There’s no doubt that many investors looking for automated financial advisory platforms start their search at either Betterment or Wealthfront. These platforms are the most popular robo-advisors on the market. They share many similarities, but they also differ in certain important aspects that can drastically impact your overall investing experience – and ROIs.
It’s important to consider everything an investment platform has to offer before committing your hard-earned money and staking your future on it.
In this article, I’ll provide an in-depth comparison of what Wealthfront vs. Betterment have to offer, down to the last detail.
Wealthfront vs. Betterment – A brief comparison
Digital & Premium
Minimum initial investment
$0 (Digital) & $100,000 (Premium)
Human financial advisors
Must meet a $500,000 minimum investment requirement to qualify
Socially responsible investing
Available via stock-level tax-loss harvesting and Smart Beta. Must meet a $100,000 minimum investment requirement.
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Wealthfront is one of the biggest Robo-advisors, with more than $12 billion in assets. Here is a brief overview of how it works and what it has to offer.
Getting started on Wealthfront
Wealthfront has an elaborate but straightforward registration process designed to understand your investment goals and needs. Users are required to share some information when signing up, including their pre-tax income and savings. You will also be asked to link financial information to your accounts and assets to be used to fund your investment plan.
The next step entails setting an investment goal. The platform will present you with four options to get you started:
- High-interest cash
- General long-term investing
- Retirement investing
- College investing
It is advisable to choose one goal and add others as your investment portfolio grows. Wealthfront recommends starting with retirement investing if you are unsure where to start.
Wealthfront then proceeds to ask a range of questions designed to understand your comfort level for risk on a scale of one to 10. For example, the platform will ask you what you would want to do if your investment portfolio lost 10% in one month. It is worth noting that this platform uses the Modern Portfolio Theory, as discussed later.
Wealthfront portfolio management
Wealthfront relies on the Modern Portfolio Theory (MPT) to create and manage users’ investment portfolios. MPT is based on the Nobel Prize-winning concept of allocating assets by identifying the largest expected return based on your risk comfort levels.
Wealthfront divides users’ investment portfolios among a maximum of eight asset classes represented by index-based exchange-traded funds (ETFs). These asset classes include:
- U.S. Stocks
- Foreign Stocks
- Dividend Stocks
- Real Estate Bonds
- Government Bonds
- Corporate Bonds
- Inflation-Protected Securities
Your asset allocations will remain constant regardless of the balance in your account. However, the platform will move your assets around in response to developments such as market fluctuations and money withdrawals and deposits. Additionally, the platform will adjust allocations when certain assets surpass pre-set thresholds, based on a technique called threshold-based rebalancing.
You can always change your risk comfort score to make changes to your investment portfolio. However, Wealthfront may take some time to make changes that reflect your new risk comfort score to avoid sudden, disruptive changes.
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Betterment was founded in 2008 and is the first automated financial advisory platform. It is also the largest robo-advisor with more than $16.4 billion in assets under its management. Here is a brief overview of how it works and what it has to offer.
Getting started on Betterment
Betterment also relies on Modern Portfolio Theory (MPT) for its investment portfolio management. Consequently, the registration process entails answering many of the same questions asked when joining Wealthfront. The idea behind these questions is to measure your risk comfort level and understand your general investment needs and preferences.
The information requested when signing up on Betterment includes financial details such as your income and savings. You will also be required to link to an account or other assets to fund your investment portfolio.
Betterment portfolio management
Betterment uses MPT, as mentioned. The information presented during registration is used to determine your overall trading strategy from a scale of conservative (fewer stocks and more bonds) to aggressive (more stocks and fewer bonds).
Betterment divides users’ trading portfolios among 14 asset classes represented by index-based ETFs. These asset classes include:
- U.S. Total Stock Market
- U.S. Value Stocks (Large Cap)
- U.S. Value Stocks (Mid Cap)
- U.S. Value Stocks (Small Cap)
- International Developed Market Stocks
- International Emerging Market Stocks
- U.S. High-Quality Bonds
- U.S. Municipal Bonds
- U.S. Inflation-Protected Bonds
- U.S. High-Yield Bonds
- U.S. Short-Term Treasury Bonds
- U.S. Short-Term Investment-Grade Bonds
- International Developed Market Bonds
- International Emerging Market Bonds
These asset classes are comprised of eight bond funds and six stock funds. They also comprise index funds, thereby reducing expenses to a minimum.
