Betterment vs. Wealthfront

Betterment vs Wealthfront. The comparison between the two biggest robo-advisors is like the clash of heavyweights inside a boxing ring with investors sitting in the front row.

Instead of a boxing ring, however, we have the automated investing landscape where both have towered like a colossus. When two elephants fight, according to an African proverb, the grass underneath them suffers.

While they have pioneered and reshaped this nascent industry in fundamental ways, thankfully, no grass was harmed during their competitive slugfest – at least to the best of our knowledge. But what we are happy to count as casualties the elimination of the barriers to investing that existed before their emergence.

Let’s take a look how to these two robo advisor compare to one another.

General Comparison and Overview 🔍

Moreover, many clients in digital wealth management are also happy to transition from the expensive managed account programs into lower-cost automated alternatives.

To understand what these alternatives are offering, this comparison is therefore quite pertinent in today’s investment climate, as “Robo Advisors (RAs) are perhaps the most important disruptive trend in wealth and asset management today,” according a recent study in the Journal of Asset Management.

Betterment and Wealthfront represent the battle of the forces disrupting the old order that comprised of investment tools previously available only to the wealthy, which required a hands-on approach with exclusively human advisors.

After more than 14 months using each platform, we’ve gathered data, thoughts, and general feelings about each platform to help you decide where to best invest your money.

What is Betterment? 🤔

Founded in 2008, many consider Betterment as the company that jump-started the robo-advisor revolution. Much like any successful pioneer, its innovation and insurgent methods have since gone mainstream.

Betterment can allow you to get started with no minimum deposit, but even that is one of the least interesting things about it.

For the diffident investor, Betterment helps to overcome your indecision by investing 100% of your dollars automatically. Therefore, you never have a cash balance in your account because everything there is invested immediately based on your risk profile.

Its area of strategic expertise involves building diversified portfolios of low-cost exchange-traded funds (ETFs) which match the risk profile of the individual client. It is tailored to both serve the new investor but also quite useful for the grizzled veteran due to its impactful, eclectic mix of features.

The commendable thing about Betterment is that it has refused to remain a dinosaur but has continued to reinvent itself and in the process moved from being just a trailblazer to become a pacesetter.

For instance, in the fast-changing world of robo-advising, it allows you to change your risk profile or investment categories on the fly.

One of its competitive advantages is its ability to allow clients to synchronize all of their financial accounts to get a holistic picture of their assets without even investing.

What is Wealthfront? 💭

Although you can certainly manage your own money for less (say with another robo-advisor such as Betterment for instance), Wealthfront, nevertheless, offers an investor many services that help them grow their money in less time.

Although Wealthfront came onto the scene at approximately the same time as Betterment, it didn’t morph into its present iteration until 2011. To its credit, however, it has been able to substantially narrow Betterment’s three-year head-start, for example, by providing one of the strongest tax-optimization services available from an online advisor.

Wealthfront has a one-two punch combination that it has deployed deftly to keep investors happy and competitors at bay. The first is its free financial planning tool, which we’ll look into in the next section.

The other is stock-level tax-loss harvesting, which resembles a regular tax-loss harvesting strategy (which we shall also look into later). However, rather than invest in only broad market ETFs, Wealthfront’s algorithms buy individual stocks in an index (such as S&P 500 stocks) to take advantage of tax-loss selling.

Goal Setting and Planning 📅

Just as in life, goal setting is cardinal for financial investing. In like vein, the best robo-advisors should provide an adequate mechanism for not just setting goals, but also monitoring the extent to which you are adhering or deviating from them.

We have seen this shift towards goal-based investing grow stronger in recent years, which is especially ideal for the type of algorithmic specificity that likes to deal with.

The tools available to help clients choose their financial goals and assess whether those goals are reachable are fundamental for clients. Apart from helping you choose your financial goals, the best goal planning tools feature in-built reminders to get you back on track in case you slide off the progress of your plans.

