Betterment vs Wealthfront or Wealthfront vs Betterment. This is a common question investors face when choosing the best online advisor. Betterment and Wealthfront have differentiated themselves from other robo-advisors over the past several years, causing consumers and investors to wonder which brokerage offers the best performance and returns as well as lowest fees and costs.
In many instances, Betterment and Wealthfront are very similar. In one sense, you really can’t go wrong with either of the two brokers. Both of these robo-advisors provide a variety of helpful wealth management tools that help new and passive investors alike.
As we compare fund performance and returns, fees, tax strategies, features, and portfolio management approaches, this Betterment vs Wealthfront comparison will help you find the best online robo-advisor for your particular needs.
Betterment vs Wealthfront: Overview
Betterment and Wealthfront are very similar because they are both online wealth management firms. Both brokers assess your risk tolerance and investment goals, and use that information to place you in specific exchange traded funds (ETFs).
This algorithmic process uses the Modern Portfolio Theory, or MPT for short. MPT, in simple terms, constructs a portfolio that seeks to maximize return for a certain level of risk. Supporters of modern portfolio theory believe that what you invest in isn’t necessarily important, but rather how you allocate and diversify your investments across various asset classes.
The benefit to you as an investor is that this investment strategy provides a very hands-off, passive approach. If you’re a new investor or simply want a low maintenance portfolio that will match or exceed the market with the expense of a costly financial advisor, you’ll be happy.
It is important to note when looking at Betterment vs Wealthfront that Wealthfront does not hold your physical portfolio, and instead manages it for you. Your physical portfolio is held with Apex Clearing.
Wealthfront vs Betterment: Portfolio Allocation
The sign-up process for Wealthfront and Betterment is relatively simple. You answer a handful of questions before opening an account, and while these are simple questions, you’ll want to take them seriously since both companies will use your answers to construct your portfolio.
Betterment uses 13 ETFs to invest your money – six stock ETFs and seven bond ETFs. They recently made a change in their bond portfolio to lower expenses by roughly 0.25%. It is important to note that, based on your particular risk profile and the type of account you choose (taxable vs. non-taxable), you may not have all of the following ETFs in your portfolio with 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
You will notice some similarities between Wealthfront and Betterment in their portfolio options. Like Betterment, Wealthfront uses a small number of ETFs (10 to be exact) to construct your portfolio, based on your particular circumstance and financial needs. The following are the ETFs Wealthfront uses for their portfolios:
- VTI – Vanguard Total Stock Market ETF
- VEA – Vanguard Developed Markets ETF
- VWO – Vanguard Emerging Markets ETF
- VIG – Vanguard Dividend Appreciation ETF
- LQD – iShares Investment Grade Corporate Bond Fund ETF
- EMB – iShares Emerging Bond Fund ETF
- SCHP – Schwab Treasury Inflation Protected Securities ETF
- MUB – iShares Municipal Bond Fund ETF
- VNQ – Vanguard REIT Index Fund ETF
- XLE – Energy Select Sector SPDR
Differences Between Wealthfront and Betterment
You will notice two specific differences between the Wealthfront and Betterment portfolios.
The first is that Wealthfront offers two “alternative” investment options with the real estate and energy ETFs. This makes Wealthfront somewhat stronger as it allows for better diversification. On the other hand, Betterment offers U.S. bonds, which Wealthfront does not.
Finally, both offer TIPS, also known as Treasury Inflation-Protected Securities, which can benefit investors as the Federal Reserve begins to increase rates.
Betterment vs Wealthfront: Fee Structures
An inherent advantage for online robo-advisors is a lower fee structure. Given that fees can significantly decrease a portfolio’s returns in the long-run, low fees and commissions can help you retire with a larger nest egg. Betterment and Wealthfront are among the leaders in the automated online wealth management industry in terms of cost structure. Nevertheless, there are some differences to consider.
First, let’s discuss the fees at Betterment. It is important to first point out that Betterment allows investors to open accounts regardless of initial deposit. With no minimum deposit or balance requirements, you can open an investment account with very little money. However, if you open an account with nothing, they do ask you to deposit at least $100 per month to fund the account. If you’re unable to do that, you will incur a $3 monthly fee.
Assuming you’re not paying the $3 per month fee, Betterment has a very competitive fee structure. As you can see from the image below, Betterment has three fee plans.
For example, if you have an account value of $100,000, you will pay $150 per year. This is incredibly hard to beat, considering what you’d pay for a physical, financial advisor to offer the same service. Just remember that Betterment’s fees do not include your portfolio’s ETF expenses, although Betterment has done a great job in selecting low-cost options.
Now let’s take a look at the fees at Wealthfront. While Betterment has no minimum balance requirement, Wealthfront requires a balance of $500 at all times. To keep this in perspective, this is very reasonable when looking at some of the other top discount brokers.