Betterment fully manages users’ accounts based on their risk comfort level, portfolio target, and other factors. Additionally, Betterment Premium users get unlimited access to a team of human financial advisors. One of the main differences between Betterment and Wealthfront is that Wealthfront has completely eliminated human contact and doubled down on automation, while Betterment believes that human advisors are beneficial.
Wealthfront vs. Betterment: Who’s better?
Take a look below as I compare the features of Wealthfront and Betterment.
Betterment and Wealthfront both invest in index-based ETFs representing various asset classes. Notably, Betterment offers access to more asset classes than Wealthfront (almost twice as many). In contrast, Wealthfront offers only four fixed income classes and three stock classes, as discussed above.
However, Wealthfront tries to compensate for this gap by offering a more diversified range of asset classes. These include Real Estate Investment Trusts (REITs) and natural resource stocks. Notably, these asset classes are more immune to the impacts of inflation, making your investment portfolio more reliable. Additionally, they offer access to a broader investment mix (and a more diverse array of opportunities).
Notably, Wealthfront also added cryptocurrencies to their list of asset classes and investment options. Its current focus is on Bitcoin and Ethereum, two of the most popular and profitable cryptocurrencies. It offers two crypto investment trusts:
- Grayscale Bitcoin Trust (GBTC)
- Grayscale Ethereum Trust (ETHE)
Overall, both platforms’ asset classes are profitable. However, Betterment’s asset classes have firmly positioned it as the industry’s leading robo-advisor platform.
Investment performance & experience
Wealthfront and Betterment offer many identical features and services, as mentioned. Here is an overview of how and where they differ.
Where Wealthfront shines
Wealthfront beats Betterment in the following aspects.
- Risk Parity - Risk parity is an investment strategy that aims at equalizing each asset class’s risk contributions. The strategy has been proven to generate high returns in the long term. However, it requires a large account balance and is riskier than alternative investment strategies.
- Stock-Level Tax-Loss Harvesting - Individual stocks offer more flexibility than ETFs, making tax-loss harvesting more efficient. Consequently, Wealthfront offers three different portfolios that access thousands of individual stocks, depending on the account size. However, this only works for portfolios worth between $100,000 and $500,000.
- Portfolio Line of Credit - Wealthfront lets you borrow up to 30% of your portfolio’s value if you are eligible for its portfolio line of credit – your portfolio must be worth at least $25,000. You can pay the loan back at your own schedule, and interest rates start at 3.60% (plus the federal rate). Interestingly, you don’t need a credit check to qualify for the loan, and it will not impact your credit score. However, you may be required to repay the loan faster than planned if your portfolio’s value drops.
- Wealthfront Path - Wealthfront Path is a sophisticated (and free) financial planning tool designed to optimize your financial management practices, focusing on retirement. Path utilizes powerful algorithms to analyze your financial data to predict highly likely future financial outcomes. For example, it predicts factors such as how long you can sustain your current lifestyle, whether or not you can buy a house, when you can retire, and more – it is essentially a fairly accurate preview of your financial future. Users don’t need an investment account to use Path. However, the program requires detailed financial information for accurate analysis. It is available as a desktop and mobile app.
- Smart Beta - Wealthfront’s Smart Beta service is designed to essentially out-perform the markets, thereby increasing users’ ROIs. It does this by analyzing virtually every factor affecting your stocks’ performance, including volatility. It also deemphasizes market capitalization as the main force behind your investment portfolio’s development. Wealthfront’s Smart Beta service generates higher returns when combined with the platform’s highly efficient stock-level tax-loss harvesting. However, it is only available to users with at least $500,000 in their investment portfolios.
- Investing Excess Cash - Wealthfront recently added a new feature that automatically invests excess cash in your checking or cash account into your chosen asset class. This takes the hesitancy out of investing, which is common with manual money management. Your investment account options include traditional IRAs, Roth IRAs, and 529 College Savings Accounts.
Where Betterment shines
Betterment beats Wealthfront in the following aspects.
- Human Financial Advisors - Financial technology is advancing at an incredible pace, but it still lags behind humans in certain aspects. For example, computer algorithms cannot fully comprehend human sentiment as a factor in how investors make their decisions. Consequently, Betterment believes that its users can benefit from a human’s input. Betterment users with investment portfolios worth at least $100,000 are guaranteed unlimited access to human financial advisors. The platform charges 0.40% of your total investments for this service, which is a fraction of the standard 1-2% charged by traditional human financial advisors. It is also worth noting that Betterment offers a range of financial advice packages educating users on basic financial planning.
