Updated Sept. 13, 2018: Wanna hear a fun statistic? According to a 2015 survey by Capital One ShareBuilder, 93% of people 35 and under are leery of the stock market because they lack trust or knowledge about the market itself. Only 33% of these so-called millennials own stock, compared to the national average of 43%. We’re also about to hit one of the biggest generational wealth transfers ever, leaving this generation with a lot of money (something like $30 trillion over the next 30 years).
First-time investors, which describes most millennials, need to develop the confidence to put their money to work early. Betterment and Wealthfront, two smart new investing services, are great options.
Betterment and Wealthfront both use technology to provide lower fees than traditional investment accounts (we’ll describe why that’s important later), more tax efficiency, and come with new features that push you to accomplish your financial goals.
But which one is the right choice for you? In this review, we dig deep into Betterment and Wealthfront's offerings, their fees, returns, and portfolio performance, as well as the features that make them unique. By the end of it, we’ll tell you which one is right for you.
Betterment vs. Wealthfront: the breakdown
|Accounts offered||Traditional and Roth IRAs, SEP IRAs, rollover IRAs, individual and joint non-retirement accounts, trusts||Traditional and Roth IRAs, SEP IRAs, rollover IRAs, individual and joint non-retirement accounts, trusts, and 529 college savings plans|
Betterment Digital: 0.25%/year, no minimum balance
Betterment Premium: 0.40%/year, $100,000 minimum balance
|First $10,000 managed for free, 0.25%/year after that|
Goal driven investing
529 college savings plans
Tax loss direct indexing and advanced indexing
Line of credit
Betterment v.s. Wealthfront: brothers from other mothers
Here’s the real deal on Betterment and Wealthfront: they’re similar in that they’re both built on Modern Portfolio Theory, which is another way of saying they’ll ultra-diversify your investments. They also both specialize in offering lower fees than traditional brokers (more on the specifics later), and Warren Buffett himself has said that thanks to the way compound interest works, reducing fees on your investments is one of best ways to maximize your returns over time.
They both offer similar types of accounts
Traditional and Roth IRAs, SEP IRAs, rollover IRAs – basically, if you need an individual retirement account, you’re set at either Betterment or Wealthfront. They also both offer individual and joint non-retirement accounts (i.e., taxable portfolios) and trusts.
Wealthfront does offer one unique type of account – 529 college savings plans – that we’ll get into later.
They both make portfolios out of ETFs
Exchange-traded funds, or ETFs, are groups of stocks, commodities, or bonds that trade at approximately the net value of the assets that make them up. For example, both Betterment and Wealthfront allow you to buy shares of an ETF called "Vanguard US Total Stock Market." As you probably guessed from the name of the ETF, this ETF is "designed to provide investors with exposure to the entire U.S. equity market."
Instead of buying a share of every stock on the stock market, you can just buy shares of this ETF. If the overall stock market grows, you’ll see gains on your ETF. If the overall stock market shrinks, you’ll see losses. If one company suddenly implodes – Twitter, let’s say – it may still affect your portfolio, but not as much as it would if you actually owned Twitter stock outside of the ETF.
In general, this is a smarter way to invest. They offer broad diversification at a low cost and are more tax efficient than other investments. Building portfolios out of ETFs is primarily how Betterment and Wealthfront can offer you such low fees.
They both offer tax loss harvesting
Tax loss harvesting is an advanced investment strategy that Wealthfront and Betterment have both brought to consumers at no extra cost. Tax loss harvesting, at its simplest level, is the practice of selling an asset that has realized a loss and reinvesting that money back into the market. You can then use that realized loss to offset taxes the IRS will charge you on realized gains.
Tax loss harvesting is a strategy that will save you money and help you realize more growth in your portfolio. Tax loss harvesting used to be a thing that investors would do manually once a year, but using investment algorithms, Betterment and Wealthfront can do it daily. Betterment estimates that you’ll see a 0.77% increase in returns by using tax loss harvesting. That may be chump change when you first start out, but as your balance grows, so will the gains realized by tax loss harvesting.
Because traditional advisors have to perform tax loss harvesting manually, it’s usually reserved for accounts with high balances. Betterment and Wealthfront offer it to all of their customers.
Note that tax loss harvesting doesn’t affect accounts under $500.
They both automatically rebalance your portfolio
When you make an account at either Betterment or Wealthfront, they recommend an allocation for you. For example, if you’re a young investor with a long time horizon before retirement, your investment account may be set at 90% stocks (i.e., pretty risky). As Betterment and Wealthfront automatically buy and sell ETFs in order to help you realize a gain, your account may naturally shift away from your target. Both Betterment and Wealthfront’s investment algorithms will realize this and rebalance your portfolio when appropriate.
