Robo-advisors are modern investing solutions that have been growing in popularity since their inception in 2008. Two of the most popular robo-advisors were also two of the first: Betterment and Wealthfront.
Betterment and Wealthfront are also two of the best robo-advisors out there, offering low costs, tax-loss harvesting capabilities, and a wide variety of value-added services.
Below you’ll find a full review of both Betterment and Wealthfront, as well as a comparison of the two leading robo-advisors so that you can understand the differences between the two and pick the right one for your needs.
What is a Robo-Advisor?
In simple terms, a robo-advisor is an investment platform that manages your investment portfolio for you over the long-term.
In most cases, when getting started with a robo-advisor, you’ll first need to answer a series of basic questions. This includes providing both personal information as well as some information on your investment goals and strategy.
From there, the robo-advisor will build a portfolio with a specific asset allocation to fit your goals and manage it over time.
Why Us a Robo-Advisor?
Robo-advisors occupy a “sweet spot” between investing on your own and hiring a professional investment manager.
Investing on your own costs less than using a robo-advisor, but can also be time-consuming and complicated. For a small fee, a robo-advisor will do the heavy lifting for you.
A financial advisor or investment manager also does most of the work for you, like a robo-advisor, and even provides some added peace of mind for some investors who like to have someone to call when in need. However, they are often costly. Sometimes, even 3 or 4 times the cost of using a robo-advisor.
Robo-advisors are an excellent alternative for someone who wants a little extra hand-holding but on a budget.
Betterment and Wealthfront Overviews
Betterment is often recognized as the pioneer for robo-advisors. Founded in 2008, they have been around for over a decade, helping everyday investors.
Betterment has continued to perfect its services over that time, too, offering a lot of value for best-in-class fees.
|Management Fees:||0.25%- 0.40%|
|Accounts Offered:||Individual and Joint Brokerage Accounts, IRAs, Trusts, Bank Accounts|
|Tax Loss Harvesting:||Yes|
|Investment Assets Offered:||Primarily ETFs|
|Promotions:||Get up to 1 year managed free|
Wealthfront is very similar to Betterment in a lot of ways.
They also offer low fees, tax-loss harvesting, and a wide variety of low-cost exchange-traded funds (ETFs). However, there are a couple of key differences, mainly their account minimum and a slightly longer list of types of accounts offered.
|Accounts Offered:||Individual and Joint Brokerage Accounts, IRAs, Trusts, 529 Savings, Bank Accounts|
|Tax Loss Harvesting:||Yes|
|Investment Assets Offered:||Primarily ETFs|
|Promotions:||First, $5,000 managed free|
Betterment vs. Wealthfront Comparison
Costs and Fees
- Betterment: 0.25% – 0.40% annual fee
- Wealthfront: 0.25% annual fee
Betterment offers two tiers of service. Their digital plan comes with a 0.25% fee, and their premium plan has a higher 0.40% fee.
Betterment states on their website that the digital plan is suitable for most investors. With the digital plan, you get all of their core services, including personalized financial advice, automatic rebalancing, tax-saving strategies, and access to a customer service team. The premium plan is for someone who is looking for in-depth financial planning advice and access to CFPs.
Wealthfront charges one simple fee, 0.25%, for their services.
Keep in mind, on top of the management fee; you will have to pay the expense ratio on ETFs in your portfolio. This is the case for both robo-advisors and would add around 0.10% in fees annually, depending on which asset allocation is used and which ETFs go into your portfolio.
- Betterment: $0
- Wealthfront: $500
Betterment and Wealthfront both have a small minimum deposit, with Betterment being nothing and Wealthfront being just $500.
If you are trying to get started with less than $500, Betterment is the better place to start. Though, it probably wouldn’t hurt to build up to $500 (or even $1,000) before taking the time to move money into either of these robo-advisors.
