Betterment vs Wealthfront: Which Robo-Advisor is Better?
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‘Betterment vs Wealthfront, which is better?’ is a common question I get asked on a regular basis. Betterment and Wealthfront are the key players in the robo-advisor space and many first-time investors ask whether Betterment or Wealthfront are the better option for their needs.
Betterment and Wealthfront work in very similar ways so you really can’t go wrong in choosing one over the other. However, there are enough differences to make it worth considering whether Betterment or Wealthfront is better for you. With that in mind, this is an in-depth look at Wealthfront vs Betterment to see how they stack up against each other.
Betterment vs Wealthfront: Basic Background
The main idea behind both Betterment and Wealthfront, and all robo-advisors for that matter, is to manage your investing needs. With both platforms, you answer roughly 10-15 questions to give them an idea of your needs. Through your answers, they learn about your risk tolerance, your goals and your timeline.
You don’t invest in individual stocks with either Betterment or Wealthfront. Rather, they’ll customize a portfolio of low-cost index funds based on your answers. This may sound boring, and really investing should be boring. It’s not really the specific stock you’re invested in that counts but how you’re allocated. Both platforms follow the Modern Portfolio Theory (MPT) to guide investment decisions.
What this provides for you as an investor is a professionally managed portfolio. This is great for both the new investor and the hands-off investor alike. You can rest in the confidence that everything is going as it should, and all you need to do is put money in your account and check in on it from time to time.
Portfolios: How Do They Compare?
As I mentioned earlier, both Betterment and Wealthfront ask you a small handful of questions before you open your account. This is what they’ll use to customize your portfolio, so it’s important to answer the questions seriously. There are many similarities between the Betterment and Wealthfront portfolios, but there are also some significant differences. Let’s take a look at each portfolio option.
Betterment Portfolio Options
The investment options at Betterment offer a selection of 13 different low-cost index funds, made up of six stock funds and seven bond funds. Many of them come from either Vanguard or iShares, both of which are very solid. Below are the 13 fund options available through Betterment:
- VTI – Vanguard U.S. Total Stock Market Index ETF
- VTV – Vanguard U.S. Large-Cap Value Index ETF
- VOE – Vanguard U.S. Mid-Cap Value Index ETF
- VBR – Vanguard U.S. Small-Cap Value Index ETF
- VEA – Vanguard FTSE Developed Market Index ETF
- VWO – Vanguard FTSE Emerging Index ETF
- SHV – iShares Short-Term Treasury Index ETF
- VTIP – Vanguard Short-Term Inflation-Protected Treasury Bond Index ETF
- BND – Vanguard U.S. Total Bond Market Index ETF
- MUB – iShares National AMT-Free Muni Bond Index ETF
- LQD – iShares Corporate Bond Index ETF
- BNDX – Vanguard Total International Bond Index ETF
- VWOB – Vanguard Emerging Markets Government Bond Index ETF
Depending on your needs, you may not see all 13 funds in your portfolio. Again, it comes down to being properly allocated (which includes the best asset classes) so don’t be concerned if you don’t see all 13 in your account.
WEALTHFRONT PORTFOLIO OPTIONS
Wealthfront is very similar in their portfolio offerings, so you really begin to see some of the similarities between the two robo-advisors. While Betterment offers 13 portfolio options, Wealthfront offers 10, which you’ll see below:
- VTI – Vanguard Total Stock Market ETF
- VEA – Vanguard Developed Markets ETF
- VWO – Vanguard Emerging Markets ETF
- VIG – Vanguard Dividend Appreciation ETF
- LQD – iShares Investment Grade Corporate Bond Fund ETF
- EMB – iShares Emerging Bond Fund ETF
- SCHP – Schwab Treasury Inflation Protected Securities ETF
- VNQ – Vanguard REIT Index Fund ETF
- XLE – Energy Select Sector SPDR
- MUB – iShares Municipal Bond Fund ETF
As you can tell, the two portfolio options are very similar. Both are focused on low-cost funds that provide broad-based access to the stock market. You’ll notice a few differences as well. First, Wealthfront does not provide access to U.S. bonds, but to Treasury Inflation Protected Securities (TIPS). Bonds are quite low-paying these days, so Wealthfront looks to match inflation.
The other difference you’ll see is that Wealthfront offers two alternative investment options – real estate and natural resources. This makes Wealthfront’s portfolio options a bit more well rounded, in my opinion.
Wealthfront vs Betterment: Fees
This is where the beauty of robo-advisors, and most automated retirement programs for that matter, shines – they’re generally very low in fees. I love to see that from a brokerage as it means more of your money works for you. With that, let’s take a look at Betterment vs Wealthfront in terms of fees.
What I love most about Betterment is that they allow you to open an account with no minimum balance, and you can also get up to six months commission free when you open an account. If you do go with a lower amount, however, you’ll pay a $3 monthly fee unless you auto-deposit $100 per month. Assuming you do, your fee will be .35% per month for accounts under $10,000.
Once you hit that $10,000 threshold, your fees will drop to .25% and once you top $100,000 your fees will drop to .15% of your assets under management. So, with a hypothetical $100,000 portfolio, you’d pay $150 in fees per year. This is hard to beat and one of the best fee structures in the industry for a managed portfolio.
