Investment in crypto, index funds, and ETFs can make quick profits but it takes time to learn and manage the portfolio. Most people invest in these elements as side hustles while holding a job or running a business.
So, there is never enough time to learn the nitty-gritty of such investments. The developers of Betterment and Wealthfront have designed these platforms exactly for such individuals. And because these are the leading platforms in this market, they have also sparked a Betterment vs Wealthfront debate.
These platforms use artificial intelligence to generate algorithms that plan investment and retirement advice tailored for each individual. You neither have to monitor the transactions nor hire a middleman to keep oversight. Just provide the platforms with your risk tolerance, financial situation, and goals to start your investment journey.
While Betterment and Wealthfront are the pioneers of such platforms, there are important differences between them. You need to be familiar with them to make an informed choice and this piece is exactly for that. So, let’s get straight to it.
What Is Betterment?
Betterment is a platform that offers automated investing to clients. As a fiduciary, it acts in the best interests of the clients and offers guided investments, cash management, and retirement planning.
The platform asks several questions when a client sign-ups for it. It includes questions related to risk tolerance, long-term and short-term goals, and investment strategies. After taking everything into account, artificial intelligence generates an algorithm that works exactly how you want to achieve your financial goals.
There are six investment portfolios to choose from which also include one for socially responsible investment. Each portfolio is designed to meet certain types of goals. For example, there will be a different portfolio for someone who wants to invest in emergency funds than one who wants to build a retirement account.
Betterment invests in a slew of EFTs which mirror established indexes to diversify the portfolio. The percentage of investment in each fund depends on the goals that you have selected. For example, individuals that opt for emergency funds have 85% investment in bonds and 15% in stocks. Similarly, long-term investment can hold up to 90% of the stocks.
In addition to managing an investment portfolio, Betterment also offers some other features which include professional financial advice, tax management, and cash reserves.
Pros Of Betterment
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Flexibility of Plans
Betterment offers two plans, a digital plan, and a premium plan that has a unique set of features and pricing. Investors can select the one that they deem most suitable for them.
The digital plan would work for most investors as it offers all the basics and core functions like portfolio management, tax-loss harvesting, and automatic rebalancing. It charges an annual fee of 0.25% of the total investment which is comparable to its competitors.
The premium plan offers an upgraded suite of features in addition to financial advice by experts. With this plan, you can get advice on investments outside the Betterment. However, it comes at an additional cost of 0.40$ annually. You also have to meet a minimum of $100,000 to gain access to the premium plan.
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Variety Of Investment Plans
Betterment is designed to meet multiple financial goals by offering a wide range of asset classes. There are 13 classes in total which include both stocks and bonds. The platform divides the investment in each class based on the goals that investors have opted for.
Furthermore, Betterment also offers a few other options to provide specialized allocations to the portfolio. These include socially responsible funds, an all-cash strategy, an all-bond strategy, and an innovative technology strategy.
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Fractional Shares
Stocks that are performing well are also expensive and sometimes it is not possible to purchase the entire stock. With a fractional share, you do not have to wait to acquire enough capital to purchase such stocks. You can purchase a fraction of such stocks with whatever resources you have at hand.
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Suite Of Tools
In addition to managing the investment portfolio, Betterment also offers a suite of powerful tools that would help with various aspects of the finances. The tax-impact tool lets the investors know how the changes in the portfolio would affect the taxes.
Similarly, a retirement-planning tool offers a complete picture of the finances and suggestions to optimize them to achieve the set goals.
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Tax Reductions
Betterment offers two strategies to reduce the tax on investments, tax-loss harvesting, and tax-coordinated portfolio. The tax-coordinated portfolio suggests the best accounts to reduce the tax by taking a look at a comprehensive picture of your finances.
For example, the portfolio would suggest moving investment from highly taxed sectors to least taxed accounts such as IRA. Tax-loss harvesting, on the other hand, sells dead investments to reduce the tax applicable to investments.
Cons Of Betterment
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Account Minimum On Premium Plan
Betterment requires an account minimum of $100,000 for the premium plan which is too high for Robo-advisors. Most people who use these services are new to the world of investment and would not be comfortable with such a high account minimum.
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Does Not Offer Direct Indexing
Betterment does not use direct indexing in the investment portfolio which otherwise offers upsides during tax-loss harvesting. Direct indexing means holding the stock directly instead of an ETF.
Each stock within the ETF has varying performance but Robo-advisors have to sell the complete fund during tax harvesting. It means that all the stocks that perform well would have to be sold too. So, while it reduces the tax, it also compromises the potential profits.
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Portfolio Set-Up Can Be Confusing
Signing up and accessing Betterment is quite simple. All it requires is a name and a valid email address but when it comes to setting up the portfolio, things get a little complex. Investors are presented with a range of options that do not always have clear instructions on them.
What Is Wealthfront?
Wealthfront is also a Robo-advisor that manages the investment portfolio for you but in addition to stocks and ETFs, it also offers cryptocurrency trusts. It works exactly like Betterment and invests the capital into a tax-efficient portfolio that is appropriate for the financial goals and the risk tolerance of the investors.
The platform also offers a direct stock purchase from the index funds which is not possible with Betterment. However, investors will have to maintain a minimum of $500 to start the portfolio.
When an investor sign-ups with Wealthfront, it offers several options for investment. You can pick from long-term investments, retirement plans, savings for college, or opening a bank account. Within each of these plans, there is a variety to pick from.
For example, there are 529 plans for college savings that can be selected based on risk tolerance and the amount that would be invested.
Like Betterment, it also offers some other tools to deal with your finances. With the Path tool, investors can connect all of their accounts together to get a comprehensive picture of their finances. You can let this tool know about future goals and it will outline measures that can be taken to achieve them.
