Betterment vs. Wealthfront: Which is best for you?

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Betterment and Wealthfront are two of the top independent robo-advisors, so when people talk about robo-advisors, they often mean one of these two leaders. Each offers a ton of features: sophisticated portfolio management, cash management accounts, and so much more.

Betterment and Wealthfront both score top marks in Bankrate’s reviews, but let’s break it down.

Betterment vs. Wealthfront: How they compare

A robo-advisor provides automated portfolio management for investors, selecting investments for you using an algorithm based on your risk tolerance and when you need the money. Top robo-advisors use low-cost exchange-traded funds to build your portfolio and then add on a heap of value-added features such as tax-loss harvesting and a cash management account.

The result is a portfolio that may be able to outperform a human-created portfolio. If you need a rundown on the benefits of a robo-advisor and why you might want one, see Bankrate’s review.

Now, two top scorers in Bankrate’s reviews – Betterment and Wealthfront – are going head to head in the following five categories to see which one may be better for you.

Portfolio management

In many respects Betterment and Wealthfront look similar in terms of managing your portfolio.

Betterment constructs a portfolio based on 14 asset classes, and allows you to set multiple goals and save for them individually. You’ll have access to a smart beta fund, which weights various factors to try to beat the market return, as well as socially responsible investments. You can go “all cash” or “all bonds,” and you have some freedom to adjust your portfolio’s weightings.

If you can bring $100,000 or more to Betterment, you can access the premium tier (at a higher cost, more below), giving you unlimited access to its team of certified financial planners. Even if you don’t opt for the premium tier, you still can buy a planning session with a human advisor.

Similarly, Wealthfront creates a customized portfolio from 11 asset classes, and allows you to invest for multiple goals. With more than $100,000 you can access the robo’s risk-parity fund, which tries to reduce risk for a given level of return. With more than $500,000, you can access Wealthfront’s smart beta fund, which weights features in your investments to drive returns up.

Both also offer tax strategies that can reduce the net cost of the service (more below).

Both Betterment and Wealthfront offer sophisticated portfolio management even before you go into the extra bells and whistles, which may or may not increase your returns. So if you need a smart beta fund when you start, maybe Betterment is the better choice, since Wealthfront asks for a half-million to access its similar fund. But most investors are not likely to know or notice.

A clearer differentiator is Betterment’s option to have unlimited access to qualified human advisors, though you’ll need to meet the much larger minimum and pay more for it. If the lack of a human advisor is a dealbreaker, then Betterment may be your choice.

However, both Betterment and Wealthfront are designed to function without human advisors. Otherwise, what’s the point of a robo-advisor? Both have well-developed sections on their site for answering questions, though naturally non-routine questions do arise from time to time.

Edge: Too close to call, unless you need a human advisor, then Betterment.

Cash management account

Wealthfront and Betterment are close when it comes to the cash management accounts they offer. In fact, they’re some of the best in the industry and pay interest, unlike many accounts. Admittedly, that was a more valuable feature before the Fed slashed interest rates to near zero, and each robo-advisor offered a rate north of 2 percent.

Here’s how their cash management accounts stack up:

Cash management feature Wealthfront Betterment
Can open without an investing account? Yes Yes
No monthly fee? Yes Yes
No overdraft fee? Yes Yes
Minimum balance? $1 $0
Pays interest? Yes Yes
Debit card? Yes Yes
Cash-back rewards? At thousands of merchants
Two-day early direct deposit? Yes
Fee-free ATMs? 19,000+ Reimburses ATM fees worldwide
Mobile check deposit, bill pay, check writing? Yes Yes
Portfolio line of credit? Yes

These two robo-advisors are identical on so many features, but let’s run through a few differences:

  • Cash-back rewards: Betterment offers limited cash-back rewards using its debit card, but they’re targeted, not the typical 1 percent back on everything that’s available with so many cards. Wealthfront doesn’t offer this feature.
  • Early direct deposit: Wealthfront offers early direct deposit on your payroll check, so you can get that money working for you faster, while Betterment does not.
  • Fee-free ATMs: Both offer access, but Betterment’s reach is broader.
  • Portfolio line of credit: Wealthfront allows you to borrow up to 30 percent against your investing account (if it’s above $25,000) at a very low rate. You can have the money in hours. Betterment does not offer this feature.

Wealthfront offers a better suite of features with early direct deposit and a portfolio line of credit, allowing you immediate access to a loan, which may be helpful when paying off high-rate debt.

