Betterment vs. Wealthfront
Robo-advisors—online investing platforms that seek to emulate the services of a financial advisor—have grown in popularity in recent years. They’re particularly popular among beginner investors who want help without paying the higher costs of a hands-on advisor.
Two of the most popular robo-advisors are Wealthfront and Betterment. Both offer high-quality, trustworthy products managed by teams of professional investors looking to earn you the highest return on investment. Because they have similar offerings, it can be tough to decide which is right for you unless you take a look at some of their differentiating features. Based on fees and tax-loss harvesting options, each is better for a specific type of investor.
Betterment is one of the first robo-advisors, and many consider the company to be the one that started the industry. With a history going back to 2008, Betterment is focused on putting your investments into low-cost, diverse exchange-traded funds (ETFs) that match a risk profile you fill out when opening a new account.
You can get started with no minimum deposit, and Betterment invests 100 percent of your dollars automatically. You never have a cash balance in your account; everything is immediately invested based on your risk profile.
One of the features that many investors get most excited about with Betterment is tax-loss harvesting. Previously only available as a manual exercise for wealthy investors, Betterment’s algorithms automatically buy and sell securities in your portfolio to capture tax losses, lowering your capital gains taxes due to the IRS.
Over time, tax-loss harvesting can add up to big savings. It can offset up to $3,000 per year of ordinary income and carries forward if you go over. Betterment charges 0.25 percent, or about $25 per year for every $10,000 invested, for a regular digital account and charges no fees beyond that.
Wealthfront likewise came onto the scene in 2008, but its current iteration didn’t come about until 2011, giving Betterment a three-year head start in the robo-advising space. However, Wealthfront offers one unique product that gives you even better tax results than you can get with Betterment’s tax-loss harvesting: stock-level tax-loss harvesting, which was formerly known as direct indexing.
Stock-level tax-loss harvesting is similar to a regular tax-loss harvesting strategy, but instead of investing only in broad market ETFs, Wealthfront algorithms invest directly in S&P 500 stocks. This granular control offers even more tax-loss harvesting savings than Betterment’s ETF level tax-loss harvesting management. However, direct indexing is only for accounts with a balance between $100,000 and $500,000. Once you reach $500,000, you can join the more powerful Smart Beta product.
Another difference is in the fees. Wealthfront charges the same 0.25 percent advisory fee that Betterment charges, but they also ask you to pay a fund fee of 0.07 percent to 0.16 percent depending on the funds your money goes into.
Wealthfront also requires a $500 minimum deposit to open a new account. Otherwise, Wealthfront offers a more or less identical investing service to Betterment. After you fill out a risk profile, Wealthfront’s automated algorithms invest your money in a range of ETFs.
Thanks to no minimum opening balance, low fees and simple investment setup, Betterment is the best option for new investors looking to make money in the markets with virtually no personal involvement beyond funding your account and an initial risk profile.
Because tax-loss harvesting is built in, any investor at Betterment can take advantage of opportunities formerly reserved for the wealthiest investors even with a small starting nest egg.
However, if you have a portfolio of $100,000 or more, Wealthfront is the strongest offering by far. Thanks to its stock-level tax harvesting strategy, investors can get an edge over Betterment in the long-term.
Other Robo-Advisors to Consider
- Schwab Intelligent Portfolios: If you already have a relationship with Charles Schwab, you may be interested in Schwab’s robo-advising product. This is a winner because it comes with no fees. Of course, the funds you own via Schwab Intelligent Portfolios still do charge fees—no different than if you’d invested in them directly. Accounts require a $5,000 opening balance.
- WiseBanyan: WiseBanyan offers no-fee robo-advising with no account minimum. Advanced features like tax-loss harvesting, which come included in some competitor products, require an extra fee. If you are a brand-new investor with a small portfolio and are completely fee-averse, you may want to consider WiseBanyan.
- Wealthsimple: Wealthsimple is another option with no minimum balance requirement, but it charges 0.4 percent to 0.5 percent in management fees, making it more expensive than the average robo-advisor. Tax loss harvesting is included with Wealthsimple Black for accounts over $100,000. Wealthsimple is best known for offering socially responsible portfolio options.
- Ellevest: This robo-advisor claims to serve women better than other products because it has tailored its algorithm to women's income and life cycles. It has no minimum deposit requirement to start, and Ellevest Digital has a fee of 0.25 percent per year. The company also offers a no-fee emergency fund when you sign up for an investment account.