Whereas Betterment requires nothing to open an account, Wealthfront requires $500. Keep in mind that is still very good in relation to other online brokerages. That aside, I like Wealthfront a bit better from a fee perspective – in most cases.
With Wealthfront, you get your first $10,000 in assets managed for free. In fact, Wealthfront has offered Frugal Rules readers a special promotion of an additional $5,000 – so you get your first $15,000 managed for free when you open a Wealthfront account. Once you pass that $15,000 mark, Wealthfront charges a flat .25% regardless of your account balance.
I believe this flat fee structure is a bit easier to understand and more straightforward. But, for a hypothetical $100,000 portfolio, you’d pay $212.50 which is a bit more than at Betterment, but still a very good fee structure. Taking a look at Betterment vs Wealthfront, in terms of fees, Betterment wins out at accounts over $100,000 as they’re .10% cheaper, while Wealthfront is better for accounts under that amount – based solely on fees.
Tax-efficient investing is really where Betterment and Wealthfront stand apart. Many investors overlook the role of taxes in investing. Both Betterment and Wealthfront specialize in aiding investors in this important area.
First, both Wealthfront and Betterment offer only low-cost index funds. This is a key part of their tax strategy. Index funds, in general, are much less active and don’t have a lot of turnover in holdings.
The result is very minimal short-term gains, which is huge for taxes. Additionally, both Betterment and Wealthfront utilize dividends you receive to rebalance your portfolio, so you’re not selling off holdings (and having taxable gains) to rebalance. This, of course, occurs only in your taxable accounts and not non-taxable accounts like IRAs.
While both Betterment and Wealthfront do the aforementioned for clients, there is one difference in how they handle taxes.
Wealthfront offers what is known as Direct Indexing and is available to all clients with accounts over $100,000. In simple terms, Wealthfront takes losses from individual stocks in the S&P 500 as opposed to dealing with the index as a whole. Wealthfront claims they’re able to add slightly over a 2% return on portfolios using this feature.
That aside, both Betterment and Wealthfront offer Tax-Loss Harvesting (TLH) to all clients. TLH basically means that both will sell off holdings at a loss, to avoid capital gains, and then reinvest those funds. Both platforms used to require a certain balance to get access to TLH, but that is no longer the case. Today, they both offer TLH regardless of account value. Looking at Betterment vs Wealthfront, Wealthfront is slightly better due to their Direct Indexing feature – but, again, this is only available to clients with balances over $100,000.
Betterment and Wealthfront: How They’re Alike
Both Wealthfront and Betterment offer many of the same attractive features. Here are a few to keep in mind:
- Rebalancing – both platforms offer automated rebalancing regardless of your account value.
- Tax-Loss Harvesting – both Betterment and Wealthfront offer TLH regardless of account value.
- Common account types – both platforms offer the same account types from individual and joint accounts to retirement accounts.
- No true 401(k) option – While Betterment does offer some 401(k) plans for companies with employees neither offers Solo 401(k) plans for small businesses.
- Referral program – Both robo-advisors reward you for referring friends and family. Wealthfront offers an additional $5,000 in free account management, and Betterment offers one-month free commissions.
There are some other similarities, as has been noted throughout, but this covers the high-level similarities.
How They’re Different
While Betterment and Wealthfront are very similar, there are also some distinct differences, below are some of the top differences:
- No minimum balance requirement – you can open a Betterment account with no balance whereas Wealthfront requires a minimum balance of $500.
- How spare cash is invested – all of your cash will be invested with Betterment – so you will have fractional shares. Wealthfront does not buy fractional shares so you will have the possibility of a bit extra cash sitting and waiting to buy more whole shares.
- Lower cost for higher balances – Both platforms are cheap though Betterment offers a better pricing structure for balances over $100,000 – .15% vs. .25 found at Wealthfront.
- RetireGuide™ – This is a newer feature offered by Betterment. The feature offers personalized retirement advice, inclusive of Social Security if you like, to make recommendations. They also look at other outside brokerage accounts; something other robo-advisors don’t offer.
- SmartDeposit – With SmartDeposit you can deposit small amounts, as you go over a certain amount in your bank account, into your Betterment account throughout the month.
- 529 College Savings Plans – This is a new feature offered by Wealthfront. It depends on your state, but many allow you to get free management for your first $10,000 you’re saving for college needs.
- Direct Indexing – While both offer TLH, Wealthfront has a more robust offering if you have an account value of $100,000 or more.
- Broader diversification – By having real estate and natural resources as investment options, Wealthfront offers broader diversification possibilities.
Betterment vs Wealthfront: Which is Better?
Taking an in-depth look at Betterment vs Wealthfront shows that there are a lot of similarities between the two robo-advisors. Both offer a solid, low-cost and long-term approach to investing. This is great for both those new to investing and for those wanting a completely hands-off approach.
While there are some differences between the two platforms, it’s nothing too terribly strong to swing you to one over the other. It really comes down to your preferences, needs and what stands out to you between the two platforms. So, when you ask yourself if Betterment or Wealthfront is better, it really comes down to which you like most.
Do you invest with a robo-advisor? What are some other good things about using a robo-advisor? Would you hire someone to do your investing if you could?