So you’ve decided that the best investment strategy for you is to create a broadly diversified investment portfolio with a long term horizon. Basically, you agree with the tenets of Modern Portfolio Theory. You also want the maximum convenience that comes with using a robo-advisor and you’ve read that two of the most popular ones are Betterment and Wealthfront.
The dilemma is, which robo-advisor is better? Actually, the right question to ask is, which robo-advisor would be better for you? In this article, we will compare the various features of the two robo-advisors and break down which type of investor would benefit most from each feature.
Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, trusts, non-profit, individual, joint, and 401(k).
Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, trusts, non-profit, individual, joint, and 529 College Savings Plan.
As you can see, both Wealthfront and Betterment offer similar types of accounts with two exceptions; Betterment offers a 401(k) account (via Betterment for Business) while Wealthfront doesn’t. On the other hand, Wealthfront offers a 529 College Savings Plan, while Betterment does not.
Verdict: No difference, unless you are a business owner, in which case go for Betterment, or you want to invest for a college education, in which case you should opt for Wealthfront.
Minimum Account Balances
Wealthfront has a $500 minimum account balance while Betterment does not have one.
Verdict: Betterment has the advantage however in practical terms, it is almost pointless to invest less than $500 for an investment portfolio anyway.
0.35% p.a. on amounts under $10,000 (with monthly deposit of $100, absent which fees are $3/month)
0.25% p.a. on amounts between $10,000 and $99,999.
0.15% on amounts of $100,000 and up.
First $10,000 free.
0.25% p.a. on amounts over $10,000.
Wealthfront’s referral program also gives $5,000 of free management per referral while Betterment’s
gives 30 days free management with every 3rd referral getting 1 year free.
Verdict: If you wish to invest amounts under $10,000, Wealthfront is the clear winner. For amounts between $10,000 and $99,999, they appear equal however since Wealthfront charges the 0.25% fee for amounts above $10,000; Wealthfront still comes out slightly ahead. If you wish to invest $100,000 and up however, then Betterment’s fee structure will clearly be more favorable for you. Also, if you have higher balances, then Betterment’s referral program, which is based on free management for a certain period on your entire portfolio instead of a dollar amount, will also likely be more beneficial.
Most robo-advisors use roughly the same list of ETFs (since they are the lowest cost) in their portfolios and Betterment and Wealthfront are no different. However, there are a couple of differences that we should highlight.
First, Wealthfront invests in real estate and commodities as part of its portfolios whereas Betterment does not. Betterment believes that its equity portfolio gives it sufficient real estate exposure and that commodities are short-term in nature and thus does not fit its long term investment horizon. Betterment also invests in US Investment Grade bonds, whereas Wealthfront does not, likely due to perceived low returns (taxable accounts only).
Verdict: This might ultimately boil down to your own individual view of the inclusion or exclusion of real estate, commodities, and US bonds in your portfolio. However, there is no question that Wealthfront’s investment portfolio is overall more diversified. Therefore, we have to give the advantage to Wealthfront in this one.
Automated Portfolio Rebalancing
Both robo-advisors’ algorithms will automatically rebalance your portfolio with each inflow and outflow plus whenever a portfolio drift threshold is breached. However, Betterment is able to invest in fractional shares in ETFs meaning that every cent can be precisely allocated and you won’t have any excess cash sitting around in your account. Wealthfront does not have this capability. Betterment also allows you to keep tabs on the level of portfolio drift and make deposits to reduce said drift. Further, Betterment’s Tax Impact Preview feature also allows you to see the potential tax impact of making a portfolio allocation change prior to performing the action.
Verdict: Betterment is the clear winner in this instance.
Both Wealthfront and Betterment offer free daily tax-loss harvesting for all taxable accounts. Other
than this basic feature, Wealthfront offers a Tax-Optimized Direct Indexing service for accounts of $100,000 and up while Betterment offers its Tax-Coordinated Portfolio that takes advantage of asset location. In order to use this feature you need to have a mix of both taxable and non-taxable accounts.
Wealthfront estimates that its Tax-Optimized Direct Indexing service can add as much as 1.77% to 2.03% to your annual returns (depending on level of direct indexing, which is based on account balances). On the other hand, Betterment estimates that is Tax-Coordinated Portfolio will provide an additional annualized benefit of 0.48%.
Verdict: If you have over $100,000 in your taxable accounts, then Wealthfront is the clear winner in this case. However, if your taxable account balances are under this threshold and you have a mix of both taxable and non-taxable accounts, then Betterment’s Tax-Coordinated Portfolio wins out.
While both Wealthfront and Betterment have retirement-specific accounts and goals, Betterment has made its retirement planning feature much more specific. RetireGuide allows you to monitor how on-track or off-track you are with your retirement goals and even gives you probability percentage of your portfolio being able to achieve said goals. Its comprehensive feature allows you to link your non-Betterment accounts to the tool as well for a complete analysis.
Verdict: Betterment clearly comes out ahead here.
Betterment has a SmartDeposit feature, which is just a simple auto-deposit feature. You just set the maximum amount in your checking account and Betterment will automatically transfer the difference between your checking account balance and that amount up to your set maximum deposit limit. A great option to force yourself to invest if you find financial discipline challenging. Wealthfront has no such feature.
On the other hand, Wealthfront does have a Single Stock Diversification service for selling stock options and transferring them into Wealthfront. However this is only for employees of very select publicly-listed companies.
Verdict: Betterment wins out for convenience but if you are an employee of one of the selected publicly listed companies with significant stock options, then Wealthfront will be of greater help.
As we stated in the beginning of this article, the real question to ask is: Which of the two robo-advisors is better for you? Well, that of course depends on who you are.
One of the main, if not the main consideration, when choosing a robo-advisor is fees. And as we explained above, Wealthfront is cheaper for amounts under $100,000 and Betterment for amounts above.
However, if we bring in tax efficiency in the mix, then if that $100,000 is in taxable accounts, Wealthfront’s Tax-Optimized Direct Indexing service will probably be able to generate more than enough in excess returns to make up for the 0.10% (0.25% – 0.15%) fee difference. Of course, if we are talking about non-taxable accounts, then Betterment will still be ahead.
To conclude, Wealthfront seems to be the best choice if you have mostly taxable accounts. However in the case of non-taxable accounts, then if you have over $100,000 in said accounts, Betterment comes out ahead.