Account Types Offered
- Betterment: Individual and Joint Brokerage Accounts, IRAs (Traditional IRA, Roth IRA, etc.), Trusts, Bank Accounts
- Wealthfront: Individual and Joint Brokerage Accounts, IRAs (Traditional IRA, Roth IRA, etc.), Trusts, 529 Savings, Bank Accounts
Betterment and Wealthfront both offer a similar list of account types. Still, Wealthfront has a slight advantage because, on top of providing standard brokerage accounts and most types of retirement accounts, they also offer 529 college savings accounts.
If you are looking to build college savings or an education expense fund, Wealthfront is the obvious choice.
However, both robo-advisors have you covered when it comes to general investing and investing for retirement. Plus, both have also added high yield savings accounts (sometimes called a “cash account”) in recent years. They don’t offer the best interest rates from what I can see, but it’s an excellent option to keep your money in one place and earn a better rate than the typical big bank savings account.
- Betterment: Variety of ETFs
- Wealthfront: Variety of ETFs
Betterment and Wealthfront both primarily offer portfolios of ETFs across various asset classes.
Betterment offers a variety of equity of bond ETFs to build diversified portfolios depending on your financial goals. For example, if you’re a recent college grad saving for retirement, they will likely weigh your investment portfolio heavily with equity ETFs. However, if you’re saving for a kitchen remodel in the next 3-5 years, your portfolio will likely be more heavily weighted with bond ETFs.
Wealthfront offers equity and bond ETFs, but also offers real estate and natural resource ETFs. This provides slightly more diversification for someone interested in investing in more than just stocks and bonds.
Betterment also offers the ability to buy fractional shares, which helps keep your funds invested and off the sidelines. Plus, Betterment offers the option to build socially responsible portfolios if you want to practice socially responsible investing with part or all of your portfolio.
Tax Loss Harvesting
- Betterment: Yes
- Wealthfront: Yes
Both robo-advisors offer tax-loss harvesting services. Tax-loss harvesting, in simple terms, involves selling assets at a loss to offset tax consequences. In the case of robo-advisors, they typically quickly buy a similar asset, so your portfolio stays close to whole the entire time.
To me, this is the biggest benefit of robo-advisors.
Sure, you could tax loss harvest on your own, but it’s complicated and time-consuming.
And Betterment claims it can provide a +0.77% better annual return (with this sample set of data). Of course, take this with a grain salt, they’re trying to sell you on it, but it does paint the picture of how tax-loss harvesting can be valuable for certain types of portfolios in taxable accounts.
On top of tax-loss harvesting, Betterment will also manage your entire portfolio of accounts to improve tax efficiency. For example, they’ll keep municipal bonds in a taxable account rather than your Roth IRA.
Wealthfront offers some additional tax perks too. With investment accounts over $100,000, they will tax loss harvest at the individual stock level (instead of at the ETF level). This, in theory, would do an even better job of lowering your tax bill.
How to Sign Up: Wealthfront vs. Betterment
Signing up for both Betterment and Wealthfront is a similar process.
In fact, getting started with all robo-advisors is typically pretty easy and can be done in three steps:
- Answer a Few Basic Questions
- Select a Plan and Goal
- Connect Your Bank and Get Started
The most time-consuming part is completing the questionnaire and providing enough information for the robo-advisor to do the work for you. This includes providing personal information, answering questions about your investment strategy and goals, and providing insight on your risk tolerance.
Which is Better: Betterment vs. Wealthfront
Betterment and Wealthfront are two of the best online robo-advisors out there. At the end of the day, they have a ton of similarities, including they’re fees, ETF selection, and tax-loss harvesting capabilities. You can’t go wrong with either one.
Although, for someone who wants to have a human advisor available for retirement planning, Betterment is the clear choice. They are also the only choice for someone starting to invest with a small sum of money (less than $500).
On the other hand, Wealthfront is better for someone who is saving for college or education expenses, or who doesn’t feel like they need financial advice from a real person.
Last, keep in mind these two companies are not your only option when it comes to investing! While they are great robo-advisors, there are other options (like M1 Finance), and furthermore, there are other brokerages you should be considering in your search as well (like Vanguard and Charles Schwab). Always do your due diligence before signing up with a robo-advisor or broker so that hopefully, you only ever have to do it once!