Investing has become a lot easier over the last few years with the rise of robo-advisors. Rather than creating an investment strategy through a financial planner, a robo-adviser service uses algorithms to make a wealth management plan targeted to each individual investor.
Even more appealing is that these services are often less expensive than hiring a financial planner and usually require a much smaller minimum to invest.
So if you don’t have tens of thousands of dollars at your disposable but still want to start building an investment portfolio, using a robo-advisor has a much lower barrier to entry. There are many online services available on the market, but three stand out from the pack.
Wealthfront and Betterment are two of the first and most successful robo-advisors, while investment stalwart Vanguard now offers a semi-automated service as well. We’ll review all three options so you can decide which one works best for your investment preferences.
Side by Side Comparison: Wealthfront, Betterment, and Vanguard
|Management Fees||Expense Ratios||Account Minimum|
|Wealthfront||0.25% for all investments||average of 0.08% for ETFs; 0.11% for Wealthfront Risk Parity Fund||$500|
|Betterment||Digital account: 0.25% with $0 minimum balance; Premium account: 0.40% with $100,000 minimum balance||average of 0.13% for ETFs||None|
Wealthfront seeks to maximize investors’ long-term returns by creating personalized portfolios based on an individual’s own risk tolerance. It’s certainly one of the biggest players in the arena, managing over $5 billion in assets.
Wealthfront’s management service uses a portfolio theory that was created by two Nobel Prize-winning economists. It selects low-cost exchange-traded funds (ETFs) that are based on asset classes deemed ideal for the current investment environment.
There are 11 asset classes available, including U.S. stocks, foreign developed stocks, emerging market stocks, dividend growth stocks, and U.S. government bonds. From there, your portfolio is regularly monitored and may have ETFs rebalanced based on performance.
A new asset class is also available from Wealthfront, called Risk Parity. The goal of this allocation strategy is to deliver better risk-adjusted returns across a range of market environments.
Wealthfront’s Fees and Account Types
All Wealthfront accounts are managed for an annual advisory fee of 0.25%.
This is fairly standard for robo advisors today. You must have an account minimum of $500 but there are no account charges like transfer or closing fees. Its average expense ratio is 0.08% for ETFs and 0.11% for the Risk Parity Fund.
This is a standard offering allowing you to diversify your portfolio across several accounts or to select just one specific type of investment opportunity you’d like to focus on.
Perhaps you already have an employer-sponsored retirement plan and just want a non-retirement account. Wealthfront offers the flexibility to do just that without having to be extremely hands-on in the decision-making process.
In addition to retirement savings plans, Wealthfront also offers a variety of taxable savings accounts. The most common is an individual account, which is a popular option for building long-term wealth in addition to traditional retirement accounts.
Joint accounts are an easy way to build savings alongside your spouse, and trust accounts can help you manage your assets for handing down in the future.
Wealthfront’s new 529 college savings plan is a tax-advantaged account that helps you save for your child’s future college tuition and other related expenses.
Earnings are tax-deferred and the funds won’t be taxed when you withdraw to use them at an eligible institution. It also has a high contribution limit, which is $379,000 per beneficiary.
All Wealthfront accounts enjoy automatic rebalancing. Rather than having your portfolio manually reviewed quarterly or annually by a financial advisor, Wealthfront sets thresholds for each asset class. When it moves away from the target allocation, your funds are automatically redistributed to get back on track.
Another feature available for taxable accounts is daily tax-loss harvesting which entails selling securities that have a loss, then replacing them with a similar one.
This strategy keeps your asset allocation balanced while maximizing your tax savings. Wealthfront also offers direct indexing on any account over $100,000, providing another level of tax-loss harvesting for larger accounts.
Many of these strategies have historically only been available to investors with multi-million dollar portfolios. But Wealthfront’s automated system has leveled the playing field to allow portfolios of any size to take advantage of these more sophisticated investment strategies.
Wealthfront also offers a referral bonus. When you invite a friend who decides to sign up, you both get fees waived for an additional $5,000. An added bonus? Wealthfront recently launched a free financial planning app called Path, giving clients software-based services for both their investments and financial planning.
