Betterment vs Wealthfront – Which Robo-Advisor Is Best?

Betterment vs Wealthfront: One of my goals this year is to make better use of my time. Thankfully, I don’t spend much of it commuting to work but I do spend a good sixty to ninety minutes a day exercising. Normally, I pop in my headphones and listen to music while working out. But now I’ve changed to listening to podcasts instead.

One of my favorites is Guy Raz’s “How I Built This.” In October 2018, he interviewed Jon Stein who started a top robo-advisor company called Betterment.

During the interview, questions were asked about how they were different from his top competitor Wealthfront. It’s fascinating to hear how someone takes an idea and grows it into a multi-million (or billion) dollar company.

Let’s take a look at both companies and help you decide which one is best:

Betterment vs Wealthfront

What Are Robo Advisors?

Betterment.com defines robo-advisors as:

“A robo-advisor is an online financial advisor that uses technology to help manage people’s money and financial plans. While traditional advisors today certainly use digital tools to manage investments, robo-advisors typically aim to deliver financial advice direct to consumers for a low cost by delivering advice directly through technology. That means more Americans have cost-effective access to financial advice (real advice from a fiduciary) than ever before.”

In layman’s terms, these are online services that create automated portfolios based on the investor’s preferences.

Their popularity has skyrocketed recently and they are expected to have close to $500 billion in assets to manage by 2022.

Betterment vs Wealthfront – Overview

Betterment is based in New York and was founded by Jon Stein in 2008. They currently have roughly $14 billion of assets under management.

Wealthfront is an automated investment service firm based in California. It was founded in 2008 by Andy Rachleff and Dan Carroll. They have more than $13 billion of assets under management.

Betterment – How It Works

Here’s a video explaining how Betterment works from their website:

https://youtu.be/eIw8ze_o0AM

Here’s four steps explaining how Betterment can best help you:

1) They start off by finding out your goals.

What are you trying to accomplish? Are you just starting off and need to save for emergencies or are you focusing on investing for retirement? This also would be the first step a financial coach or advisor would ask about as well.

2) Portfolio creation. 

After they learn about what you’re trying to accomplish, now it’s time to create the portfolio that best fits your needs.

3) How much to invest?

Depending on your initial goals, different accounts should be funded with varying amounts. In order to make it simple, these investments can be automated for you.

4) Rebalancing via technology 

Betterment’s technology manages your money even after you initially begin investing with them. Once your investments begin producing dividends, they are automatically reinvested to keep cash from accumulating to give you the best rate of return.

Asset Allocation

After I answered a few questions and entered both a fictitious age (50) and annual income ($150,000), here are their recommendations:

Let’s continue our Betterment vs Wealthfront journey and switch gears to see how Wealthfront works…

Wealthfront – How It Works

Wealthfront works in a similar manner to Betterment. Recommendations are made after they learn your goals.

Next, you’re told:

• the amount needed to save
• which accounts to invest into
• future strategies to ensure success

One thing that Wealthfront does differently on the front end is focus on four main areas:

• Home ownership
• Early retirement
• Time off for travel
• College

I think this is a smart way to get people interested because most of us can relate to at least one of these categories at any point in our lives.

Wealthfront – Get Started

Wealthfront’s new client experience starts out asking:

• whether you want to start investing by opening an account
• or build a financial plan

Open Account

Build Plan

I went through the process of answering questions in order to assess my risk tolerance.

Here’s what they came up with:

What can I say, I’m a risky guy!

Wealthfront Asset Allocation

Based on the recommended plan above, here’s the breakdown regarding the asset allocation in a taxable account:

U.S. Stocks

Foreign Stocks

Emerging Markets

Dividend Stocks

Muni’s

Betterment vs Wealthfront – Comparison

Now that you’re familiar with both platforms, let’s compare the major differences so you can make the best educated choice for your investing.

Minimum Deposit

Betterment – no minimum deposit

Wealthfront – $500 minimum.

Wealthfront initially started with a $5,000 minimum deposit. Since then, they’ve lowered it to attract more investors.

Annual Fees

One of the main drawbacks investors have for hiring financial advisors is the cost. Especially those that charge an assets under management (AUM) fee. Typically this averages 1%.

In the Tony Robbins book, “Money: Master the Game” he discusses how important fees are regarding our retirement:

“But what the majority of Americans don’t realize is that an increase in 1% in fees will cost you 10 years in retirement income!”

The good news is that Betterment and Wealthfront do a great job of keeping costs low for investors.

Here’s a nice chart comparison of the two from Benzinga:

Tax Efficient Investing

Both platforms offer great features to help minimize taxes assuming you’re using a taxable account. They do this with “tax loss harvesting.”