Line of Credit is another feature that would come in handy, especially for business owners. If you have invested at least $25,000, Wealthfront will offer a loan that is about 30% of the total investment value. The process of acquiring that amount is very simple and the service can be availed at interest rates anywhere between 2.40%-3.65%.
Pros Of Wealthfront
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Advanced Tax-Loss Harvesting
Tax-Loss harvesting is a process of selling dead stocks which is explained earlier. It is more advanced on the Wealthfront as it allows the investors to purchase stock from indexes. Hence, instead of selling a complete EFT, you can hold the performing shares and sell that can make a potential loss.
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Low Cost
Wealthfront charges an annual advisory fee that is 0.25% of the total investment. Furthermore, the minimum account deposit of $500 is not a big amount as well. Hence, individuals that want to take a start in world investment would not be discouraged by the fees of the platform.
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Line Of Credit
With the Wealthfront line of credit, investors can take a loan from the platform that is about 30% of the total investment. It could be used to fund the working capital for the businesses and can be returned easily because of simple terms and conditions.
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Suite Of Features
In addition to managing the investment portfolio, there are a number of features that can help with day-to-day finances. You can let these tools know about the financial goals and they will outline the plan to achieve them.
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Focused On College Savings
Wealthfront has a rare focus on college saving funds, it offers more than 500 plans for that. You can pick either of these plans to save for the college of a family member.
That said, the focus on college savings does not come at the expense of ignoring other strategies. The retirement, mortgage, and car plans are just as good.
Cons Of Wealthfront
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Does Not Offer Fractional Shares
Wealthfront does not offer fractional shares which means you have to purchase the ETF completely. Hence, if you are interested in an ETF you would have to collect the necessary funds to purchase it.
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Large Balance Discounts
Although Wealthfront markets itself to be equally good for both new and expert investors, it does not offer large balance discounts like its competitors. It can be discouraging for investors who want to invest big capital via this platform.
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No Human Involvement
Wealthfront does not offer advice from finance experts to investors. Hence, you would have to resort to other platforms if you want help related to investments that are not in the Wealthfront.
3 Important Differences Between Betterment And Wealthfront
Both Betterment and Wealthfront are incredible platforms for hands-off investing but there are a few important differences that one must know before investing with either one of them.
Fees
Fees of Betterment and Wealthfront are identical at about 0.25% for asset management. Neither of these platforms charges additional trading fees. However, Betterment also has a premium account that charges 0.40% and requires $100,000 as the minimum account balance.
Feature
Automatic rebalancing, reporting, tax harvesting, and external account consolidation are the features that Betterment and Wealthfront share. But besides these, each of these platforms offers a plethora of features that are unique to them.
Betterment offers fractional purchases which can be used to deposit all of the cash. With Wealthfront, it is not possible because it can purchase the complete EFTs only. Furthermore, Wealthfront offers to purchase from indexes that are not offered by Betterment.
Wealthfront also offers a line of credit that can be used to take loans on investments. It can be quite helpful, especially to business owners who often have problems with working capital. With Wealthfront, investors can also invest in crypto funds that are not offered in the Betterment basic plan. You have to acquire Makara to invest in crypto funds with Betterment.
Betterment offers human support and advice from experts on investments that are beyond the platform with some plans. Wealthfront does not offer anything of that sort.
Expense Ratio
Expense Ratio to which extent an EFT or a stock pays for the administration, marketing, distribution, and management of the portfolio. There is not much difference between the expense ratio of both platforms.
Betterment averages at 0.09% whereas Wealthfront provides around 0.08%-. Both of these figures are comparable to other Robo-advisors on the market.
Betterment vs. Wealthfront: Which Investment App Should You Choose?
The choice between Betterment and Wealthfront is quite tricky as they offer nearly identical fees and no human advice in the basic plans. However, for individuals that want to invest more than $100,000.
Betterment is a clear choice because it offers a more solid set of features in its premium plan. Similarly, if someone wants to invest in college funds, Wealthfront is a better option because it offers more than 500 plans just for that.
Betterment would make a better choice for beginners as it can be started with an investment of just $10. You can start low and invest higher as you begin to get hold of things. Wealthfront’s $500 is not a big ask well but compared to $10, the difference is significant. Furthermore, Betterment also allows fractional purchases which is an excellent feature for people who are just starting out.
So, while both platforms are equally good when it comes to managing the investment, we would give an edge to Betterment for beginners. Wealthfront, on the other hand, is an excellent option for investors that are a bit familiar with how such platforms operate.
The Bottom Line On Betterment vs. Wealthfront
Wealthfront and Betterment facilitate the hands-off investment approach of the investors. You can invest some capital in these platforms and earn a decent profit with little to no monitoring.
The two platforms share a lot of similarities but there are certain key differences as well. You must understand the differences thoroughly to make the right choice for you.
FAQs About Betterment vs Wealthfront
Is Wealthfront Good For Beginners?
Wealthfront is a decent Robo-advisor for beginners. It does not require a huge minimum investment which can be discouraging for new inventors. Furthermore, it is equipped with a range of tools that facilitate new investors.
Is Welathfront Better Than Betterment?
Wealthfront is better than Betterment in some aspects, for example, it focuses more on college funds, offers crypto funds in a basic plan, and provides a line of credit.
Betterment also has its unique features which include fractional purchases and expert advice among others. So, the choice comes down to your personal preferences.
Can You Lose Money With Wealthfront?
Investment with any platform including Wealthfront has certain risks associated with it. Although the chances of losing capital with Wealthfront are quite low, it does not guarantee 100% profit.
Are Wealthfront Fees Worth It?
Wealthfront charges just 0.25% on the total investment which is cheaper or comparable to leading Robo-advisors in the market. Paying such a minute amount for the potential profit that you stand to make is completely worth it.