Betterment provides goal-based investing so that your portfolio allocation is tailored specifically to reaching your personal milestones in life. Referred to as behavioral finance, Betterment provides an “advice algorithm” that looks at both time and diversification relevant to reaching your goals.
Whether you’re saving for retirement or a safety net fund, Betterment looks at your age, goal, and timeline to create a personalized investment strategy for your portfolio.
This unique approach is appealing to investors who care less about risk diversification and more about a goal with a deadline. Betterment also offers 12 different stocks and bonds ETFs for a broad selection of asset classes.
Betterment’s Fees and Account Types
Unlike Wealthfront’s flat fee system, Betterment charges fees based on a tier system. If your initial account balance is under $100,000, you’ll be charged a flat 0.25% fee. With this plan, you receive unlimited account management, tax-efficient, investing features, customer support, and no minimum balance.
If you’d like access to financial advisors, Betterment now offers two additional plans with higher feed. With a minimum $100,000 balance, you can pay a 0.40% fee for the Plus plan and receive one annual call with a team of CFP professionals and licensed financial experts.
You also get additional account monitoring with this plan. For even more service, you can pay a 0.50% fee with an account balance minimum of $250,000. This Premium plan gives you unlimited calls with Betterment’s team of advisors and the same account monitoring as the Plus plan.
Betterment offers the same types of accounts as Wealthfront: non-retirement accounts for both individuals and couples, IRAs (traditional, Roth, SEP, and rollovers), and trusts. It’s also in the process of rolling out a program to accept transfers from other brokerages for certain types of ETFs.
Like Wealthfront, Betterment clients can take advantage of both automatic rebalancing and daily tax-loss harvesting. It doesn’t provide direct indexing but does offer the unique service of goal-based investing.
Rather than filling out a risk tolerance questionnaire, you instead answer a series of questions related to your short-term and long-term goals.
You then receive suggestions on how to invest your money in order to reach those goals, which are usually related to a financial safety net, retirement, and general investing. Obviously, you ultimately get to decide how to allocate your funds, and you can then make monthly deposits based on your plan.
You can also bring some friends to Betterment and receive a referral bonus. You get 30 days managed for free for each friend who signs up, and your friend gets three months for free. For every three people who sign up through your referral link, you’ll get an entire year of free management.
Vanguard is traditionally known as one of the largest investment management companies in the nation, managing over $3.6 trillion in assets. While it still keeps a large focus on individual wealth management services, the firm has now rolled out its own hybrid robo-advisor service called the Vanguard Personal Advisor Services.
It’s not completely automated, with portfolios still customized by personal advisors. However, its fees are competitive with typical robo-advisors, giving investors the chance to have a lower-cost, hand-off experience with the added advantage of having access to a personal advisor.
Vanguard’s Fees and Account Types
All Vanguard accounts are subject to a flat fee of 0.3%. However, unlike Wealthfront and Betterment, Vanguard comes with a high minimum account balance to the tune of $50,000. While this may not be doable for many new investors, it could still be attractive to someone who’s been in the game for a while.
Unlike robo-advisors, Vanguard doesn’t focus solely on ETFs. In fact, portfolios mostly consist of index funds as well as some actively managed funds.
While the company typically recommends its own funds, you may incur additional charges and fees if you elect to purchase non-Vanguard investments. You can also elect to add in ETFs and money market funds. There are also several account types to choose from, including brokerage accounts, IRAs, 529 plans, and trusts.
Since Vanguard doesn’t provide an automated service, some of the features that are comparable to robo-advisors aren’t standard offerings.
For example, it does offer tax-loss harvesting, but it’s performed on a client-by-client basis, not daily. Rather than automatic rebalancing based on asset class thresholds, Vanguard instead re-evaluates portfolios once each quarter.
On the plus side, you do have access to your own dedicated financial advisor, rather than just a customer support phone number. You can schedule a phone call after receiving each quarterly report and can also email your advisor with questions at any time.