Investing can feel complicated and robo-advisors promise to make it simpler.
By trusting in their algorithms, after filling out a profile and assessing your risk tolerance, they promise to handle the investment for you. They'll pick low-cost funds, they'll rebalance as necessary, and they'll even tax loss harvest for you – all for a low fee.
If you’re considering going the robo-advisor route, which service should you choose?
Let’s help you to decide by taking a look at both the similarities and differences between the two robo-advisor giants.
Betterment vs. Wealthfront – Similarities
Both Betterment and Wealthfront are automated online investment platforms, more commonly referred to as robo-advisors. Both also base your portfolio allocation on your risk tolerance, which is determined by your answers to short questionnaires.
Your portfolio is comprised of a small number (10 to 12) of exchange-traded funds (ETFs) that invest in the indexes of the broad financial markets. The funds cover the US stock market, foreign markets, emerging markets and a mix of fixed income/bond markets, to create a diversified portfolio.
Once your portfolio allocation is determined, your portfolio will be created and maintained going forward. This maintenance will include periodic rebalancing to make sure that your asset allocations remain consistent with the portfolio that was determined to be the most appropriate for you.
Betterment has no minimum deposit or balance requirement, while Wealthfront's minimums are set at just $500. Each also offers regular taxable investment accounts, in addition to traditional and Roth IRAs, rollover and SEP IRAs, trust accounts, and both individual and joint accounts.
Each platform also offers tax-loss harvesting, in order to reduce the tax liability created by your portfolio.
Investment Asset Allocation
Both Betterment and Wealthfront allocate your portfolio primarily between stock index ETF’s and bond index ETF’s. Wealthfront, however, diversifies beyond a basic stocks and bonds-only portfolio, by adding other asset classes to the mix.
Wealthfront includes real estate and natural resources in your portfolio mix. This takes the form of a position in a real estate investment trust, as well as a natural resources-based ETF. This gives the Wealthfront portfolio an advantage in a strong real estate market, as well as potentially higher returns in the event of a return to inflation, since natural resources tend to be most significantly affected by rising prices.
Both services provide tax-advantaged investing within their portfolio management, through tax loss harvesting, and the use of index-based ETFs. The ETFs are tax efficient since they involve only a minimum amount of capital gains generating stock sales. But each platform goes about the specifics in different ways.
Betterment offers its Tax-Coordinated Portfolio service, which allocates investments between taxable accounts and tax-deferred accounts, to create the most tax efficient portfolio possible. For example, equity investments, like stock ETF’s, are steered toward taxable investment accounts. This is because equity investments can most benefit from the tax-loss harvesting strategy. On the other hand, fixed income investments, such as ETF’s that invest in bonds, are directed into tax-deferred accounts, since they pay taxable interest income, and are not well-suited to tax loss harvesting.
Wealthfront also offers tax loss harvesting across the board. But they also offer their Stock-level Tax-Loss Harvesting portfolios for even greater tax efficiency. It is offered at two levels, and each includes a mix of not only ETF's, but also individual stocks. The purpose of adding stocks to the mix is to increase the ability to take advantage of tax loss harvesting.
These portfolios are available with account balances between $100,000 and $500,000. Within each portfolio, up to 500 individual stocks will be purchased from the S&P 500 index, rather than through an index-based ETF. On larger balances, they purchase up to 1,000 stocks from the S&P 1500 index.
For taxable account balances over $500,000, Wealthfront offers Smart Beta. It's a strategy that uses multiple factors to determine the weighing of stocks in a portfolio. Traditional index-based investing relies on market capitalization. That is, the companies with the highest market capitalization weigh the most heavily in a portfolio. Smart Beta deemphasizes market capitalization in favor of multi-factor models. This service is available at no additional fee.
Premium Portfolio Management Levels
Betterment Premium provides all of the services available in Betterment’s regular portfolio management package, but also includes in-depth advice on investments held outside Betterment, as well as unlimited access to their Certified Financial Planners (CFPs) for guidance on life events. These events include marriage, having children, retirement or managing equity-based compensation. You must have a minimum account balance of $100,000.
There is an extra fee for one-on-one expert advice – each 45 to 60 minutes in duration – as follows:
- Getting Started Package – $149
- Financial Checkup Package – $199
- College Planning Package – $199
- Marriage Planning Package – $299
- Retirement Planning Package – $399
Betterment also offers three specialized portfolios:
Socially Responsible Investing. This portfolio provides increased weight in stocks of companies meeting certain social, environmental, and governance criteria. At the same time, the portfolio maintains proper diversification, tax optimization and cost control. The portfolio invests in large-cap US stocks, as well as emerging market stocks (but not bonds).
Goldman Sachs Smart Beta. This portfolio is actually managed by Goldman Sachs. It's a diversified portfolio strategy that attempts to outperform the conventional market cap strategy. It’s an actively managed portfolio and does involve higher risk and potentially higher rewards. It also seeks to maintain tax efficiency and low costs.
BlackRock Target Income. This portfolio is invested 100% in bonds, with different yields. It's designed to provide insulation against the ups and downs of the stock market. Its primary focus is on generating income, not capital appreciation. Income is generated by a combination of longer-term bonds, and lower quality bonds that provide higher yields.
Wealthfront Risk Parity. In addition to the Stock-level Tax-Loss Harvesting and Smart Beta plans discussed earlier, Wealthfront also offers its Risk Parity feature. It has shown higher long-term returns using a strategy of allocating the portfolio by equalizing the risk contributions of each asset class, without considering their expected returns. The strategy does involve using leverage with certain positions in the portfolio. And even though this is a premium level service, there is no additional charge for using it.
Betterment for Business – Managing 401(k) Accounts
Betterment has recently stepped into 401(k) management through Betterment for Business. Through this service, Betterment is managing employer-sponsored plans directly – in other words, it’s a plan your employer may participate in.
The advisory fee for this service is 0.25%, and may be paid by either the employer or the plan participant.
Wealthfront does not offer a comparable service at this time.
Wealthfront Portfolio Line of Credit
This is an option Betterment does not offer. But with the Portfolio Line of Credit, you can access cash from your account at low rates. The line of credit is automatically available if you have investment accounts with Wealthfront totaling $100,000 or more. You can borrow up to 30% of your account value, and make repayments on your own schedule.
The line of credit is secured by your Wealthfront portfolio. That means there is no application process, and no qualification based on credit or income. You can make your request in just 30 seconds, and receive funds in as little as one business day.
Because the line of credit is secured by your portfolio, interest rates are low, currently at between 4.55% and 5.80%.
Basic Advisory Fee
Wealthfront charges an annual fee equal to 0.25% of your total portfolio under management.
Betterment’s fees vary. On the Digital plan, the advisory fee is 0.25% on balances up to $2 million, and 0.15% on higher balances.
On the Premium plan, the fee is 0.40% on balances up to $2 million, and 0.30% on higher balances.
For most investors, those with less than $2 million, the advisory fee will be the same for both robo-advisors.
Final Thoughts on Betterment vs. Wealthfront
When the two robo-advisor giants started out ten years ago, each offered a basic automated portfolio management service at a low fee. But over the years, each has expanded its menu of investment offerings.
While each continues to offer its core service of automated investing, the difference between the two is increasingly in the details. More than anything, it comes down to which premium or additional services are offered by either platform.
But lining the two services up side by side, it does appear that Wealthfront has more premium services, but at no additional cost.
If you’re debating which platform will be better for you – Betterment or Wealthfront – carefully consider your personal circumstances, and determine which service will be to your best advantage.
Small differences in services can have a big impact on long-term investing!