‘Betterment vs Wealthfront, which is better?’ is a question I get asked on a regular basis. Betterment and Wealthfront are the major players in the robo-advisor space. Many first-time investors ask whether Betterment or Wealthfront are the better option for their needs.
Betterment and Wealthfront work in similar ways so you really can’t go wrong in choosing one over the other. Betterment is the legacy player in the space with over $15 billion in assets under management and over 400,000 clients, with Wealthfront being a close second. However, there is a significant enough of a difference 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 help you manage your investing needs. With both platforms, you answer a handful of questions to give them an idea of your needs. Through your answers they learn the following about you:
- Risk tolerance
You don’t invest in individual stocks with either platform. Rather, they 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. 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 handful of questions before you open your account. This is what they 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. They consist 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. 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.
Betterment recently added new portfolio options for both new and existing clients. Those are: Blackrock Target Income Portfolio, Goldman Sachs Smart Beta Portfolio and Betterment Socially Responsible Investing (SRI) portfolio.
The Target Income Portfolio consists of 100 percent bonds and is meant for those in retirement wanting a more conservative approach to investing.
The Goldman Sachs Portfolio uses a rules-based approach with the goal of outperforming the traditional market index. The SRI Portfolio is fairly self-explanatory, here’s our guide to the SRI approach.
Betterment recently introduced Betterment Cash Reserve as an option for spare cash in your account. The FDIC-insured, product offers an APY of up to .10 percent, after fees, on your cash.
This is one of the highest rates in the market, and offers FDIC insurance of up to $1,000,000, plus unlimited withdrawals.
Additionally, Betterment recently released an FDIC-insured checking product, called Betterment Checking, to pair with the Cash Reserve feature. Taking advantage of either product does not eliminate the two-way sweep function as that is still available.
Betterment Checking has no minimum balance requirement, and no fees. The money manager also reimburses ATM fees to your account from any ATM that accepts Visa, or roughly 2.8 million throughout the world.
Wealthfront Portfolio Options
Wealthfront is very similar in their portfolio offerings, so you begin to see some of the similarities between the two robo-advisors.
While Betterment offers 13 portfolio options, Wealthfront is a bit more robust, which you’ll see below:
- US Stocks
- Foreign Stocks
- Emerging Markets
- Dividend Stocks
- Natural Resrouces
- Municipal Bonds
- US Stocks
- Foreign Stocks
- Emerging Markets
- Dividend Stocks
- Real Estate
- Corporate Bonds
- Emerging Market Bonds
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 more well rounded, in my opinion.
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.
They’ve also recently changed their pricing structure to be .25 percent, annually based on account balance, per client. While I do like the flatter pricing structure it does increase the fees for those with balances over $100,000.
If you have a higher balance and want access to CFP professionals that provide guidance, Betterment also offers Betterment Plus and Betterment Premium. They require balances of $100,000 and have a flat fee of .40 percent.
*9/18/18 update: New clients with balances over $2 million will now receive a .10 percent marginal discount on balances over $2 million. For example, if you’re a part of Betterment Premium, and currently pay .40 percent, the first $2 million will be charged .40 percent and the remaining balance will be charged .30 percent.
While the fees are higher based on where they used to be, they’re still hard to beat for a managed portfolio. Betterment also recently added an Investment Review feature to review all of your outside investments for free. This value add to find greater opportunities for investors makes their pricing well worth the cost.
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.
With Wealthfront, you get your first $10,000 in assets managed for free. *As of April 1, 2018 this will no longer be the case. You will now be charged .25 percent regardless of your account balance. This makes them equal to Betterment in terms of fee structure, albeit it a radical shift for Wealthfront.
Once you pass that $10,000 mark, Wealthfront charges a flat .25 percent regardless of your account balance.
I believe this flat fee structure is a bit easier to understand and more straightforward. Taking a look at Betterment vs Wealthfront, in terms of fees, Wealthfront wins out with most accounts as the rate doesn’t go up at higher account balances.
