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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.
Background Info
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.
Services Offered
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.
Betterment Questionnaire
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.
Wealthfront Questionnaire
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.
My Recommendation
I don’t think that you can go wrong with either one. Personally, I prefer Wealthfront’s free investing up to $10,000. However, paying 0.25% for investment advice from Betterment won’t break the bank.
I have our money split between Vanguard and Betterment. I personally love Betterment. I am sure Wealthfront is great too but when I signed up with Betterment the fees where cheaper.
I didn’t see where you mentioned Tax Loss Harvesting. This has been a wonderful feature that you basically can’t take advantage of without the use of a RoboAdvisor. It has saved me more than the .25% fee they charge.
I recommend Betterment to all my friends who aren’t into money.
My only fear is what will happen to them in the future. Will fees continue to rise? Will they sell off and become something else? I suppose I can always just move that money somewhere else if that ever does happen.
Grant @ Life Prep Couple recently posted…Benefits of 24 Hour Fasting
Good points, but tax loss harvesting can be done by anyone. It’s also most lucrative when done with individual stocks, so I imagine that Betterment / Wealthfront invest primarily in index funds they won’t have as many opportunities.
Paul recently posted…Personal Finance Basics (and Achieving Your Goal In Life)
Betterment/Wealthfront I think exclusively use index funds, so I’ll have to see what they tax harvest by the end of the year. Should be interesting.
Thanks for sharing Grant!!! I’ve played around with both know and I can see why you like Betterment. It’s definitely a nice user experience. But I definitely love the low cost of Wealthfront 🙂
Holy MOLY I love you. This is perfect post for my friend. He doesn’t know about investments but he wants to try it out. He’s also not sure which one. Not a lot of reviews out there share screenshots either. They’re just very superficial reviews but you put your own dinero$ in the game! Thank you Mr. MSM!!!
Lily @ The Frugal Gene recently posted…How Dumb Luck Made My Husband a Rich Man
I’m glad it could be so helpful Lily!!! Hopefully this helps your friend out 🙂
Thanks for this super detailed post. I still am of the camp that does it themselves, but to me these services might be good once we’re retired and more interested in generating cash flow to live on. As Grant mentioned, the tax loss harvesting sounds like an awesome feature for early retirees.
Laurie@ThreeYear recently posted…September Net Worth Update
Thanks for sharing Laurie!!! I have to admit that I always thought that I was going to invest myself, but the features are super nice if I ever wanted to completely let go 🙂
Wow this is such an interesting experiment. I have never seen any other PF bloggers do a real comparison with some skin in the game like this before!
As I was reading your post, I was waiting to see what your recommendation would be. Interesting to see it’s a tie 😉
Ms. Frugal Asian Finance recently posted…The Glorious Life Of A Personal Finance Blogger
Thanks for stopping by Ms. FAF!!! I’m glad you liked the format, it’s definitely will be a fun experiment 🙂
I’m certainly in the do it yourself camp, but can see how these services could benefit those who are not. The robo advisers have come of age during an 8 year bull market. I’m interested to see how they do when we hit the inevitable correction or bear market. Mr. Mustard, Very impressed with your detailed research and committing your hard earned cash to do it right. Tom
Tom @ Dividends Diversify recently posted…Bridge To Engine Room: We Need More Power!
Thanks for stopping by Tom!!! I’m glad you enjoyed the format and like you I’d be very curious to see how the robo-advisor do during a down market. It would definitely be interesting to see.
Thanks for this great information. I almost opened an intelligent portfolio with schwab, but decided to pass. I am afraid to see what my taxes would look like with a robot performing the tax-loss-harvesting.
Dave recently posted…Blogger Recognition Award
Thanks for sharing Dave!!! I have to admit I was a bit nervous as well but hopefully it turns out okay. At least it’s a fun experiment, but a little expensive 🙂
For me it’s a tie, too! Both are extremely unattractive. No person in the FIRE community should consider them.
1: The fees are too high. 0.25% doesn’t sound like much. But if you are targeting a 3.5% safe withdrawal rate then 0.25% fees reduce that to 3.25%. That’s a 7% reduction in withdrawals. You can easily do the tax loss harvesting yourself and save that fee.