Among the other services provided by these tools such as college cost estimates, retirement spending budgets, and more.

So how these two stacks up on goal setting? Well let me show the ways

Betterment’s Goal Oriented Approach 🥅

Goal-based investing is highly prized by financial advisors, both human and artificially. The folks – or is it the algorithms? – at Betterment also make sure that investors, the majority of whom equally value this feature, get value for their money regarding goal setting.

According to Dan Egan, Betterment’s Managing Director of Behavioral Finance & Investing, the purpose of goal setting is to “help you set a personalized financial plan with investments that are aligned to help you fulfill that plan over the long-term.”

Egan further states that in light of that objective, Betterment is “working to make setting and attaining your financial goals a natural and straightforward experience.”

Aesthetics and good visuals are important in a user-interface, especially for new users still getting themselves familiarized with investing and all that it entails such as goal setting. Betterment’s goal-setting tool fits this bill.

It displays a client’s asset allocation in a concentric ring with visual cues like presenting equities in colors of green while the fixed income is colored in shades of blue. Falling behind on any of your goals?

Not to worry, because Betterment’s goal monitoring tool is there to remind you, and encourage you to set more aside. These prompts can be particularly useful for younger investors who don’t view retirement or buying a house with the same urgency and therefore hold it as a less financial priority.

Planning and goal setting is not only easy to set up, Betterment also makes it easy to track your progress, easy to add a new goal at any time, and monitor each goal separately.

In addition, plenty of planning tools and advice are offered along the way for your benefit.

Retirement Planning 🗓️

Betterment nudges you to link external accounts, like your bank, mortgage, and brokerage holdings, to your Betterment investment account in order to provide both a complete picture of your assets (and liabilities). The objective is to make transfers from these into your investment account easier.

Different investment strategies may fit better with goals. Therefore, long-term goals such as retirement or paying for college can have a higher risk priority than a shorter-term goal, for example, funding a down payment on a house.

Wealthfront’s Impressive Dashboard 🤖

Goal setting and tracking are Wealthfront’s bread and butter. In fact, if we had our way, we would want this Wealthfront’s feature to be the prototypical gold standard among robo-advisors.

Once a customer sets up a Wealthfront account, they automatically gain access to Path, which is a financial planning tool that comes freely integrated with their account data. Path uses third-party data to assist customers to get a better grip on their financial situation, assisting them in making projects especially as it relates to retirement planning scenarios.

Wealthfront’s dashboard is configured to show an investor a snapshot of their assets and liabilities, thereby providing them with a quick visual report on the likelihood of attaining their goals.

The company prides itself on its ability to provide the guidance necessary for their clients to optimize their finances. Wealthfront keeps clients on track with their long-term goals such as retirement, helping them answer questions on whether they were still on track for meeting their retirement goals.

The dashboard is like an accountability tool for making sure clients stay on track. If need be, it integrates with third-party tools to facilitate this. For instance, if a home purchase is in the offing, then Wealthfront connects the client with Redfin (a real estate brokerage) to help them estimate how much a house in a particular geographic location will cost.

Wealthfront’s goal-setting assistance is granular and in-depth, even for large goals. While incorporating cost estimates for numerous U.S.-based universities in their platform, projections for expenses are not just limited to tuition but include room and board as well.

Another way that Wealthfront’s planning tool shines is in the smart recommendations it provides to its clients. For instance, its financial planning algorithm is capable of discerning when pertinent accounts might be missing from your dashboard; say if you work for a public company, then Wealthfront will advise you to link it to your equity compensation account.

Because they incorporate third-party data, Wealthfront is incredibly useful for different kinds of planning. As a result, customers may eventually find themselves running scenarios that are far beyond their current investment needs.

Or perhaps a suggestion to link your spouse’s account also if you’re married.

Retirement Planning 📆

What makes Wealthfront’s retirement planning is so enticing because it makes a credible effort to provide a panoramic overview of your financial investing possibilities.

