Betterment vs. Wealthfront – Which One Should You Choose?

Daniel Penzing
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How Do Wealthfront and Betterment Compare?

Wealthfront considers itself a wealth management company, which basically means it provides investment management services, like asset allocation, asset management, and portfolio construction, for a purely digital setting. This is different from a robo-advisor, which uses algorithms to help you decide how much you should be investing, but doesn’t actually manage your portfolio.

Betterment, on the other hand, is a robo-advisor that was founded at the end of 2011. They help investors around the world invest their money in ETFs.

Wealthfront is proud to be a fiduciary, which means they are legally obligated to put your best interest before their own. Betterment is not a fiduciary, which means they are not legally obligated to place your interests ahead of their own. Wealthfront has its headquarters in California, while Betterment’s headquarters are in New York. This doesn’t mean that one is necessarily better than the other, but it will inevitably mean that they have different state-specific tax structures.

About Betterment and Wealthfront

With online financial advisors like Betterment and Wealthfront as the rage, every individual investor is left to answer the question, “what’s the best option between Betterment and Wealthfront.? It’s not easy to make the call. Both companies allow investors to invest their money and make their money grow, and there are numerous other commonalities in the services offered.

Despite the similarities, there are enough differences between the two to make a decision that’s at least a little bit easier. The following comparison of Betterment vs. Wealthfront might just give you the information you need to make a choice.

Wealthfront is a robo-advisor that lets investors choose from about 100 different ETFs. To make a deposit, you open an account and then instruct the company to manage your money. Returns on investments through Wealthfront are generated through a combination of ETF returns and Wealthfront applying fractional cost investment strategies. Wealthfront also offers tax-loss harvesting.

About Betterment

If you like financial advisors, you will love the service that Betterment has to offer. This service is actually the first service that claims to be automated online investing. Betterment was founded with the goal of taking the financial burden of investing off of the retail investor and, to do so, the company has created an automated investing service that gives investors financial advice. Betterment calculates the investor's target retirement investing date and makes recommendations that will allow the investor to retire with the appropriate amount of money. The company makes specific allocations to its target date fund portfolio, but it offers investors the opportunity to alter that allocation within certain bounds.

The calculations that go into the recommendations offered by Betterment demonstrate the fact that the company is interested in building long-term wealth. It takes into account the investor's behavior and financial situation to create an investment portfolio that can be adjusted to meet the investor's own financial situation, whether it is a lump sum to invest all at once or an ongoing stream of dollars.

For a flat fee of 0.25%, Betterment offers five year tax-advantaged retirement accounts and annual tax reporting. It also allows its investors to adjust the amount they are investing at any time. Betterment is a good option if you are looking for a way to start investing and create the portfolio of your own dreams without having to pay too much for the service.

About Wealthfront

Nowadays, there are so many online investment platforms that people can invest in. Starting in 2008, these companies have seen an influx of customers and have evolved from simple investment company to wealth management.

Some of the companies were backed by big players in the field – such as Charles Schwab, Fidelity or Edward Jones. Some started as more straightforward investment companies and have evolved with the market.

Because people are curious to know about the different ones, we decided to give you an overview of two of the most known investment platforms to help you better understand the value they offer. They are both considered one of the most used investment advisers around.

Wealthfront was founded in 2008 and is based in Silicon Valley in California. It offers an easy way to invest for people who want to become more knowledgeable about investing but aren’t ready to jump into the stock market.

Betterment was founded in 2008 in order to help its customers invest better and have more money to have a secure future. They call themselves “the reinvented way to invest”.

How Are They the Same?

Before we delve into the details of both Betterment and Wealthfront, let’s review the main idea behind each. Both companies provide the same service with the same goal, though in slightly different ways.

They offer a way to give you an investing portfolio that can work for you, without investing a whole lot of your time into it.

Both Wealthfront and Betterment would like to give you access to your money sooner if you need it.

Both have an extensive amount of education and information about investing and how your investment portfolio would be handled. They’ve both got CDs and a number of other savings vehicles outside of the stock market. They’ve both got apps for their services. They both have a goal of keeping your fees low, and they both offer a similar website interface.

But, of course, they’re not the same in a lot of ways. Let’s take a look at a few of the biggest differences between the two companies before we go into more detail.

How Are They Different?

Wealthfront offers a unique service in the financial market. The company manages your investments for you and helps you save for retirement, all the while charging a flat fee for its services. If you don’t mind putting some time and effort into managing your portfolio yourself, there are other services that you can get for a lot less money.

Betterment, on the other hand, manages your portfolio for you, and you never have to lift a finger. It essentially does everything for you. It will monitor your portfolio, help you save, and divert any funds you may have come across to help ensure you stay on budget.

Betterment vs. Wealthfront: Minimum Deposit

Betterment vs. Wealthfront: Annual Fees

On the surface, Betterment and Wealthfront look very much the same. Both firms are SEC-registered investment advisors and offer robo-advisory services. Both investment platforms also offer ETF portfolios, which can be adjusted to different concentrations of risk and would meet the needs of most investors.

Tax-Efficient Investing: Who's Better?

Betterment and Wealthfront are both online investment management platforms that make it quick and easy for you to set up a diversified portfolio and automate the investing process. You can set your risk level, your goals, your time horizon, and other details, and either service will decide your asset allocation and invest your money accordingly. Both of these services have their advantages and disadvantages, but ultimately the question comes down to which service better fits your individual needs.

