This post was originally published on June 12, 2019
The battle continues — Betterment vs Wealthfront. Which is the best robo-advisor?
I asked myself this question back in 2015 before opening an investment account with each company. While I didn’t have the answer back then, I do now in 2019.
As someone who has invested with both robo-advisors for over a three year time period, I have all the data I need to compare Betterment vs Wealthfront. Read on below to learn about my experience with Wealthfront and Betterment including a full review of returns, performance, features, and fees.
Betterment vs Wealthfront
Betterment and Wealthfront are robo-advisors that were both founded in 2008—Betterment in New York City and Wealthfront in Silicon Valley. While these two online companies provide similar services, there are a few key differences worth pointing out. We’ll get into that below.
As of April 2019, Betterment has $16.4 billion in assets under management while Wealthfront has $11.4 billion. Although Betterment manages more money at this time, that does not necessarily make it a better robo-advisor.
In order to make a fair comparison between the two companies, we must review their features, performance, and fees.
1. Management Fees
Both Betterment and Wealthfront charge something called a management fee. This fee is essentially a payment to your advisor for managing your investments.
While both robo-advisors charge a 0.25% annual management fee for their standard plans, Betterment also offers a premium plan with a 0.40% annual fee and $100,000 minimum balance. In this Betterment and Wealthfront review, I will only focus on the standard plans.
Here is a table comparing management fees and minimums.
|Annual Management Fee||0.25%||0.25%|
Most people think that the only fee you pay is the management fee to your advisor; however, this is not the case. You see, every individual ETF in your investment portfolio has a management fee. These fees vary from one ETF to another, but in general are between a fraction of a percent and a couple percent.
In any case, your robo-advisor provides an investment prospectus for each ETF which defines these additional fees. As a result, you have access to these fee amounts; however, most people aren’t even aware of them in the first place.
Although you will have to pay these ETF fees no matter where you invest, I’m just trying to make you aware that the management fee is not the only fee that you will pay.
2. Investment Account Types
Both Wealthfront and Betterment offer multiple types of investment accounts. Depending on your needs, you can choose the appropriate account type for yourself.
Regardless of which investment account you choose, the investment strategy remains the same. In other words, your money will be invested into the same type of portfolio whether you choose an IRA or taxable account for example. While you can have multiple investment accounts, think of each one as a different container for your money.
|Individual Taxable Account||Yes||Yes|
|Joint Taxable Account||Yes||Yes|
|529 College Savings Plan||No||Yes|
While I personally have a Roth IRA and an individual taxable account with Wealthfront, I’m not in a position to give you advice as to which account type you should open.
I will quickly say, however, that I highly recommend opening a Roth IRA. With a Roth IRA, you contribute after-tax money today and allow your investments to earn tax-free returns while you can enjoy tax-free income in retirement.
One last point worth noting is that this is an investment account, not a savings account. Consequently, there is potential for you to lose money if the markets perform poorly.
With that being said, investing is a long-term game. Historically, the stock market has returned on average 10% every year. As long as you intend to let your investments grow over many years, you have the right mindset going into it.
Features including automatic rebalancing, automatic deposits, and automatic investing truly make investing with Betterment and Wealthfront passive.
Some of the biggest hurdles of investing are discipline and emotion. Automatic deposits, investments, and rebalancing eliminate the need to be a disciplined investor. At the same time, all the emotion of the daily ups and downs of the market go away when you have intelligent computer algorithms optimally investing your money.
In addition to this, tax-loss harvesting offsets taxes which will save you money in the long run. Without getting too detailed, tax-loss harvesting gives you tax efficient investing. It’s definitely a good feature.
Here is a non-comprehensive list of Betterment and Wealthfront features.
|Stock-level Tax-loss Harvesting||No||Yes|
|Real Estate Investing (REITs)||No||Yes|
|Goal-oriented Saving Plans||Yes||Yes|
|Mobile App (iOS & Android)||Yes||Yes|
As you can see, Betterment has fractional shares while Wealthfront does not. Fractional shares allow you to invest in an ETF without buying a full share. This especially comes in handy when the price of one share is high so you don’t have stagnant cash sitting around. As a result, Betterment is able to better allocate shares to and rebalance your portfolio.
On the other hand, Wealthfront has stock-level tax-loss harvesting while Betterment does not. Although Wealthfront has this feature, stock-level tax-loss harvesting is only available to taxable accounts of $100,000 or more.
Additionally, Wealthfront has real estate investing via REITs while Betterment does not. We’ll get into this more in the next section when we compare performance.
Like I said in the beginning of this post, I had investment accounts with both Betterment and Wealthfront between December 2016 and August 2019.
In order to create a fair comparison between Wealthfront vs Betterment returns, I chose comparable portfolios.
For Betterment, my portfolio consisted of 90% stocks and 10% bonds. Betterment uses the terminology “target allocation” to describe a portfolio’s breakdown. As you can see below, Betterment invests in bot stock and bond asset classes.
On the other hand, my Wealthfront portfolio had a risk tolerance of 9 out of 10. In addition to stocks and bonds, Wealthfront also invests in real estate.
While both portfolios aren’t exactly identical in terms of asset allocation, this is the best I could do given the minimal control I had over the design of my portfolios.
Regardless, here is a table of my Betterment returns and Wealthfront returns during this time period.
As you can see, the performance was surprisingly close. The difference was less than a percent.
I want to point out here that just because I saw slightly better performance with Wealthfront during this time period doesn’t mean that Wealthfront is a better robo-advisor. Don’t let this rudimentary comparison solely dictate which robo-advisor you choose. Make sure you consider all factors including features and fees.
A Deeper Look at Betterment and Wealthfront Performance
Before I closed my Betterment account in mid-2018, I made this YouTube video about my Betterment account performance.
I made another video about my Wealthfront performance during the turbulent stock market at the end of 2018. I feel like a lot of reviews about only focus on the upside of robo-advisors.
For that reason, I recommend that you watch this short video as well in order to get an honest look at robo-advisors, even when the stock market takes a turn for the worse.
Like these videos? Subscribe to my YouTube channel for more videos like this in the future.
Is Betterment or Wealthfront Right For You?
While Betterment and Wealthfront have comparable features, I ended up closing my Betterment account and transferring all my funds to Wealthfront.
Although Betterment and Wealthfront performance was comparable, Wealthfront had slightly better returns. In addition, I like the fact that Wealthfront invests in real estate via REITs. Diversification is critical for investing in order to gain exposure to other markets and reduce volatility.
Finally, thanks to Wealthfront’s referral program, they will manage your first $5,000 for free. This means you won’t have to pay a management fee until your Wealthfront balance goes above $5,000.
In order to get your first $5,000 managed for free, sign up for your Wealthfront account using my personal referral link.
If you have any questions about Betterment, Wealthfront, or investing with robo-advisors in general, let me know in the comments below. Also, check out some of my other investing blog posts for more information on financial topics like investing.