Betterment defines tax loss harvesting as:

The practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.

In essence, both Betterment and Wealthfront perform tax loss harvesting or a re-balancing of your portfolio on a daily basis.

As a side note, my favorite way to help minimize taxes is by investing in index funds in taxable accounts. Not only are these the lowest fees but they provide a natural tax advantage.

Additionally, both platforms also use dividends to rebalance your portfolio. This means you’ll sell fewer positions which will result in fewer capital gains taxes as well.

Features

Here’s a table provided by The Simple Dollar illustrating the main features between the two:

At first glance, it appears that both companies provide many of the same benefits.

However, one area stood out to me with Betterment. As someone that thrives on goal setting, having the ability to set individual investment goals is a plus.

Customer Service – Betterment

Customer service is the main factor in who we do business with. From hotels to restaurants, if you want our business, customer service has to be top notch.

Here’s the rub… Once you’ve experienced great service from someone, it’s hard to not expect it from others.

Take fast food restaurants for example. We don’t eat at many but if we do, our first choice is Chick-fil-a.

Truett Cathy made customer service one of his top priorities when he started in the restaurant business back in 1946.

I’m an old fashioned guy. If I need to reach a company’s customer service department, I’d rather call than email. The good news with Betterment is that they offer support via three ways:

• Chat
• Email
• Phone

It’s nice to know that you can talk with a live person when you need to.

Customer Service – Wealthfront

The customer service with Wealthfront is a bit different than Betterment. When I tried accessing it online, I had to fill out a form. The only way you can reach them via phone is if you’re an existing client.

So…what if I have questions about “becoming” a new client? I guess I have to stick with emailing them and hope to get a response.

But I must say that one area Wealthfront prides themselves on is that their customers typically don’t have to contact them.

Their Unique Selling Proposition (USP- why you should do business with someone versus another) is to make it easy to manage your investments directly from your phone which makes having to call a live person to get things done unnecessary.

Remarkable at Wealthfront

Here’s a few areas that Wealthfront prides itself on:

PassivePlus

PassivePlus^® is Wealthfront’s suite of portfolio-enhancing features that deliver more value over buying and holding an index fund.

It includes the following features:

• Stock-level Tax-Loss Harvesting is designed to further reduce your tax bill by capturing losses on individual stocks within an index, not just the index itself. It activates when your account reaches $100k.
• Risk Parity aims to increase your risk-adjusted returns in a wide range of market environments through an enhanced asset allocation strategy. It activates when your account reaches $100K.
• Smart Beta is designed to increase your expected return by weighting the stocks in your portfolio more intelligently. It activates when your account reaches $500k.

College savings 

Wealthfront offers 529 plans sponsored by the state of Nevada. The plan has a contribution limit up to $370,000 per child and has all-in fees (investment expenses and management fees) of no more than 0.46%.

Path (Digital financial planning) –

Path is a tool that’s provided to Wealthfront clients for free. It’s a cool feature that helps to answer all of the “what ifs” life can throw your way regarding long-term planning.

Cash Account 

Whether you’re saving for a down payment on a home or funding an emergency fund, having cash is a must. Most savings accounts pay paltry interest rates but Wealthfront offers a savings account that pays 2.24% interest.

Remarkable at Betterment

In-app human advice 

Betterment did away with their “Plus” advice program which used to charge their customers. Now, they’re using a dedicated team of CFPs to answer advice-related questions over a dedicated chat app.

The base cost at Betterment includes in-app messaging with financial advisors, with messages answered within 24 hours.

Smart Deposit 

SmartDeposit takes any funds over a maximum balance (that you set) in your checking account, and invests them for you. No more extra cash laying around in your checking waiting to be spent. Instead the money is invested automatically via Betterment. The tool sends a notification before a Smart Deposit takes place and allows you to opt out.

Tax-Coordinated Portfolio 

Betterment claims it can increase your portfolio value 15% over thirty years using their tax-coordinated portfolio. They’re using asset location by placing your assets that will be taxed highly in your IRAs, which have big tax breaks. Then, it places your lower-taxed assets in your taxable accounts.

Smart Saver 

Betterment also offers an account to park cash. Their account invests in U.S. government bonds with an annual yield of 2.19%.

Two-Way Sweep 

The goal of Two-Way Sweep is to seamlessly move your extra cash from your linked checking account to Smart Saver—and back when you need it. Two-Way Sweep combines a daily recurrent cash analysis with an automated cash transfer between your checking and Smart Saver accounts.

If your checking account balance dips too low, it will transfer money back out of Smart Saver to replenish it. You can set the target balance for your checking account, and like Smart Deposit, Betterment notifies you before each sweep.

Betterment vs Wealthfront – Final Thoughts