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In the world of Robo Advising, two of the biggest names today are Betterment and Wealthfront. I have been asked my thoughts on them numerous times. Admittedly, since I’ve never used either service, I didn’t have much of an opinion.
In order for me to better advise people, I decided to educate myself on these services. At $500 a piece, I signed up for each service to determine the positive and negative aspects of each one. I figure that since I have some skin the game, I can provide legitimate feedback.
Both Betterment and Wealthfront were founded in 2008. Both have similar investment philosophies– essentially that people do not always receive the best financial advice unless they are in the top 1% of the country and also that that people are far from rational when it comes to managing their money. They both advertise unique services for an underserved community.
Currently, Wealthfront is based in Redwood City, California. At the end of August, they reported that they have $7.5 billion under management, with over 180,000 accounts, or an average account balance of $41,000.
Betterment, which is based in New York, New York, recently reported at the beginning of September that they have $10 billion under management, with over 350,000 accounts, or an average account balance of $28,000.
Betterment and Wealthfront have the ability to manage your:
- Traditional IRA
- Roth IRA
- Rollover IRA
- SEP IRA
- Individual brokerage account
- Joint brokerage account
- Trust investment account
Wealthfront also offers additional accounts to include
- 529 College Savings plan
- Company stock selling plan
How They Invest Your Money
Betterment and Wealthfront both employ the Modern Portfolio Theory, which is an investment theory that risk-averse investors can create a portfolio to maximize their expected returns. This means that the proper asset allocation is more important than the selection of the individual securities.
Since both Betterment and Wealthfront utilize this methodology, they aim to maximize the investment returns based on the investor’s risk tolerance. In order to understand the investor’s risk tolerance, each company requires an investor to fill out an initial questionnaire. Then, a proprietary algorithm in each company lets the investor know their risk tolerance.
Let’s first start with Betterment so that you can see the questions that they ask.
Once you answer all of their questions, you decide if you will invest with the Digital plan, which charges 0.25%, or the Premium plan, which charges 0.40%, but has unlimited access to a team of CFP professionals. If you want that human touch, you can simply pay an additional 0.15%.
After you have selected your plan, you receive your asset allocation along with the holdings of the stocks. As you can see, Betterment employs a lot of Vanguard’s funds.
Both Betterment and Wealthfront pursue passive index fund strategies with low-cost fees as opposed to actively-managed funds. This is how they can charge such paltry fees compared to those of financial advisors, who often charge 1% or more.
Now, let’s take a look at Wealthfront’s questions.
As you can see, Wealthfront asks more questions, and the questions themselves seem more detailed. It is more reminiscent of a questionnaire that a financial planner might use. In terms of setting up the account, I appreciated Wealthfront’s thoroughness.
After you have answered all of the questions, Wealthfront provides you with your diversified investment plan.
As you can see though, they do not always line up. My asset allocations targets are slightly different than the current status of my portfolio. On top of that, I was disappointed to see that there was idle cash sitting in my portfolio, instead of the utilizing all my cash as seen in my Betterment portfolio.
In addition, I also enjoy how Betterment shows the breakdown of my portfolio all on one page. In contrast, Wealthfront requires a click on each asset class to read about each fund you have bought.
Both services provide passive investing, with a focus on low cost fees, that seek to match the market performance. Betterment currently has the ability to invest your money into 13 exchange traded funds (ETFs): 6 stock funds and 7 bond funds.
Betterment also launched a socially responsible investing portfolio, which invests in companies that seek to make positive changes while also making valuable contributions to the stakeholders, such as the local community, employees and shareholders.
Wealthfront currently invests in 18 ETFs: 2 US stock funds, 2 dividend stock funds, 2 foreign stock funds, 2 emerging market funds, 6 bond funds, 2 real estate funds, and 2 natural resource funds (which they use as their energy class).
If you invest in a taxable account through Betterment and Wealthfront, both offer tax-loss harvesting strategies. This means that they sell securities that have experienced a loss in order to offset gains and income on other securities. Both conduct these tax-loss harvesting strategies on a daily basis.
The Cost: Betterment
Betterment has a two-tier pricing strategy. The digital plan does not have a minimum account balance and has a flat annual fee of 0.25%. Their premium plan has a $100,000 minimum account balance and charges an annual fee of 0.40%. But again, that plan provides the human element of having unlimited access to a CFP to provide financial guidance along the way.
Another benefit of using Betterment is that the 0.25% is capped at $2 million dollars. If you invest more than $2 million dollars, they essentially manage that money for free.
The Cost: Wealthfront
Wealthfront, on the other hand, does not have a tiered pricing structure. They require a minimum deposit of $500, but you can invest the first $10,000 for free. After that, a 0.25% annual management fee is applied for investments.