They’re both inherently risky
Just in case you missed the 2008 financial meltdown for whatever reason, you should know that investments are inherently risky. Neither Betterment nor Wealthfront can protect you from a catastrophic market event that destroys the world economy. Unlike a bank account, neither are FDIC-insured.
This message isn’t designed to scare people off from investing. In fact, depending on how young you are, a market meltdown is a great opportunity to buy as many stocks as possible at a low, low price. You just need to be aware that Betterment and Wealthfront are not the place for your emergency fund.
Betterment vs. Wealthfront: the fees
Let’s start with Wealthfront, because they’re pretty simple: Your first $10,000 are managed for free. After that, your fee is 0.25% per year. Note that the first $10,000 are always managed for free – if you have $25,000 in your account, you’ll only be charged 0.25% on $15,000 of your balance.
Betterment's fees are based on the plan level you choose:
- Betterment Digital: 0.25%/year, no minimum balance
- Betterment Premium: 0.40%/year, $100,000 minimum balance
Fees are waived for account balances over $2,000,000, and the higher tiers give investors access to advice from (human) experts. In July 2017, Betterment launched a new offer for people who open an account with at least $10,000: Depending on the amount of money deposited within the first 45 days of opening the account, management fees will be waived for up to a year.
In both cases, their fees are really low compared to traditional financial advisors, who can charge as much as 1.12% for managing $100,000.
You should also note that the ETFs that make up the portfolios at both Betterment and Wealthfront charge their own fees on top of the management fees we discussed above. According to Better Finance, the difference in ETF fees between Betterment and Wealthfront are largely negligible and do not affect our advice below.
Who wins on fees?
When it comes to fees, Wealthfront wins in the short term. With the first $10,000 free and the highest fees after that matching Betterment's lowest (0.25%) is the most affordable option for any investor looking strictly at price.
But are Betterment's fees ever worth the higher price? They are if you still want a little human touch to go with your robo-advisor. The higher fees aren't just for show, and investors get varying access to the company's team of CFPs and licensed financial experts.
Betterment vs. Wealthfront: returns and performance
Returns are impossible to predict. But because both Betterment and Wealthfront use ETFs, you can basically track their returns by tracking the overall market. If the market is going up, it’s likely your returns will go up. Is the market down? Your returns will be down, too.
Over the course of the next forty years or so (or however long you have until you retire), you’re probably going to realize an overall gain, even if there are a few financial meltdowns on the way there.
However, features of Betterment and Wealthfront and small differences in their portfolios may help you realize different returns over time.
For example, Wealthfront has more exposure to alternative asset classes, like real estate and natural resources, than Betterment does. These are risky asset classes, but great for diversification and rebalancing. Additionally, above $100,000, Wealthfront allows you to take advantage of its Direct Indexing feature (which we’ll explain in further detail below). This could lead to more tax loss harvesting opportunity.
Betterment, however, has its own trick up its sleeve: it buys fractional shares of ETFs, which means that you’ll have practically no cash in your account. Instead, almost all of your money will be working for you in the market. This could lead to higher gains over time.
Who wins on returns?
Ultimately, this one is a toss-up – neither company has one stand-out feature or asset class that is going to blow the other one away. Depending on the mood of the market, you could end up with a higher return at either Betterment or Wealthfront. The most important thing to do is to stick to a plan over the long run, which is exactly what both services encourage customers to do.
Betterment v.s. Wealthfront: unique features
Of course, just because Betterment and Wealthfront are based on similar methodologies doesn’t mean that they’re exactly the same. Both Betterment and Wealthfront have unique features that could help you decide which one to choose. In this section, we’re going to highlight two major unique features from both Betterment and Wealthfront to give you an idea of how they’re different.
Betterment's unique features
Goal driven investing The differences between Betterment and Wealthfront’s user interface (UI) can be subtle, but we believe that Betterment’s UI is ideal for putting investors in the right mindset about their financial goals. Both Betterment and Wealthfront allow you to open multiple accounts with different target allocations, but Betterment doesn’t call them accounts. Instead, they’re "plans" that have different goals. You name your plans things like "Build Wealth," "Retirement," and "Safety Net."
This subtle re-framing is based on a methodology called "goal driven investing," which aims to help investors stay focused and achieve their financial goals. You can read more about how Betterment thinks about goal driven investing on their blog. In short: Matching appropriate risk to specific goals and time horizons prevents investors from being forced to deviate from their plans at a bad time.