If neither work for you, read our guide on apps like Betterment to identify a better solution.
Tax-efficient investing is really where Betterment and Wealthfront shine. Many investors overlook the role of taxes in investing. Both Betterment and Wealthfront specialize in aiding investors in this important area.
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 two percent return on portfolios using this feature.
Both Betterment and Wealthfront offer Tax-Loss Harvesting (TLH) to all clients. TLH means that both will sell off holdings at a loss, to avoid capital gains, and then reinvest those funds. Regardless of your balance you get to take advantage of TLH on either platform.
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.
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 also has a special referral offer.
There are some other similarities, as has been noted throughout, but this covers the high-level similarities.
How They’re Different
Betterment and Wealthfront are very similar, but 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.
- Lower cost for higher balances – Both platforms are relatively cheap given what you’d typically pay for similar services from a traditional advisor.
- 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. Wealthfront also offers a service for college planning needs. With the new tool, Wealthfront customizes a plan based on the specific, real-time costs of any college your student may want to attend. They calculate the amount of financial aid you need and customize a plan so you can see how far your funds will go towards covering outstanding needs.
- Direct Indexing – While both offer TLH, Wealthfront has a more robust offering if you have an account value of $100,000 or more. Wealthfront also recently added Advanced Indexing. Advanced Indexing is a multi-factor investment strategy that combines with direct indexing to bring a tax efficiency not found in Smart Beta ETFs. This new feature is available to clients with balances over $500,000.
- Tailored transfers – Transferring between two brokerages can be a hassle. In most cases you need to sell your holdings, likely causing a tax bill. Wealthfront provides tailored transfers that brings over your holdings into a diversified portfolio tax efficiently – thus avoiding any potential tax bills.
- Live help – Betterment recently added the ability to send live messages to reps via their mobile app, as well as unlimited phone calls for Premium and Plus plan members with CFP professionals. Wealthfront does offer Path, though the new offerings at Betterment are a bit unique.
- Broader diversification – By having real estate and natural resources as investment options, Wealthfront offers broader diversification possibilities.
- Portfolio Line of Credit – Wealthfront recently launched an additional feature – Portfolio Line of Credit. It works just as it sounds. If you need access to funds for whatever reason, Wealthfront allows you to access of up to 30 percent of the value of your portfolio. There’s no application to fill out and it’s available to any clients with an Individual or Joint account valued at $100,000 or more. Current interest rates are between 3.25 – 4.5%, depending on the size of your account. You can receive funds in as little as one business day and pay only the interest with no additional fees.
- RetireGuide™ – This newly updated feature at Betterment allows you to get a goal-level view of your retirement planning and not just by your specific Betterment account. This gives Betterment an edge over Wealthfront by helping investors make more informed decisions based on their overall retirement goals, as well as receive more effective guidance.
If you’d like a greater breakdown of what each has to offer, check out our Betterment review and Wealthfront review.
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.
However, given the recent announcement by Wealthfront, and other news stories, the edge goes to Betterment in our opinion. Wealthfront is still a solid consideration though given the radical shift in their pricing structure the jury is out on their direction.
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?
very informative review. You mentioned that all of your cash will be invested, but isn’t it possible to have cash drag with Wealthfront since they don’t let you buy fractional shares?
John Schmoll says
Thanks Ricky, and that’s a good question. Yea, it is possible to have that I believe since Betterment will invest in fractional shares. I’ve updated that in the post, thanks for pointing it out.
Valerie Mitchell says
You mentioned that neither have a 401K solo option. What do you recommend for this type of investment?
John Schmoll says
Yes, that’s correct Valerie. I’d recommend either Vanguard or Fidelity. We have ours through Vanguard and like them and have their typical super-low fees. Fidelity is very similar.
Beau W. says
Very nice article. Are you still happy with using Betterment? I have a IRA with them and have no complaints so far.
John Schmoll says
Yep, we still recommend them. Glad to hear you’re happy with them.