock-level tax-loss harvesting or Smart Beta.
Alternative Robo Advisors & Options
There are plenty of other robo advisors on the market, as well as alternative investment options. In terms of other robo advisors, M1 Finance and Personal Capital are two other popular choices for investors looking to largely automate their investing strategy.
- Schwab Intelligent Portfolio: Schwab pioneered selling stocks online for a reasonable commission. They’re a major player and have built a fantastic robo advisor solution with no fees but a $5,000 minimum. You can’t go wrong with a proven and trusted player in the investment space like Charles Schwab.
- M1 Finance: We LOVE M1. No fees, fractional shares, and one-click re-balancing. They’re lessor known but worth checking out.
- Personal Capital: They’re not a robo advisor but do provide a tool to see all your investments in one spot and help with asset allocation
- Target Date / Life Cycle Fund: These are funds that update your asset allocation over time depending on your financial and retirement goals. Like a robo advisor, they’re great for busy people who are seeking a hands-off approach. You can read more about them here in our article about how to invest money in 2020.
- DIY approach (e.g. 3 Fund Portfolio or “Lazy Portfolio”): Be your own advisor with the lazy portfolio. This is one of the only instances where being lazy pays off!
More on DIY: DIY investing really is a great alternative and cheaper option compared to using robo advisors. There is nothing stopping you from opening an investment account with Vanguard or E-Trade and building your own portfolio. After all, robo advisors create portfolios from funds that are accessible to independent investors. Plus, companies like Vanguard have recently eliminated trading commissions, making it more affordable to buy and sell stocks and ETFs online. If you have the time and financial acumen then a DIY “lazy portfolio” is our preferred approach.
Financial Advisors: Finally, seeking advice from a certified financial planner (CFP) is also a viable route to take for your wealth management. While financial planner typically charge higher fees than robo advisors, the personalized advice they provide may be worth the added cost.
Final Thoughts | The Winner of Wealthfront vs Betterment
If you’re looking for a simple way to invest your money then a robo advisor may be a great solution. Millions of Americans who don’t have the time or financial acumen to build and monitor an investment portfolio are turning to robo advisors for good reason.
So who wins the Betterment vs Wealthfront battle? For the majority of investors we think Betterment is the superior option. We love the fact they have no minimum to open an account, a beautiful and user-friendly platform, and a simple yet proven investment philosophy.
But ultimately, there isn’t a ‘right’ answer to the Betterment vs Wealthfront debate. Betterment caters to lower net worth individuals and has some unique features such as access to socially responsible investing. In contrast, Wealthfront is appealing to higher net worth investors that can meet the minimum and who will benefit from features like stock-level tax-loss harvesting.
Both robo advisors have a large market share in the world of robo advisors, and this is for good reason. With low management fees, reasonable account minimums, and useful features like automatic rebalancing or tax-loss harvesting, robo advisors certainly make investing accessible to any investor.
Either way, if you want to automate wealth management, getting started with either robo advisor is the perfect way to start improving your finances and invest your money.