You can also see this methodology at work in Betterment’s RetireGuide tool, which connects to your other accounts, like an employer-provided 401(k), and gives you a full picture of your retirement goal.
Smart Deposit Betterment’s Smart Deposit is a little complicated, but it’s worth digging into.
When you set up a Betterment account, you’ll usually be asked to set up what’s called an "auto deposit." This is just a set amount of money that you automatically put into Betterment every month.
Smart Deposit, on the other hand, monitors your bank account and intelligently skims extra money off the top to put into Betterment. Let’s look at an example: Doug needs a minimum of $5,000 in his bank account every month in order to make his usual expenses. He sets up a Smart Deposit rule in Betterment, telling Betterment to intelligently take any money above his $5,000 minimum and deposit it into his vacation goal.
You can also tell Smart Deposit what the maximum you want taken out of your bank account is – Doug could, for example, set a maximum Smart Deposit of $200 per week.
Smart Deposit is a, well, smart way to take extra money and make sure it’s being invested. While keeping some cash is good – you wouldn’t want all of your money to be exposed to the stock market – Smart Deposit can help make sure that your assets are well-balanced between cash and investments. Just don’t be dumb about it: make sure you keep cash aside for an emergency fund and any major payments coming up, like a downpayment for a car.
Human touch Robo-advisors are great, but some investors may benefit from a human advisor -- especially if the fees still aren't as high as a traditionally managed account. Betterment customers can get expert advice from real life humans in both tiers - that means starting at just .25%/year.
Wealthfront's unique features
529 college savings plans We love 529 college savings plans here at PolicyGenius. Like, it’s almost obnoxious how much we love them. If you have a child that you want to go to college – or you’re a grandparent or aunt/uncle or godparent – a 529 college savings is, hands down, the best way to help that child pay for college when they grow up.
Many 529 plans are similar to 401(k)s or individual retirement accounts: They are investment accounts with tax breaks if you use the money on educational expenses. You can read more about the nuts and bolts of 529 plans here, but that’s the simplest definition.
The problem with most 529 plans is that they have relatively low balances and relatively high fees. It’s the perfect solution for an investment platform using investment algorithms – not only can they reduce the cost of the plan, but they can more effectively manage a smaller balance.
An extra perk is that Wealthfront’s Path service has recently added a college planning component, letting you see exactly how much a given school will cost, estimate financial aid, and see how far your savings, 529 or otherwise, will take you toward your goal.
If you’re looking for an automated investing solution that will help you save for retirement and your kid’s college education, Wealthfront is the only option out there.
Important note: depending on what state you live in, you may get tax breaks for choosing a 529 plan administered in your state. Make sure you do your research for the specifics in your state. For reference, Wealthfront’s plan is administered in Nevada.
Tax optimized direct indexing Want to add up to 2% to your returns? Wealthfront’s tax optimized direct indexing feature claims to do just that. Rather than relying entirely on ETFs, tax-optimized direct indexing directly purchases up to 1,001 individual securities on your behalf. This presents more opportunity for Wealthfront’s advanced investment algorithms to perform tax loss harvesting and further improve your investment performance. This feature is completely free, but it’s only available on accounts with a balance over $100,000. You can get even bigger tax savings by pairing direct indexing with Advanced Indexing, available for accounts over $500,000.
Portfolio line of credit A line of credit can provide Wealthfront investors access to fast money, up to 30% of their account value. There are no fees, and current interest rates are a low 3.25-4.5%.
Which one should I choose?
But that’s not what you came to this section to read!
You should choose Wealthfront if…
If you’re a new parent who wants to get as aggressive as possible with your tax benefits, you should choose Wealthfront.
If you have over $100,000 to invest (or will soon), Wealthfront’s direct and advanced indexing may help you build a higher-performance portfolio than something you’d get from Betterment.
And if you’re a new parent, Wealthfront is the obvious choice: They’re the only robo-advisor in the game tackling 529 college savings plans, which are the best way, hands down, to save for college. Assuming you don’t get extra tax breaks for choosing a plan in your state, Wealthfront is a great choice for a 529 college savings plan.
You should choose Betterment if…
If you’re a first-time investor who wants a human touch or wants to set goals of saving for specific items or events, Betterment is the better option for you. Their UI is based entirely around goals. Whether you need to save for retirement, a vacation, or just want to build a little wealth on the side, Betterment can help you stay focused on your goals and gives you the tools to actually complete them. And although their fees are higher, you're getting an extra helping hand out of it.
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