2: It’s impossible to coordinate the tax loss harvesting in your betterment/wealthfront portfolio with the rest of your portfolio. The IRS might disallow your tax losses if you had transactions in similar funds 30 days before/after the Robos harvested losses. A tax audit nightmare!
EarlyRetirementNow recently posted…Our Net Worth as of 9/30/2017
Hhahahah….great comment ERN!!! There are definitely some downsides with robo-advisors but much better than paying 1% for someone that does something comparatively 🙂
Thanks for a real life review. Although I don’t use either one, it looks like they both offer good benefits to the users. It will be interesting to see the outcome of each in a year, 2 years, 5 years, etc.
FIbythecommonguy recently posted…September 2017: Net Worth Update #6
I’m really looking forward to how they perform in a bear market. Should be super interesting to see their returns 🙂
I believe betterment is for those who don’t really understand investing or don’t have the time to do so.
Having a robot manage your money effectively without you having to lift a finger is a dream for some people.
Betterment is good for people who want to get their feet wet in investing.
Thanks for sharing Cory!!! I know a lot of people that have said they have no interest in learning and so this works perfectly for them. Clearly with the amount of assets under management it has a market 🙂
Thanks for the thorough review. I like the personalization provided by both companies. I have a Wealthfront account only because I heard of them first through another PF bloggers review. Another big plus for me too was the fact they’ll manage up to 10k for free.
SMM recently posted…Be Your Own Auditor
I definitely like the first 10k free aspect. I’m sure they will definitely get people in the door where they can charge them hopefully as they grow their accounts 🙂
I have a significant amount invested with Betterment. At the time I made my initial investment, Betterment had two factors in its favor: 1) 0.15% incremental fee at the level I was invested and 2) fractional shares (the lack of which is why Wealthfront keeps some of your investment in cash). Subsequently 0.15% has been raised to 0.25%. I considered leaving Betterment at that time but decided to stand pat for now. Compared to other roboadvisors (not just Wealthfront), Betterment was competitive. Betterment is good for dollar cost averaging. If you went with a brokerage account, you would pay commission on each deposit. Betterment is more like a mutual fund in that every two weeks, I deposit a fixed amount and it’s all bundled into my portfolio at 0.25%.
“Betterment is more like a mutual fund in that every two weeks, I deposit a fixed amount and it’s all bundled into my portfolio at 0.25%”
I do my own investments but I teach Personal Finance to my high school students and I was thinking Wealthfront might be a good option for some of them. I was wondering what you mean by this statement? My understanding was that you just put money in either and it will automatically invest it in your allocations.
Most mutual funds sell fractional shares. If you invest $100 in a mutual fund (or Betterment), $100 gets invested in the fund(s). Wealthfront truncates to the integer share. If the share price is $97/share and you invest $100, you get 1 share plus $3 invested in a cash account. With Betterment you get 1.0309 shares.
Thanks, Dan!
My students will definitely be under the $10,000 limit and I imagine that the 0.25% additional fee for Betterment would outweigh the reduction of lazy money in cash.
Thanks for sharing Dan!!! I didn’t see where Wealthfront explained that so that’s great info. Thanks as always for the great info!!!
Thanks for providing a detailed comparison between the two robo advising investment companies. I was debating between these two companies of where I should invest in. But with their tax harvesting and free management for up to 10K I ended putting my money on wealthfront last year. I like them so far, I did not invest a lot of money into their account but they are providing great advice.
Kris recently posted…Expense Chronicles – September 2017
Thanks for sharing Kris!!! Wealthfront definitely seems popular with people looking for the free management to start out. It’s definitely a nice way to dip your toes in the water if you’re unsure.
I have a very small amount of money in Wise Banyan because I was curious how the whole robo-advisor thing went and like the idea of 0% management fees.
I don’t have a horse in the fight between Betterment and Wealthfront, but, would probably go with Wealthfront because the first $10,000 is free. However, I personally like Betterment’s site more as it seems more user-friendly just trying to navigate the homepage.
Josh recently posted…Would You Support a Debt Jubilee?
Thanks for sharing Josh!!! I figured since Betterment and Wealthfront were the big players in the space that I’d do a comparison between them but I’ll also take a look at Wise Banyan 🙂
So now that you have experimented will you move more money to one service or another?
Jason recently posted…A Strategy for Debt Fatigue