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:
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.
(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.)
So, let’s address Dan’s question about Betterment versus Wealthfront, starting with the basics.
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1. Account Types
Wealthfront offers the following account types:
- Taxable accounts (personal, joint, trust & corporate)
- Traditional IRA accounts
- Roth IRA accounts
- SEP-IRA accounts (for small businesses)
- IRA transfers
- 401(k) rollovers
- 529 college savings plan accounts
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
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: Betterment announced a new fee structure in 2017. Their fees now fall into two categories: Regular, Plus, and Premium.
The fees are as follows:
- Digital – 0.25% (no minimum required)
- Plus – 0.40%; minimum 100,000 and access to their CFP professionals. Also includes in-depth advice on non Betterment investments.
- Up to ONE YEAR managed free – Betterment is currently offering a limited time promo where if you deposit $5,000 you get 1 month managed for free. $25,000 gets you two months. $50,000 gets you 3 months. $100,000 deposited earns six free months. $250,000 earns 9 free months and finally, $500,000 deposited gets you their services for one year, free of charge.
With the limited time promo, Betterment turns out to be the current cheaper option (for year one). The more you deposit, the more you’ll save in fees even if you take advantage of the Plus platform. Wealthfront turns out to be the cheaper option in the long run once the bonus opportunity fades beyond year 1.
3. Asset Allocation
But there are also some differences:
- Betterment favors value funds – companies that are undervalued according to certain measures, like P/E ratio.
- Wealthfront has real estate investment trusts (REITs), Betterment does not.
- Wealthfront has commodities, Betterment does not.
- Wealthfront tilts toward dividend paying stocks – they have a high dividend yield ETF, while Betterment doesn’t.
- 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.
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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, Wealthfront 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 currently has no account minimum required, and you are not charged a fee for an account that has a $0 balance.
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.