- Value Stocks - Value stocks are companies that seem like risky investments and are generally avoided by investors but are actually sound financial investments. In fact, these stocks can generate above-average ROIs in the long term. The trick is that these stocks trade at a lower price than what fundamentals such as revenue growth and dividend yield indicate. Consequently, they are at the core of one of the most rewarding short-term and long-term investment strategies. Betterment is one of the very few robo-advisors that offer value stocks as an asset class. They include small-cap, mid-cap, and large-cap U.S. stocks.
- Socially Responsible Investing - More people consider a company’s social responsibility when making their investment decisions, making it an important metric. Betterment leverages this by offering a comprehensive Social Responsible Investing (SRI) strategy comprising thousands of companies that meet certain governance, environmental, and social rules. Essentially, there is an SRI alternative for each of the 14 asset class ETFs available in the regular investment portfolio. An SRI portfolio also offers many of the features and services available in a regular portfolio, including tax-loss harvesting.
- Cash Reserve - Betterment Cash Reserve doesn’t charge monthly fees or require a minimum balance. Additionally, you can make as many withdrawals as you want – other savings accounts restrict withdrawals to about six per month. More importantly, your savings will generate interest at a rate of 0.10% APY, one of the highest rates in the market.
- Checking Account - Betterment also offers one of the best checking accounts in the banking industry. Some of Betterment Checking Accounts highlights include: no fees of any kind, no minimum balance, your funds are FDIC-insured up to $250,000, and your ATM fees are reimbursed worldwide. Betterment Checking Accounts also come with a Visa Debit Card that you can use to shop and earn cash back on certain purchases. The platform’s rewards and cash-back program is available at more than 10,000 online and brick-and-mortar merchants worldwide. However, cash-back rewards for online shopping are only available when you use Betterment’s rewards section on the app or site. The cash-back is automatically deposited into your account without any prerequisites on your part. Interestingly, Betterment goes the extra mile to improve its clients’ experience by offering relevant recommendations based on your shopping and spending histories. Additionally, the app offers a “Locator” feature that enables users to find cash-back and rewards options in their local areas.
- Smart Beta - While Wealthfront’s Smart Beta service stands out because of its stock-level tax-loss harvesting, Betterment’s Smart Beta also beats most others in the market. It is managed by Goldman Sachs, one of the most reputable banks and shrewd investors. Additionally, the bank manages it actively – unlike other Robo-advisors that manage their Smart Beta services passively. Betterment’s Smart Beta’s ultimate goal is to boost your ROIs. However, you must have at least $100,000 in your investment portfolio to qualify.
Wealthfront vs. Betterment pros & cons
Wealthfront and Betterment offer a range of benefits over each other Robo-advisor platforms as a whole. Here is a side-by-side comparison of their benefits.
An affordable minimum initial investment of $500
No minimum initial investment is required (start with whatever you can afford)
An affordable annual advisory fee set at 0.25% on your investment portfolio
An affordable annual advisory fee of 0.25% for accounts up to $2 million and 0.15% for accounts over $2 million
Access to a portfolio line of credit on a minimum account balance of $25,000
Access to human, financial advisors (for large accounts)
Access to asset classes in real estate and natural resources
Access to highly lucrative value stocks (small-cap, medium-cap, and large-cap stocks)
Free access to sophisticated financial planning tools
Class assets in Socially Responsible Investments (SRIs)
Cryptocurrency investment trust options
Smart Beta option actively managed by Goldman Sachs for large accounts
A flexible cash account option
External account analysis
A rewarding Smart Beta option
Tax-loss harvesting on all taxable accounts
Asset classes in Socially Responsible Investments (SRIs)
Access to individual stocks for large portfolios
Option to invest excess cash automatically into different qualifying accounts
Availability of 529 college savings accounts
Wealthfront and Betterment also have a range of shortcomings. Here is a side-by-side comparison of the things that you may not like about each platform.
The minimum investment requirement of $500 may be an obstacle for some investors
It doesn’t include external accounts in asset allocations, despite providing analysis
Fees don’t reduce for large portfolios
Lower fees are available only for large accounts with more than $2 million
The $500,000 minimum account requirement to qualify for Smart Beta is a major barrier for many investors
It doesn’t diversify into alternative investments such as natural resources or real estate
Verdict: Which is the right platform for you?
On the one hand, Wealthfront is best suited for investors starting with small balances and looking for a passive yet rewarding investment experience. On the other hand, Betterment is ideal for beginner investors lacking time to manage their investments themselves. To decide which platform is right for you, consider how everything I mentioned above fits into your situation.