Tax Efficiency

One of the biggest differences between Betterment and Wealthfront involves how tax efficiency is handled. Betterment funds its taxable accounts with traditional funds, meaning required distributions will accrue capital gains. And if your account size reaches a certain threshold, your taxable assets will be automatically moved into a generation-skipping trust (GST). Wealthfront, on the other hand, begins its taxable portfolio with tax-advantaged funds, and all gains will be tax-deferred. In other words, there’s a good chance that Betterment will have bigger tax events than Wealthfront over the course of your investing life.

Betterment vs. Wealthfront: Portfolio

Comparison This article is for people who are looking at creating an account with betterment or wealthfront to invest but don’t know which option to choose. To help make my case, the information in this review will be based on the portfolio comparisons between Betterment and Wealthfront.

I will also compare the companies on the additional services that they provide, the interface to the websites, customer service, and other miscellaneous information that may not be as important but can also play a role in achieving your goals.

So first let’s take a look at the portfolio comparison and go over the different sections so you know what each one means.

Index Fund %…

A Capped portfolio is measured by the average of the percentages of different asset classes. So this section shows what percentage of the portfolio is made up of different asset classes. Because Caps protect investors from market volatility and fluctuation, this section could be an indicator of how risky the investment is. The lower the percentage in any of the asset classes, the less risky the investment.

Company

This section of the portfolio comparison shows which companies were used to diversify the holdings within the portfolio.

Front End Sales Charge…

The front end sales charge for this portfolio is 0.25%. This is the only option that is offered for clients that open an account with Wealthfront.

Betterment's Portfolio

Management.

Betterment Automatic Rebalancing: Asset allocation assumes that different combinations of assets will have different, and often unpredictable returns.

For example, in a year when the S&P 500 has a -10% return, an allocation to both small-company stocks (+20%) and intermediate-term bonds (+15%) will likely result in an overall portfolio loss of less than five percent.

However, in a year when both of these asset classes have positive returns (as such portfolios often did in the 1970s), the strategic asset allocation might have actually led to a portfolio loss.

Betterment Automatic Rebalancing is a powerful tool that helps investors overcome these return anomalies by automatically moving assets around when asset class returns are straying away from the investor's original allocations.

Wealthfront Portfolio

With Wealthfront, you can choose from five different portfolios. The portfolios will differ in their percentages of stocks and bonds based on your personal risk tolerance, and that’s an important distinction that you need to make a be aware of.

Although there are five portfolios to choose from, one is really not at the right level for you. The five types are individual stocks, a portfolio of individual stocks and bonds, a mix of growth and value stocks, a portfolio of alternative investments, and a socially responsible portfolio.

The one that’s potentially the best one for you depends on the extent of your investing knowledge and if you are looking for a conservative or more aggressive portfolio. If you’re a moderate investor with some knowledge of investing, you can choose from the simple growth mix, the simple value mix, the alternative investment mix, and the socially responsible mix.

As you might have guessed, the individual stocks and the alternative investments mixes are more aggressive than the others. If you’re looking to be completely hands-off and have a set-it-and-forget-it investment strategy, you can choose the simple mix options. Wealthfront will balance your portfolio automatically to match your risk tolerance. If you want to be more involved, you can choose one yourself by customizing your services.

Retirement Planning

Nobody likes to think about their distant future when they’re young and full of energy, but your retirement is not something you can escape thinking about. Making a wiser decision on how to manage your retirement funds can have a major impact not only on your personal health, but also on your family’s future. ЁCThe older you get, the more important it is to really plan out your retirement years and not let them just pass you by and be filled with regret. This section will help you to decide how to invest your money in the best way possible so that you can enjoy the rest of your life.

What Is Wealthfront?

Wealthfront is one of the most common financial advisors that people use. They seem to have a huge online presence, and while they are great at some things, they tend to make some mistakes as well.

Where to Begin

It’s important to decide early on what kind of investment you want to make. For example, you can either invest in mutual funds or hedge funds. Mutual funds are generally considered more secure, but they are also a lot more expensive to upkeep. If you’re not sure how to make a decision, talking to a financial advisor can be a good place to start.

To Invest or Not to Invest?

Security

If you are starting with your first investment in the stock market, you might feel a little uncomfortable. Several simple ways, like keeping your wealth in form of liquid funds, provides safety and ease of mind. Investing in stocks is more complicated than just choosing an amount and seeing your purchasing power grow in number. It involves risks along with enjoyment, where the former can possibly erode the later.

A multitude of factors can influence your portfolio on a daily basis and make you worried and stressed. The fear of a downturn in the stock market and fluctuations in the values of your stocks can drive you mad. Somehow, gaining the required level of knowledge to manage the risk to the least is one of the biggest challenges for retail investors. It is very important to know the exact level of risk you are facing. Maintaining the correctness of your investment ratios can help you mitigate risk and stay balanced. As the stock market and the economy is unpredictable, you will need to revise your asset allocation from time to time. You cannot rely upon a fixed investment plan and need to monitor it constantly.

Which Is Better: Betterment or Wealthfront?

For most of us, it’s difficult to imagine investing without a human advisor guiding us along the way to help us choose the right investments and manage our money. After all, for many people, even signing up for online accounts is a struggle. Who wants to choose investments without someone to help make the right choices? Who wants to build a portfolio without support when times get tough?

That’s why you need to consider which type of money manager you would rather have – a human one or a robo-advisor.

Of the two top robo-advisors – Betterment and Wealthfront – which one is the better choice?

The Best Robo-Advisor

Although the two robo-advisors go by the same name, they are actually quite different. They differ in how they do business, the kinds of investments they offer, and the amount of money you have to have in order to invest with them.

So, which one should you choose?

Let’s take a look at some of the different factors, starting with the cost of using the services.