Robo-advisors—online investing platforms that seek to emulate the services of a financial advisor—are growing in popularity. They appeal to young and low-income investors because they offer lower fees and minimum investment requirements than hands-on advisors.
Two of the most popular robo-advisors are Wealthfront and Betterment. Both offer high-quality, trustworthy products managed by teams of professional investors looking to earn you the highest return on investment. Because they have similar offerings, it can be tough to decide which is right for you unless you take a look at some of their differentiating features. Based on fees and tax-loss harvesting options, each is better for a specific type of investor.
Betterment and Wealthfront offer various services and products, including financial planning and savings accounts. For the purposes of this review, we're focusing on their personal investment accounts.
Betterment is one of the first robo-advisors, and many consider the company to be the one that started the industry. With a history going back to 2008, Betterment focuses on putting your investments into low-cost, diverse exchange-traded funds (ETFs) that match a risk profile you provide when opening a new account.
You can get started with a $10 minimum deposit and no minimum balance. Betterment invests 100% of your dollars automatically. You never have a cash balance in your account; everything is immediately invested based on your risk profile.
One of the features many investors get most excited about with Betterment is tax-loss harvesting. Previously available only as a manual exercise for wealthy investors, Betterment’s algorithms automatically buy and sell securities in your portfolio to capture tax losses, lowering the capital gains taxes you owe to the IRS.
Over time, tax-loss harvesting can add up to big savings. It can offset up to $3,000 per year of ordinary income and carries forward if you go over. Betterment requires no minimum balance and charges a 0.25% annual fee, or about $25 per year for every $10,000 invested, for a regular digital account. The premium account, which includes access to advice from CFP professionals, requires a $100,000 minimum balance and charges an annual fee of 0.40%.
Wealthfront also came onto the scene in 2008, but its current iteration didn’t exist until about 2011, giving Betterment a three-year head start in the robo-advising space. However, Wealthfront offers a product that gives you even better tax results than you can get with Betterment’s tax-loss harvesting: stock-level tax-loss harvesting (formerly known as direct indexing).
Stock-level tax-loss harvesting is similar to a regular tax-loss harvesting strategy, but instead of investing only in broad market ETFs, Wealthfront algorithms invest directly in S&P 500 stocks. This granular control offers even more tax-loss harvesting savings than Betterment’s ETF level tax-loss harvesting management. However, you only gain access to stock-level tax-loss harvesting when your taxable investment balance reaches $100,000. Once you reach $500,000, you can join the more powerful Smart Beta product.
Another difference is in the fees. Wealthfront charges the same 0.25% annual advisory fee that Betterment charges, but it also charges a fund fee of 0.06 to 0.13%, depending on the funds your money goes into.
In addition, Wealthfront requires a $500 minimum deposit to open a new account. Otherwise, Wealthfront offers a more or less identical investing service to Betterment. After you fill out a risk profile, Wealthfront’s automated algorithms invest your money in a range of ETFs.
Where Betterment Wins
Thanks to its no-minimum opening balance, low fees, and simple investment setup, Betterment is the best option for new investors looking to make money in the markets with minimal personal involvement. Because Betterment builds in tax-loss harvesting, any investor can take advantage of opportunities formerly reserved for the wealthiest investors.
Where Wealthfront Wins
If you have a portfolio of $100,000 or more, Wealthfront is the strongest offering by far. Thanks to its stock-level tax-loss harvesting strategy, investors can get an edge over Betterment in the long-term.
Other Robo-Advisors to Consider
- Schwab Intelligent Portfolios: If you already have a relationship with Charles Schwab, you may be interested in Schwab’s robo-advising product. This is a winner because it comes with no fees. Of course, the funds you own via Schwab Intelligent Portfolios still do charge fees—no different than if you’d invested in them directly. Accounts require a $5,000 opening balance.
- Axos Invest (formerly known as WiseBanyan): Axos Invest has a 0.24% robo-advising fee with a $500 account minimum. Advanced features like tax-loss harvesting, which are included in some competitor products, require an extra fee. If you are a brand-new investor with a small portfolio, you may want to consider Axos Invest.
- Wealthsimple: Wealthsimple is another option with no minimum balance requirement, but it charges 0.4% to 0.5% in management fees, making it more expensive than the average robo-advisor. Tax-loss harvesting is included with Wealthsimple Black for accounts over $100,000. Wealthsimple is best known for offering socially responsible portfolio options
- Ellevest: This robo-advisor claims to serve women better than other products because it has tailored its algorithm to women's income and life cycles. It has no minimum deposit requirements to start. Ellevest offers three membership levels with monthly fees ranging from $1 to $9. The company also offers a no-fee emergency fund when you sign up for an investment account.