Wealthfront allows users to have their first $10,000 managed for free. However, through a special BestDiscountBrokerages.com promotion, you get an additional $5,000 without fees so your first $15,000 is managed for free.
After that initial $15,000, you will pay an annual fee of 0.25%. With the hypothetical $100,000 portfolio used in the Betterment example, you’d pay $212.50 per year in fees. While this is slightly higher compared to Betterment, it’s still very competitive.
So, who is the winner when comparing Betterment fees vs Wealthfront fees? It depends. If you have a portfolio less than $100,000, Wealthfront will be slightly cheaper. If you have more than $100,000, Betterment is slightly cheaper. Frankly, either way, you are saving money and improving your returns compared to a traditional financial advisor.
Who Handles Taxes More Efficiently?
A discussion of Wealthfront vs. Betterment would not be complete without a discussion of taxes. Taxes play a critical role in investing, though many retail investors don’t appreciate the effects. While both investment firms do a great job of managing the tax impact on returns, Wealthfront takes the lead.
The first thing to note is that both Wealthfront and Betterment handle taxes efficiently through the use of low-cost index funds. By their very nature, index funds have low turnover (meaning they don’t trade very actively) and thus reduce the tax impact from sale transactions.
Beyond their investment selection, both Betterment and Wealthfront actively employ tax-loss harvesting. Wealthfront stands ahead of Betterment with regards to TLH because Wealthfront provides daily harvesting regardless of account value. To be fair, Betterment also allows TLH regardless of account value, but Wealthfront’s program is more robust.
Wealthfront’s Direct Indexing
Wealthfront also offers a feature known as Direct Indexing. Through Direct Indexing, you harvest losses with individual stocks in the S&P 500. It is important to point out that investors must have at least $100,000 in their Wealthfront account to take advantage of this feature. If you’re able to take advantage of the Direct Indexing program, Wealthfront claims to be able to add just over 2% to your portfolio return on an annual basis.
Both Betterment and Wealthfront have a lot of great features in common, such as:
- Rebalancing – Both offer automatic portfolio rebalancing regardless of account value.
- Tax-Loss Harvesting – As noted above, both Betterment and Wealthfront offer TLH regardless of account value.
- Common account types – Both firms offer access to standard account types, including Traditional, Roth and SEP IRAs as well as individual and joint taxable accounts.
- Referral program – You get an incentive to refer family and friends to either firm. To reward you, Betterment offers three months commission free whereas Wealthfront allows an additional $5,000 to be managed for free.
However, there are some common drawbacks to consider as well, such as:
- No money market fund – All of your cash will be invested because there is no true cash position or money market.
- No outside recommendations – You will not get direction or investment advice on your outside accounts held with other discount brokers, 401(k)s, etc.
As much as Wealthfront and Betterment have in common, the companies have been able to differentiate themselves.
- No minimum balance requirement – When you open a Betterment account, there is no account minimum. This is a great option for people who want to start investing with little money.
- Six months commission free – Depending on the amount you fund your account with, you can receive up to six months commission free.
- Lower fees on large accounts – If you have over $100,000 in your account, you will pay less in fees at Betterment versus Wealthfront. This is because the fee is 0.15% as opposed to 0.25% at Wealthfront.
- RetireGuide Calculator – This is a newer feature at Betterment, which offers personalized retirement planning guidance. The key factor to note is that the calculator takes into consideration other accounts you hold outside of Betterment.
- SmartDeposits – As another newer feature at Betterment, SmartDeposits allows you to automatically deposit funds from a bank account once your checking or savings account exceeds a certain amount specified by you.
- First $10,000 managed for free – Wealthfront allows users to get their first $10,000 managed for free. Just remember that you can get the first $15,000 managed for free when you sign up through our special promotion.
- $500 account minimum – Wealthfront used to require $5,000 to open an account, but recently, the company has lowered the amount to $500.
- Direct Indexing – As previously discussed, if you have an account valued at $100,000 or more, you can take advantage of Direct Indexing. This feature reduces your fees and increases potential tax savings.
- Broader diversification – Through their use of energy and real estate ETFs, Wealthfront offers more robust diversification options.
Betterment or Wealthfront: Which Is Better?
The question of Betterment vs Wealthfront is not an easy one to answer. Both firms have strong investment offerings, low fee structures, excellent features, tax-friendly strategies, and great customer service. While Wealthfront and Betterment share many common traits, each also delivers some unique features.
The final decision on choosing Wealthfront or Betterment is really up to you, your financial needs, goals and preferences. You can’t go wrong with either investment firm. Ultimately, you need to decide which firm has the tools and features that matter to you most.