For example, it even considers social security projections during the planning. It begins by capturing all your financial information like 401(k)s, IRAs and any other investments you might have like bitcoin or a Coinbase wallet.

After doing that, Wealthfront is subsequently able to show you a picture of your current situation and your progress towards retirement. If you want, its Path planning tool can assist you in comparing your forecasted income in retirement against your present spending habits to enable you to see if you can maintain your current lifestyle during your winter years.

Wealthfront’s goal planning is so versatile that you can even use it to anticipate how long you can take a break from work to travel, while simultaneously making your other goals work.

Wealthfront has been championing a commitment to its Self-Driving Money vision. Self-Driving Money goals are to assist Wealthfront’s clients to build an emergency fund, pay their bills, and steadfastly contribute to their own investment portfolio.

To pursue this vision, Wealthfront acquired Grove, a financial planning startup, in August last year. However, Self-Driving Money still remains in the pipeline and is yet to be launched.

Free Financial Planning 📈

One of the ways Wealthfront has cemented its position as one of the leading automated investment services is with its free automated Financial Planning. Wealthfront touts this tool as “a better way to experience financial planning.”

This advantage here obviously goes to Wealthfront since Betterment lacks an equivalent tool.

Since the tool is free, anyone can avail themselves of it to explore the range of possibilities that their income and investments provide. In addition, the tool also provides advice on how to optimize one’s finances.

Features and Accessibility 🧰

Betterment and Wealthfront are evenly matched, for the most part, in terms of features, and although there are some crucial areas of difference, the choices will usually come down to individual preference.

There are various areas of distinction in which customers have given overriding preference. As the statistics above from a KPMG study into the dynamics of robo-advising shows, the number one item on the list for customers is account aggregation, where 73% gave it a rating of either 4 or 5.

The second most attractive feature  is auto investing because people usually want things to run on autopilot, as most investors prefer the option of having their investment procedures to run seamlessly. However, this desired auto-investing feature would be greatly hampered if a robo-advisor didn’t also have the ability to move money between accounts.

Account aggregation is therefore also imperative for robo-investing. This is because it facilitates the automatic transfer of a specified dollar amount or percentage from a customer’s checking or savings into their investing account, to be allocated across all holdings.

Wealthfront 💎

Wealthfront has begun addressing this favored client trend toward account aggregation through with the launch of its Wealthfront Cash Account, which blurs the line between banking and online financial services.

Betterment 😎

But Betterment also has a competitive advantage in auto-investing because it never allows any cash balance in your account, automatically investing everything on your behalf according to the criteria that have already been preset.

With regard to Pricing and Fees, customers do not necessarily mind paying premium prices as long as they get value for their money.

“Customers’ willingness to pay and the monetary value they place on digital advice services depends heavily on the features, functionality, and capabilities of the offering,” according to a KPMG report on robo-advising.

These heavyweights are so dominant in the robo-advisor arena that it is difficult for any other service to challenge and undercut them on price.

Security is paramount with regards to online transactions, especially where money and finances are involved. Thankfully, both of these robo-advisors have robust security, implementing a combination of layered security practices to ensure that it would be difficult for an unauthorized user to gain access to your account.

They utilize both two-factor authentication and biometric login on their mobile apps.

Betterment vs. Wealthfront: Fees Compared

Both these robo-advisors have very competitive pricing, offering an annual fee of 0.25% that is quite affordable.

Betterment’s Pricing and Fees 💰

Betterment provides two types of investment accounts: there is a Digital plan, which requires an annual fee of 0.25% with a $0 minimum balance. Only digital consultations are included with this plan.

On the other hand, if you are an investor who desires some added human attention and investing advice, then Betterment comes with a second-tier known as Betterment Premium. This premium plan assesses a 0.40% annual fee and you’ll need to pack a hefty $100,000 minimum balance.

Betterment Premium’s team of financial advisors are available through phone and email communications.