In contrast, Betterment’s cash-back rewards seem less valuable than a typical rewards card, because they only work with certain merchants and specific times. Meanwhile, fee-free ATMs are a nice add-on but cash is becoming less necessary every day, though frequent travelers abroad may find this to be a worthwhile perk of the account.

Edge: Wealthfront. Used responsibly, the portfolio line of credit is a great feature.

Management and fund fees

Betterment and Wealthfront are neck and neck when it comes to management fees (which go to the robo-advisor) and fund fees (which go to the fund company that created the fund).

Betterment charges 0.25 percent of assets annually for its entry-level service, compared to Wealthfront’s 0.25 percent. In either case, that would cost $25 for every $10,000 invested.

Of course, Betterment has a second tier of service that steps up the price to 0.40 percent of assets (with at least $100,000 in the account), or $40 per year for each $10,000 invested. In Betterment’s case, any money above $2 million will receive a discount of 0.1 percent, so a 0.25 percent fee becomes 0.15 percent, for example, on fees above that threshold.

When it comes to ETF fees, the race is just as tight. Betterment says its portfolios average a svelte 0.07 percent, or $7 per year for every $10,000. Wealthfront is right there, though, with an average portfolio costing about 0.08 percent.

In practice, the ETF fees that you’d pay at either robo-advisor depend exactly on what kind of portfolio is constructed and that depends on your individual needs and preferences.

Edge: Too close to call for most investors, when comparing the core services.

Tax strategy

A robo-advisor can also add value through its tax strategy, and robo-advisors are ideally situated to perform tax-loss harvesting, with the ability to do trades that would be onerous for a human advisor. Tax-loss harvesting means selling losers to take a tax loss that can offset gains.

Betterment and Wealthfront both use daily tax-loss harvesting to try to maximize your gains. Typically, they’ll sell one fund and then replace it with another that has many similar features. You’ll have access to this service with any level of assets you bring to the accounts.

Betterment also has a tax-coordinated portfolio that tries to minimize taxes by optimally putting investments in taxable and tax-advantaged accounts such as an IRA. The robo says this service improves after-tax returns by about 0.48 percent annually, or about twice the advisory fee.

But Wealthfront takes tax-loss harvesting to the next level. When you have more than $100,000, Wealthfront can start using direct indexing, giving you more opportunities to realize savings. So rather than owning the fund, your account owns the constituent stocks. In any given trading day, Wealthfront has more opportunities to take losses, meaning more savings over time.

Wealthfront says its tax-loss harvesting program can recoup its management fee for 96 percent of its clients. The robo-advisor says that clients in riskier portfolios (that is, stock-heavy) have seen an estimated after-tax benefit of six to 13 times the advisory fee.

Meanwhile, Betterment says that between 2000 and 2013 its tax-loss harvesting service would have provided an average 0.77 percent after-tax increase to an investor’s returns. That’s about three times Betterment’s annual advisory fee.

Edge: With potential higher returns and direct indexing, Wealthfront wins here.

Features and tools

Betterment and Wealthfront both offer features and tools that can add value to your account.

Besides those already mentioned, Betterment’s tools include:

  • Tax impact preview, which allows you to see how a financial decision affects your taxes
  • Charitable giving tool, which helps you manage your giving and receipts, and save more on taxes, too
  • Goal-based saving tool, which helps you set different goals and save for them

In addition to those already mentioned, Wealthfront’s tools include:

  • Path financial planning tool, a robust tool that helps you plan for multiple financial goals by pulling in all your spending and financial data. You can project your net worth over time, and see how spending in one area can affect your progress to other goals in an easy-to-use graphic. You’ll also be able to use the tool to plan for college and open a 529 college savings plan with Wealthfront or link an outside plan. You can even budget for time off and see how that affects your goals.

Plus, Wealthfront’s planning tool is comprehensive and available even if you’re not a customer.

Edge: Wealthfront. Its one excellent planning tool (which is really several tools in one) compares well against Betterment’s three useful (but more narrowly focused) tools.

Bottom line

Whether you go with Betterment or Wealthfront depends a lot on your individual needs. If you need a human advisor and have the money, Betterment may be your answer. Still, you may figure that Wealthfront’s tax-loss harvesting is worth much more than you’re paying, reducing your all-in cost. Or perhaps you need a specific feature in a cash management account (such as free ATMs or a portfolio line of credit) that sways you to one robo-advisor or the other.

You may also want to consider the virtues of other top robo-advisors such as Schwab Intelligent Portfolios and Ellevest, both of which bring their share of positives to the industry.

Learn more:

Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor