In this article, I’ll highlight the key differences between these two automated investment firms as well as the factors that help them stand out in the field.
Table of Contents
- What Are Robo-Advisors and How Do They Work?
- Betterment vs. Wealthfront: Key Differences
- Betterment vs. Wealthfront: Comparing Costs, Performance
- Comparing Financial Planning Tools
- Comparing Tax Strategies
- Betterment vs. Wealthfront: Which Company Offers Better Perks?
- Alternative Options: Robo-Advisors vs. Hybrid and Full-Service Financial Advisors
What Are Robo-Advisors and How Do They Work?
Robo-advisors started becoming available to retail investors less than 15 years ago. They filled an obvious need in the market: trustworthy yet inexpensive investing help for indivduals.
Previously, you basically had just two choices. You could manage your own investment portfolio, or you could pay a hefty 1% or more to a full-service financial advisor.
Robo-advisors have filled the gap between the two options. They offer automated investing through pre-built portfolios. Less human involvement in managing those portfolios means less cost for you.
Robo-advisors match your goals, income and timeline to the portfolio that best meets your circumstances.
Betterment and Wealthfront were both founded in 2008, though it took Wealthfront a few years to pivot to being a robo-advisor. However, both companies are considered to be "originals" in the space. And, by and large, they offer more and better features than their younger competitors.
They both made my list of the best robo-advisors of 2021.
The two companies have much in common. But depending on what you want, there’s can be a clear choice that’s better for you.
Let’s dive into some of the Betterment vs. Wealthfront differences.
Betterment vs. Wealthfront: Key Differences
| Betterment | Wealthfront |
|---|---|
| • $0 minimum balance | • More sophisticated planning tools |
| • Option to consult or work with financial advisor | • Greater portfolio diversification |
| • Greater portfolio customization | • Superior tax treatment |
| • Investment strategy includes value stocks | • College savings (529) plans available |
| • Fractional shares/less uninvested cash | • Uniquely supplements planning tools with partnerships |
| • Best robo-advisor banking alternative | • Outstanding planning for home buyers |
| • Pragmatic approach to financial goals | • Offers low-interest lending |
| • Tax-efficient charitable giving tool | • Six-figure investors get additional features |
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Betterment and Wealthfront can each boast a number of ways that they’re better than the other.
That’s why it’s important to understand who you are as an investor and what appeals to you.
You'll probably prefer Betterment if you:
- Like getting some help from a person who can walk you through what you need to do to work toward your goals.
- Have just a few dollars to invest.
- Want the option to get help from a human advisor on either a one-off or continuing basis.
And you’ll probably prefer Wealthfront if you want:
- A more diversified portfolio that includes assets that aren't correlated with market performance.
- Access to arguably the best financial planning tools in the robo-advisor industry.
- Access to the best tax strategy in the robo-advisor industry (though this matters less if you're investing through an IRA).
Keep reading to get more in-depth Betterment vs. Wealthfront comparisons.
Betterment vs. Wealthfront: Comparing Costs, Performance
| Company | Advisory Fees | Weighted Average Expense Ratio | Minimum Deposit | Annualized Return |
|---|---|---|---|---|
| Betterment | 0.25% | 0.09%* | $0 | 8.90%* |
| Wealthfront | 0.25% | 0.10%* | $500 | 9.60%* |
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*Based on Backend Benchmarking's Fourth Quarter 2020 Robo Report. Betterment and Wealthfront recommend different portfolios to different clients. Your actual results will vary based on the portfolio option you select as well as future market performance.
The all-in cost difference between these companies, which takes into account the annual fee and the average portfolio expense ratios, is just 0.01%.
In the last five years, at least, Wealthfront's average portfolio has returned 0.70% more than Betterment's according to Backend Benchmarking, which tracks robo-advisor data. That's a significant difference, especially considering that Wealthfront also offers a better tax strategy.
Each company features multiple investment strategies, and of course, past performance doesn’t necessarily predict future results.
But Betterment offers a premium-level product if you invest at least $100,000. It charges 0.40% annually, which is 0.15% higher than the entry-level product, and offers unlimited access to the services of Certified Financial Planners.
In short, costs are similar, but you can get a better deal by upgrading with Betterment. However, Wealthfront has shown superior performance.
Winner: Tie
Comparing Financial Planning Tools
If you’ve never used well-designed financial planning tools that incorporate all of your assets and accounts, you’re in for a treat with either Betterment or Wealthfront.
