Betterment vs. Wealthfront

Two of the biggest robo advisors are Betterment and WealthFront.  At first glance they may appear to be virtually identical.  Both create diversified portfolios with similar low cost ETFs.  Both rebalance your portfolio, reinvest your dividends, and offer tax loss harvesting.  Both have slick, easy to use websites.

But there are some significant differences between WealthFront and Betterment upon closer inspection.  A podcast listener named Dan touched on this in a recent email:

Congrats on your Buckeyes making it to the title game- should be a good one! Are you going to do a podcast on what made you choose Wealthfront for your taxable account (other than to keep multiple sponsors happy!)? I assume it’s for the Wealthfront 500 and tax-loss harvesting benefits it offers, but Betterment counters that this is only done on a portion of the account, and not worth the added cost. Is this the future of indexing or a gimmick? Still very interested in this topic (robo-advisors) which you brought to my attention.

Many thanks,
Dan

(Betterment was at one time a sponsor of the Dough Roller Money Podcast.  As of today, neither Betterment nor WealthFront are sponsors, but both offer affiliate programs that I participate in.)

The most important aspect of Dan’s email is of course his reference to Ohio State football.  The 42 to 20 win over a great team was one for the ages!

Back to robo advisors. Let’s address Dan’s question about Betterment vs. Wealthfront, starting with the basics.

Listent to the Podcast of this Article

1. Account Types

Wealthfront offers the following account types:

  • Taxable accounts (personal, joint, trust & corporate)
  • Traditional IRA accounts (including 401(k) rollovers)
  • Roth IRA accounts
  • SEP-IRA accounts (for small businesses)

Betterment options are more limited:

  • Taxable accounts (personal, joint, revocable trusts, irrevocable trusts)
  • Traditional IRA accounts (including 401(k) rollovers)
  • Roth IRA accounts
  • SEP IRA accounts
  • 401k

2. Cost

Which one is cheaper depends on your account balance.  In addition to the costs of the ETFs, each service charges a management fee.

Wealthfront: Charges a flat rate of .25% of assets under management, though the first $10,000 is free.

Betterment:

  • $3 per month if you open the account with less than $10,000 (unless you set up automatic deposit of at least $100 a month);
  • If you make automatic contributions of $100 per month, your fee will be .35% of the account balance;
  • With a balance of $10,000 or more, the fee is .25% of the account balance;
  • With a balance of $100,000 or more, the management fee drops to .15% of the account balance;

As you can see, Betterment uses a sliding scale in which the fee drops as your balance increases. As a rule, you’ll be better off with Wealthfront up to $100,000, since the first $10,000 is free. But beyond $100,000, the advantage favors Betterment.

3. Asset Allocation

Both use solid asset allocation plans. They each allocate your money into different exchange traded funds (ETFs). Personally, I think both platforms have reasonable asset allocation plans.

But there are also some differences:

  1. Betterment favors value funds – companies that are undervalued according to certain measures, like P/E ratio.
  2. Wealthfront has real estate investment trusts (REITs), Betterment does not.
  3. Wealthfront has commodities, Betterment does not.
  4. Wealthfront tilts toward dividend paying stocks – they have a high dividend yield ETF, while Betterment doesn’t.
  5. Wealthfront has no US government bonds – yields are low so they don’t see them as a good investment; Betterment does have US bonds.

On balance, I prefer Wealthfront, but it’s a close call. You may see if differently based on your own investment preferences.

4. Website

Both are easy to use and to understand. It’s also easy to change asset allocations. But I think Betterment is the better of the two.

5. Tax Loss Harvesting

Both offer it, but you have to have a certain account minimum for each.  With both Betterment and WealthFront there are no minimums for tax loss harvesting.

Tax loss harvesting doesn’t eliminate your tax liability, it defers it. That has value because the more money you can keep in your account, the more you can earn on that balance. For that reason, there’s no doubt that tax loss harvesting has value, and increases your return. It’s almost impossible, however, to quantify the value of tax loss harvesting.

Wealthfront does offer a unique tax loss harvesting feature called the Wealthfront 500.  For those with at least $500,000 in a taxable account, Weatlhfront will buy shares in all 500 companies in the S&P 500 rather than invest in an index ETF. By doing so, they can generate additional tax losses on a company by company basis.  They plan to roll out a similar feature for those with balances of at least $100,000.

6. Account Minimums

Wealthfront has a minimum of $500 (down from $5,000) to open an account. Betterment has none, but you will need to set up automatic monthly contributions of $100 in order to avoid the $3 per month fee. Even better, you should invest a minimum of $10,000 with Betterment to keep the fees capped at .25%.

I confess to having a personal bias toward Vanguard. I’ve been with them a long time. But both Betterment and Wealthfront are good options.

Trending Stories

Topics: InvestingPodcast

6 Responses to “Betterment vs. Wealthfront”

    • Rob Berger

      Chuck, I have looked at SigFig. As you’ve noted, you leave your money with (or move it to) TD Ameritrade. That’s very different than either Betterment or WealthFront. SigFig is really similar to FutureAdvisors. It seems to me to be another reasonable option.

  1. Jeremy G.

    Wealthfront just announced today that everyone with a taxable account, not just those with $100,000 or more, will receive their tax-loss harvesting benefits. People with $100,000 or more will now have access to the Wealthfront 100, which is a separate offering as well.

Leave a Reply