Wealthfront’s Pricing and Fees 💸

Wealthfront charges 0.25% fees on your balance irrespective of the account type.

Which is Safer? Betterment or Wealthfront 🛡️

While Wealthfront carries a measure of Securities Investor Protection Corporation (SIPC), Betterment doesn’t carry it at all – at least not directly. Its trades are cleared via Apex Clearing, which incorporates risk management tools.

Betterment’s Security 👮

Moreover, Apex Clearing Corporation has added an extra insurance policy to augment its SIPC protection. This supplementary insurance policy, popularly known as “excess SIPC,” becomes accessible to customers in the event that SIPC limits are reached.

However, just like SIPC protection, this added insurance does not cover losses in the market value of securities.

But frankly, most of these measures are out of an abundance of caution as Betterment’s clients are not placing risky trades (and neither is Betterment doing so on their behalf), and no margin lending is being provided.

All these factors make it highly unlikely for any need for additional SIPC coverage.

Nevertheless, if you are holding more than $250,000 in cash in your Betterment Cash Reserve account, or there is more than $500,000 in your account, then you should think about moving these into a firm that has additional insurance.

Wealthfront’s Security 🔒

With regard to security, I would say that it is an advantage to Wealthfront for several reasons. It is a part of the Securities Investor Protection Corporation (SIPC). This membership translates into a client’s account protected to the tune of $500,000.

While SIPC coverage isn’t an ironclad, guaranteed insurance, it nonetheless gives Wealthfront the advantage. However, it has no excess SIPC insurance.

Portfolios 👥

Building a diversified portfolio with minimal hassles and costs is one of the reasons the ordinary investor is attracted to automated investing. This is a much better proposition than speculating in individual stocks and trying to beat the market on your own – a perilous and often losing proposition.

To create the hands-off approach that most customers, especially the small investor desire towards building a diversified portfolio, these automated wealth managers routinely turn to Exchange-Traded Funds (ETFs). These ETFs comprise of pieces of many different stocks, which allows the investor to achieve more diversity without investing a lot of cash.

An investor’s portfolio consists of ETFs based on their investing experience, risk preference, financial goals, and time horizon.

Portfolios: Automatic Rebalancing 📊

Most investors have a general knowledge of what rebalancing entails but usually have a murky understanding of how it works.

Over time, investment portfolios can become lopsided. When this occurs, an investor typically has to rebalance them manually.

However, left to their own devices, most investors would be hard-pressed to rebalance their own portfolio on a regular basis either because of lack of time or for the simple reason that they don’t know how to do so.

Fortunately, since it is one of the most essential investments tactics vital for the successful operation of a portfolio, most robo-advisors, therefore, offer automatic rebalancing.

12 Portfolios: Tax-loss Harvesting 👤

No one likes the idea of losing money on investments; but if you keep on investing, at a certain point in time, losing money becomes inevitable to avoid. To mitigate those losses and blunt their impact on your investment portfolio, brokerage services introduced a concept known as tax-loss harvesting.

The concept simply means that there are times when you just have to cut your losses to prevent additional financial pain. Or perhaps it might just be to offload an underperforming asset in order to rebalance your portfolio.

In essence, tax-loss harvesting involves selling assets and securities that are currently worth less than what was originally paid for them. Tax-loss harvesting somehow goes together with rebalancing.

Both Betterment and Wealthfront have no minimum deposit for tax-loss harvesting.

In this section, we’ll be looking at the approaches Betterment and Wealthfront use these strategies to build portfolios for the customers.

Betterment’s Investing Philosophy 📚

Betterment centers on diversifying your investments by placing them in low-cost, exchange-traded funds (ETFs) that align with the risk profile you provide when creating your account.

It uses a Nobel Prize-winning theory referred to as Modern Portfolio Theory (MPT). The advantage of MPT is that it emphasizes the benefits of portfolio diversification.

Based on this, Betterment will recommend an asset allocation mix between stock and bond ETFs that corresponds to your age, tolerance for risk, and goals.

