Key Takeaways:
- Robo-advisors deliver a hassle-free way to grow your money, hit financial goals, or prepare for life milestones like retirement
- Betterment boasts a human touch with its financial-advice packages designed to meet major money goals
- Wealthfront offers a digital-only spread of investments, college savings plans, tax optimization features, and user-friendly financial planning software
What is a Robo-Advisor?
Betterment and Wealthfront are both examples of robo-advisors, aka automated digital services users can leverage for financial planning. As you might infer from the word itself, these virtual platforms are automated and use algorithms to determine investment portfolios, dole out financial advice, and can help push you closer to accomplishing your money goals without the need for much human intervention.
After users input financial information like risk tolerance and savings targets, a robo-advisor spits out customized advice and can automatically invest your money on your behalf. Both robo-advisor platforms in question, Betterment and Wealthfront, offer user-friendly features, portfolio management, and educational resources. The right choice for you depends on your lifestyle and financial goals. We’ll dive into the differences between them below.
What Makes Betterment a Good Robo Advisor Option?
Hands-Off Investing and Savings Growth
Betterment offers beginner investors a digital plan with easy steps to set and accomplish a goal. Users can get a birds-eye view of their asset allocation for a simple way to understand your portfolio. Betterment builds portfolios based on a mix of exchange-traded funds (ETFs), which are based on broad market sectors rather than individual securities. If you’ve fallen behind on a financial goal, you’ll get a nudge from the app to set more aside – an ideal feature for younger investors who have a hard time imagining accomplishing far-off goals like buying a house or retiring.
Betterment also offers Betterment Cash Reserve, a savings account with an impressive 0.40% annual percentage yield (APY) for no minimum account balance or management fees.
Optional Human-Based Support
If you opt for Betterment’s Premium plan, you can tap into the knowledge of their financial advisors. Unfortunately, that means you’ll pay 0.40% of your assets and you need a $100,000 minimum investment for the privilege.
You can also talk to an advisor after choosing one of Betterment’s advice packages for milestones like retirement or planning for a baby. These packages include a phone call with an actual financial advisor plus an actual action-based plan. For users who want to talk to a real person to get insight into their finances, being able to get advice applicable to a specific situation from an expert may prove to be worthwhile.
Automatic Portfolio Rebalancing and Free Tax-Loss Harvesting
When you open a taxable account with Betterment, you can set a goal for the account like building wealth or creating an emergency safety net. After inputting your information, you’ll get a stock and bond allocation according to your goals. You can manually adjust your portfolio—but the catch is that you need to have at least $100,000 in assets.
A free, optional service called Tax-Loss Harvesting helps you mitigate the impact of any losses in your portfolio to keep your portfolio balanced.
Educational Resources
For users who want a finely-tuned understanding of what’s going on with their money in Betterment, there are countless resources available on their website. Videos, articles, and comprehensive FAQs can help you develop your financial knowledge.
Drawbacks of Using Betterment
Management Fees
You’ll be charged an annual fee of 0.25% for the Digital plan but no minimum balance is required to open the account initially. For a Premium plan, you can expect to pay a 0.40% annual fee and you’ll need $100,000 for your minimum balance. To get any sort of discount for management fees, you’re required to have at least $2 million in your account.
Limited Investment Options
Your portfolio is limited to stocks and bonds with no alternatives available. For most investors, especially beginners, this isn’t a huge issue. But if you’re a more advanced investor, you might feel limited.
What Makes Wealthfront a Good Robo Advisor Option?
Customized Investments
When you invest using Wealthfront, the platform will divide up your portfolio in six to eight asset classes, which can include corporate bonds, real estate, dividend stocks, foreign stocks, U.S. stocks, and inflation-protected securities. Like Betterment, Wealthfront utilizes low-cost exchange-traded funds (ETFs).
Your investment portfolio is based on how much risk you can tolerate and readjusts when the market changes. Ultimately, the goal is to minimize the amount of taxes you’ll need to pay, so the overall investment approach is “buy-and-hold.”
Portfolio Rebalancing and Tax Mitigation
Just like Betterment, Wealthfront offers free, automatic portfolio balancing and tax-loss harvesting to keep your finances on track.
Whether you are an experienced investor or just getting started, it’s helpful to know what you’re getting yourself into when your money is on the line. Wealthfront delivers a user-friendly experience with plenty of helpful financial planning tools.
College Savings Plans
Need to save money for a college-bound child? Wealthfront features a 529 college savings plan. It keeps your child’s college fund on track and adjusts automatically for inflation. When it’s time to choose a college, Wealthfront can even help you estimate how much financial aid you’ll receive from a certain school.
Portfolio Line of Credit
Once your investment account makes it to $25,000, you can qualify for a portfolio line of credit and borrow up to 30% of your account’s value. You don’t even need a credit check nor will your credit score be influenced at all.
Digital Financial Planning Software
Path is a tool Wealthfront users can leverage to manage their wealth and plan for their future needs. It’s offered for free so anyone can prepare their budgets for longer-term financial goals like a home purchase. The best part? You don’t even need to have an open Wealthfront account to use it.
Cash Account
If you prefer to put your money in savings, you can use the Wealthfront Cash Account for free. It offers 0.35% interest and carries up to $1 million in FDIC insurance. Money in your cash account isn’t charged any management fees, similar to Betterment’s savings plan offerings.
Drawbacks of Wealthfront
Management Fees
Fees at Wealthfront are comparable to Betterment. You can expect the same annual advisory fee of 0.25%, which is a competitive rate for online financial platforms. For 529 plans, you can expect to pay 0.42% to 0.46% annually.
Minimum Account Balance
Unlike Betterment, you’ll need at least $500 to open a Wealthfront account. Although that might not be a large number, it’s still a barrier to entry for beginner investors who have less capital.
Minimal Human Interaction
If you prefer to talk to an actual person, Wealthfront doesn’t have many options to do so. There isn’t an advisor available to give you personalized financial advice and there isn’t an online chat feature. With that said, there is a phone line available between Mondays and Fridays you can use if you need an issue resolved.
Which Robo-Advisor Wins Out: Betterment vs. Wealthfront?
Ultimately, the robo-advisor choice for you depends on your preferences and financial goals. Both Wealthfront and Betterment are strong options in the robo-advisor market. If you prefer to get a financial plan for a specific goal, Betterment’s advice-based packages might offer the most bang for your buck. And if you prefer hassle-free, human-free investing or saving, Wealthfront lets you take a back seat while growing your money.
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