Betterment vs. Wealthfront – two of the oldest and most reputable Robo-advisors, but which one should you choose?
Betterment started the Robo-advisor revolution, but they also believe that having access to a human advisor can be a beneficial part of your investment experience. On the other hand, Wealthfront is doubling down and betting that we can learn more valuable advice via technology.
These advisors do share some similarities…
Both take your personal information, goals, and timeline to build a diverse portfolio of ETFs with an asset allocation that’s matched to the performance you need to meet your goals. Both use Modern Portfolio Theory (MPT) for building your portfolio. MPT is based on Nobel Prize-winning research that identifies the largest expected return for the type of risk you’re comfortable with.
And for new investors with low balances, these Robo-advisors are pretty identical.
But, let’s take a deep dive into the Wealthfront vs. Betterment debate to find which Robo-advisor will be the best pick for your investment needs.
Betterment vs. Wealthfront: Which Robo-advisor is best for you?
What is Betterment?
Betterment launched the Robo-advisory model back in 2008, making it the OG. They currently have $13.5 billion in assets under management for their customers.
While Betterment is built on the Robo-advisor model, they’re branching out to give investors access to human advisors through their financial advice packages. And for investors with over $100,000 invested, you have unlimited access to Betterment’s Certified Financial Planners.
Betterment’s method for choosing which ETFs to offer investors is by selecting funds with the least amount of friction between the ETF and its benchmark. So, they are looking for ETFs that offer exposure to the desired asset class with the least amount of difference between class behavior and portfolio performance.
The primary way Betterment analyzes and scores funds is by looking at the Total Annual Cost of Ownership (or TACO). TACO is:
- Cost-of-trade, plus
Read more in my full Betterment 2019 Review: Should You Use the OG Robo-Advising Tool?
What is Wealthfront?
Wealthfront was founded in 2011, which still makes it one of the original Robo-advisor platforms. It is now the second-largest Robo-advisor with over $12 billion in assets.
While Robo-advisors like Betterment are starting to offer users more personal interaction with human advisors, Wealthfront is betting on what they call “self-driving money.” This means they strongly believe that millennials want even more automation and less human interaction. To do that, they are working closely with Silicon Valley heavyweights.
Read more in my Wealthfront 2019 Review: How Does This Robo Advisor Stack Up?
Betterment vs. Wealthfront – Available accounts
Both Robo-advisors offer a variety of investment accounts, including:
- Individual and joint personal investment accounts
- Roth IRAs
- Traditional IRAs
- SEP IRAs
- 401(k) rollovers
However, Wealthfront also offers 529 college savings plans.
Who has better management fees?
Wealthfront offers the most simple pricing model – 0.25% advisory fee for all accounts. There aren’t trading commissions, withdrawal fees, minimum fees, or transfer fees. But, there is a $500 minimum balance to open an account.
Betterment gives investors two options for types of accounts – Betterment Digital and Premium:
- Betterment Digital charges 0.25% annually and has no account minimum. Once you hit $2 million in your account, these fees drop to 0.15%.
- Betterment Premium is 0.40% annually, with a $100,000 account minimum. This plan comes with unlimited access to Betterment’s Certified Financial Planners. These advisors are fiduciaries and are there for advice on accounts held inside and outside of Betterment. If your balance hits $2 million, Premium drops to 0.30%.
How does Betterment vs. Wealthfront’s pricing compare for you? For accounts up to $100,000, both offer the same fees. If you go over $100,000 and stay with Betterment Digital, you will start saving 0.10% annually.
M$M tip: See all of your investments in one place with Personal Capital. This is the free tool my wife and I use to stay on track for retirement, watch what we’re paying in fees, and see our net worth grow.
Does Wealthfront or Betterment offer better investment portfolios?
Betterment and Wealthfront both give investors access to low-cost ETFs with expense ratios that are nearly identical. However, there are a couple of key differences between these Robo-advisors.
Wealthfront’s PassivePlus program has some appealing benefits for investors with over $100,000 invested. You’ll have access to stock-level trading and can restrict certain assets if you want a more socially responsible portfolio. PassivePlus also claims to offer cost savings benefits through its Risk Parity fund. Wealthfront also includes natural resources and REITs in your portfolio.
Where Betterment differs in its portfolio options are by investing your money in fractional shares of ETFs to reduce cash drag. Also, if you do want a little more control over what’s in your portfolio, Betterment gives you access to a socially responsible portfolio and an income-producing portfolio for retirees. More about these in the features section.
Additional financial accounts
Betterment and Wealthfront are offering something that most Robo-advisors and online investment platforms are doing – a high-yield savings account. These rates are subject to change, but here are the current rates:
- Wealthfront 2.32% APY
- Betterment 1.78% APY
Both accounts come with zero fees are FDIC insured for up to $1 million.
Wealthfront vs. Betterment on features
Where Wealthfront shines
529 college savings plans
Wealthfront offers 529 college savings plans for investors to save for their children’s college fund. The fees attached to these accounts are considered all-in (investment and management expenses) and are no more than 0.46%.
Free financial planning
This Wealthfront feature is called Path, and is free and available to anyone, so you don’t need a Wealthfront account to access this financial planning software. It’s fully automated and lets you play out different scenarios based on where your finances stand now and in the future.
You can connect all of your financial accounts, even non-Wealthfront ones, and the software analyzes your finances to show you the type of savings you need to accomplish anything from retirement to purchasing a house.
This program offers several different features to investors with high investment balances, including:
- Stock-Level Tax-Loss Harvesting. For accounts between $100k to $500k, this feature adds up to 500 different stocks to your portfolio instead of ETFs. Your account stays diverse, while giving you even more access to tax savings.
- Risk Parity. This is similar to Modern Portfolio Theory but is a more enhanced strategy to optimize your returns. It’s available for accounts with $100k or more.
- Smart Beta. For accounts of $500k or higher, Smart Beta is a multi-factor model that uses five different factors to determine how the assets in your account are weighted. This includes value, momentum, dividend yield, market beta, and volatility.
Wealthfront’s investor line of credit
If you have an investment balance of at least $100,000, Wealthfront will let you borrow up to 30% of your account’s value. Because it’s secured by the value of your portfolio, it eliminates an application or credit score qualification.
And because you’re borrowing from yourself, you create your own repayment schedule.
Where Betterment shines
Even more portfolio options
Betterment originally only offered portfolios based on your risk tolerance, but they now offer three more portfolio options:
- Socially Responsible Investment (SRI) portfolio. This focuses your investments on companies who are working for the greater good.
- Goldman Sachs Smart Beta portfolio. This portfolio has 101 variations that focus on four factors to minimize your risk while also offering a higher return potential. The four factors are good value, strong momentum, high quality, and low volatility.
- BlackRock Target Income portfolio. For retired investors (or those close to retirement) looking for a steady stream of income, this portfolio is bonds only.
Access to human advisors
Betterment offers two options for speaking to a Certified Financial Planner. One is for investors with a minimum balance of $100,000 enrolled in Betterment Premium, which comes with a 0.40% management fee.
Or, for a one time fee, you can speak to a human advisor who can give you practical advice through one of Betterment’s financial planning packages:
- Getting Started $149
- College Planning $199
- Financial Checkup $199
- Marriage Planning $199
- Retirement Planning $299
You can buy fractional shares
To make the most of your investment funds, Betterment will purchase fractional or micro shares of ETFs. They do this to prevent any cash drag. Wealthfront only purchases full shares of ETFs for your portfolio and puts what’s leftover into cash savings account until you deposit more to invest.
No minimum deposit to start
There are no minimum fees to open an account with Betterment.
Betterment makes it easy to donate shares to charities of your choice, and when you donate shares, you aren’t paying capital gains taxes.
Final word on Betterment vs. Wealthfront: Which Robo-advisor should you choose?
The features of one versus the other are probably going to be the make it or break it for you. These are things like access to a human advisor, a 529 college savings plan, stock-level tax-loss harvesting, free financial planning, etc.
While you might not need some of these features now, thinking about your future needs will reduce the chances that you’ll need to move your money around to a better fitting Robo-advisor.
But either way you look at it, both of these Robo-advisors have a strong history and options available for investors at any level.