Using these MPT principles and investment themes, Betterment consequently offers a good portfolio mix consisting of five portfolio types:

1. Providing a standard portfolio consisting of globally diversified stocks and bonds in exchange-traded funds (ETFs) from about 12 asset classes for different levels of risk tolerance and goals.
2. A Flexible Portfolio which creates from the standard portfolio’s asset classes, weighted according to user preferences for clients who want some more control over their investment.
3. Socially responsible investing made up of holdings that score well on environmental and social impact.
4. Goldman Sachs Smart Beta Portfolio, both to compete with Charles Schwab and to outperform the market.

Automatic Rebalancing: Betterment 🤖

With an eye towards tax efficiency, Betterment automatically rebalances your portfolio mainly through the Sell/Buy Rebalancing, and Allocation Change Rebalancing.

Tax-loss Harvesting: Betterment 🏷️

Investors are excited about Betterment’s tax-loss harvesting ability to automatically trade securities in your portfolio to capture tax losses, thereby reducing the capital gains taxes you owe.

Nevertheless, although this is one of those features where Betterment shines, Wealthfront explains its methodology in more robust terms.

Wealthfront’s Approach to Investing 📕

Wealthfront aims to be an all-in-one financial solution for users, especially Millennials weaned on digital services providing comprehensive solutions in their domain of influence.

Wealthfront’s focus is on three of its fully automated services, namely, investment management, lending, and the aforementioned free financial planning tool.

These pieces of Wealthfront’s offering — which it touts as Invest, Save, and Borrow — are designed to help you accumulate wealth and open a line of credit without any fuss.

As a result, Wealthfront provides its Portfolio Line of Credit to accounts that have more than $25,000. This enables those clients to have access to a line of credit at 4.75% to 6% interest, allowing them to borrow up to 30% of their accounts.

This is provided without any credit check or credit score impact.

Automatic Rebalancing: Wealthfront 💵

Wealthfront will monitor and rebalance your portfolio every day, if that is necessary, but usually on an as-needed basis.

Tax-loss Harvesting: Wealthfront 💳

Wealthfront’s stock-level tax-loss harvesting gives it a significant advantage over Betterment when it comes to tax-loss harvesting. One of the reasons is the more granular control provided by stock-level tax-loss harvesting, which offers increased tax-loss harvesting savings compared to those provided by Betterment’s ETF-level tax-loss harvesting management.

Unfortunately, this “Indexing 2.0” tax-efficiency approach is largely available only to people with a lot of money to invest, because an investor can only gain access to stock-level tax-loss harvesting when their taxable investment balance reaches $100,000.

In addition, Wealthfront has taken the effort to explain its methodology in stark terms for anyone on their website.

Final Verdict: Which is Better? 🏁

The importance of robo-advisors in wealth management can no longer be overlooked, because of their substantial benefits. As stated in a recent paper in the Journal of Alternative Investments, “RAs can combine the judgement and computing resources of both human and machine, or bionic power, to provide alternative wealth management services to meet the diverse needs of private wealth clients.”

Wealthfront and Betterment are two evenly matched competitors, so in the comparison between them, the spoils of victory often come down to a game of inches.

In our opinion, the biggest deciding factor separating these two in the battle of automated investing platforms ironically turns out to be a human one: if you want to work with a human advisor, you’ll only find that option at Betterment, although for a higher account fee.

If you only want digital advice, then Wealthfront’s offering may be more robust. Also, Wealthfront provides more additional account types, but with a $500 difference in what it takes to start an account.

From the fees and the general prize structure, Wealthfront is not geared towards less affluent investors as its counterpart Betterment.

Wealthfront comes with some constraints for the small investors since portfolios under $100,000 are not customizable beyond risk settings. Moreover, Wealthfront investor accounts may contain more expensive mutual funds.

In conclusion, they are both great robo-investing services, but Betterment has a slight edge over Wealthfront.