Both companies’ tools give you a comprehensive snapshot of your finances and goals in one place and provide actionable advice. They’ll each help you prioritize multiple goals, indicate the probability of reaching those goals and provide guidance on what it will take to get the result you want.
However, Wealthfront’s tools are more sophisticated and innovative but are still easy to use and understand.
Wealthfront uses government data on personal spending to analyze your current spending habits and estimate the rate at which you'll spend your money in retirement. It mines Department of Education data to project future college costs based on your school of choice and pulls data from real estate sites Redfin and Zillow to help estimate how much you can afford to spend on a house in your area.
Betterment’s financial planning tools are more goal- and process-oriented. It requires new customers to set a specific goal during the onboarding process.
Every goal on Betterment’s platform includes a specific dollar amount, a specific date and at least one financial account to fund that goal. It offers a timeline, a monthly savings amount, your range of likely outcomes based on the attached investment portfolios and tips if you fall off track.
Winner: Wealthfront
Comparing Tax Strategies
Tax strategy can be intimidating to think about — and at least as boring as watching paint dry.
But it’s a significant factor when it comes to maximizing your return on investment. It’s also a significant differentiator in the Betterment vs. Wealthfront debate.
The good news: Both companies offer significant tax strategy programs, or "tax-loss harvesting," to every investor. Many robo-advisors don't offer tax-loss harvesting at all or offer it only if you meet a specific investment minimum.
You can read more details about Wealthfront's innovative approach to taxes in my Wealthfront review. But Wealthfront probably does a better job of limiting the tax burden of its investors than any other robo-advisor.
Winner: Wealthfront
Betterment vs. Wealthfront: Which Company Offers Better Perks?
Both companies offer some pretty sweet extras to their clients.
Both offer excellent alternatives to traditional banking. But if you’re pitting Betterment against Wealthfront, Betterment is the clear winner for doing your day-to-to banking.
Its checking and savings options are almost surprisingly good. At 0.40% APY, the savings option pays as well as the best high-yield savings accounts. Betterment doesn't require a minimum deposit, doesn't charge management fees, allows for automated "Two-Way Sweeps" between checking and saving to make sure you don't miss earning interest on as much money as possible, gives you unlimited ATM rebates and more.
You can also pay (between $299 and $399) to consult with a Betterment-approved Certified Financial Planner about specific topics. (Betterment also offers this service to non-customers.)
Wealthfront gives customers a great banking alternative as well including 0.35% APY on savings as of March 2021. That includes “Autopilot,” which is similar to Betterment’s Two-Way Sweeps program.
Wealthfront also offers a line of credit against your portfolio at low interest rates. Money expert Clark Howard always encourages people to save before investing. Emergency funds are the best way to pay for unexpected expenses. But borrowing at rates below 4% or even below 3% is much better than the interest that most credit cards will charge.
Winner: Betterment
Alternative Options: Robo-Advisors vs. Hybrid and Full-Service Financial Advisors
Based on my extensive research into automated investing, I consider Betterment and Wealthfront to be the top overall entry-level robo-advisors.
If you don’t want to handle your investments all on your own, robo-advisors are almost always the least expensive option but offer little to no human guidance.
Hybrid advisors offer robo-investing with inexpensive access to human financial advice. That access often is limited in some ways compared to what you’d get with a traditional full-service financial advisors, but their services will cost you about 1% of your portfolio annually.
Clark is a huge fan of Vanguard's Personal Advisor Services (PAS), which is a hybrid financial advisor.
PAS is Clark’s favorite recommendation to anyone looking for a financial advisor. It requires a $50,000 minimum investment, which is half of Betterment Premium. PAS also charges a lower annual fee (0.30%) and boasts lower average expense ratios (0.07%).
Generally, you’ll pay more for more access to human financial advisors. But Betterment and Wealthfront are great entry-level robo-advisors because their free tools and rich features make them competitive with human advisors – as long as you’re comfortable with reading and interpreting simple charts instead of having a human discuss them with you.
Final Thoughts
Betterment and Wealthfront are both excellent automated investment platforms. They’re low cost, they offer terrific financial planning tools, great banking alternatives and plenty of extra features.
If you’re a new investor, you have less than $500 to start investing or you like getting a little nudge to stay on track toward your goals, I’d lean toward Betterment.
If you care about the impact of taxes on your overall ROI, you love digging into financial planning tools and you want as many features as possible, Wealthfront may be the better option for you.
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