Betterment and Wealthfront are two of the biggest names in automated, web-based, investment portfolio management. Both aim to simplify options, offering a broad selection of exchange-traded funds, and streamline investing decisions via sophisticated algorithms that allocate and optimize portfolios. This human-less process translates into lower costs for customers, making robo-advisors a popular option for beginner investors and experienced investors alike.
Wealthfront vs. Betterment: Battle of the Robo-Advisors
Although both of these automated advisors offer the same general services, each follows a unique approach. Understand the differences so you can better decide which might be best for your financial strategy and investing style.
What Is Betterment?
Betterment works to provide affordable investment advisory services by prioritizing the customer experience, offering hands-off and human-led advice. The service specializes in individual retirement accounts, 401k retirement accounts and rollover accounts.
Click to see the best robo-advisors of the year.
What Is Wealthfront?
Wealthfront is a pioneer in the use of modern portfolio theory and other algorithms. Portfolio management includes all financial services.
Wealthfront and Betterment each offer a full menu of features. Here’s a quick look at their offerings for you to compare:
|Annual Management Fees||0.25% – 0.50%||0% – 0.25%|
|Minimum Initial Deposit||None||$500|
|Single Stock Diversification||No||Yes|
|529 Plan Accounts||No||Yes|
|Average Return — net return of 60/40 portfolio from 12/31/15 through 8/31/16||6.51%||4.64%|
Wealthfront vs. Betterment: Delving Deeper
Wealthfront and Betterment share many of the same core functions; however, upon closer examination, you’ll find there are significant differences as well. Knowing the differences can help you make a better decision about which of the two robo-advisors could best serve you.
Annual Management Fees
Betterment fees have three tiers. The first, Betterment Digital, offers the basic automated online robo-advisory service at 0.25 percent. The second, Betterment Plus, comes with an annual fee of 0.40 percent and includes email access to financial advisors, as well as one annual planning call. The third, Betterment Premium, provides unlimited access to financial advisors via email and phone for a 0.50 percent management fee.
Wealthfront fees are waived for all balances under $10,000. Only accounts of $10,001 or more are charged a 0.25 percent annual fee.
Betterment focuses on value ETFs such as the Vanguard Small-Cap Value ETF. Its allocation doesn’t include real estate or commodity-based ETFs, however. Wealthfront does provide real estate investment trust and natural resource options, as well as the Vanguard Dividend Appreciation ETF and other dividend stocks.
Betterment allows investors to purchase as little as 1/1,000,000 of a share when they don’t have the funds to invest in one whole share. A small purchase like this allows for the full utilization of the capital and minimizes diminished returns caused by idle cash. Wealthfront does not offer this option, so investors must buy full shares.
Single Stock Diversification
Wealthfront’s Selling Plan feature allows shareholders who are concentrated in a single stock to sell shares commission-free and diversify into other holdings. Its selling plan feature is also done in a tax-efficient process that utilizes dollar-cost averaging. Betterment doesn’t offer such a service, making diversification more costly.
Both robo-advisors include tax-loss harvesting as a solution for turning losses into tax breaks, but they each differ in their approach. For investors with at least $100,000 in taxable accounts, Wealthfront offers its Direct Indexing option. This allows you to purchase up to 1,001 individual stocks instead of a single ETF or index fund, providing more opportunities for tax-loss harvesting. Betterment uses a simple method, with an algorithm that reduces your taxable gains by leveraging overall market losses.
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Wealthfront lets you move existing IRA funds into your portfolio without selling your holdings and incurring taxes on your gains. Betterment’s RetireGuide links your 401k and other outside retirement accounts to offer comprehensive retirement advice.
Portfolio Line of Credit
Wealthfront’s Portfolio Line of Credit offers a unique opportunity to borrow against your holdings. Investors with a balance of $100,000 or higher can receive up to 30 percent of their portfolio value in loan funds, at 3.25 to 4.50 percent interest, a competitive cost compared to bank loans. No application is required and there are no additional costs to pay beyond the interest portion of the borrowed funds. Betterment doesn’t provide a way to borrow directly against your portfolio, but you might be able to use it as collateral for a securities-backed line of credit provided by an outside lender.
Wealthfront is strictly computer-based, with no traditional advisory services available. Betterment, however, offers an additional layer of service that gives access to human advisors for the Betterment Plus and Betterment Premium accounts. Custom advice from a human advisor can further personalize your portfolio and deliver peace of mind that comes with a knowledgeable second opinion.
Betterment is currently offering a few ways to cut management fees:
- One month of free management when you deposit $10,000 or more
- 30 days of free management when you refer a friend
- One year of free management when you refer three people
Wealthfront also provides a referral bonus, waiving fees on up to $5,000 for you and anyone you invite to the service.
Base Your Choice on Your Financial Strategy
As the Betterment review and Wealthfront review comparison shows, these robo-advisors have built a strong record of providing automated investing services. Wealthfront’s strengths include its tax-efficient offerings and ability to borrow funds, whereas Betterment excels as a hybrid of automated and traditional, human-led advising.
Ultimately, the decision to employ one service over the other boils down to how you prioritize various aspects of your finances. In either case, it’s imperative that you monitor your portfolio regularly and speak with a financial professional to better understand how to manage your investments.
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