As I explained in previous posts, I’m on a quest to roll over my old 401(k) into the best retirement account I can find. My account currently stands at around $85,000. I socked this money away in my 20s by living very frugally, but it’s sitting in an account at my old job where I haven’t been for over six years!
Between my family and a busy career, I’ve got enough to worry about. So I’m looking for a low-cost, long-term retirement solution that requires the absolute minimum time commitment to manage.
That’s what led me to look into online financial advisors. These companies manage your investments using sophisticated software to rival the results of professional money management services — but with rock-bottom fees. At this point, I’ve researched and reviewed Wealthfront, Betterment, and Personal Capital in detail to see which option might work best for my situation.
While there are a lot of things I like about Personal Capital, including the fact that I would have access to a personal financial advisor, I decided to rule them out — mostly because I would pay a 0.89% fee for their expertise, which breaks down to about $750 per year for my $85,000 balance. While that’s an excellent rate when compared to traditional financial firms, it’s still substantially higher than the rates I would l pay with either Wealthfront or Betterment.
Still, even though I chose to pass on investing with Personal Capital at the moment, I do plan on using their free online tools and net-worth analyzer. I currently use Mint for this, but I’ve heard Personal Capital is more robust, and these tools are still free!
So, that leaves Wealthfront and Betterment as the two contenders for my 401(k) rollover. I’ve already reviewed both of these companies in detail, but I thought it would be a good idea to compare them side by side before I make a final decision. Let’s take a look.
Wealthfront vs. Betterment: At a Glance
Wealthfront is an online financial advisor based in California’s Silicon Valley. After several years in business, Wealthfront now has more than $5.8 billion in assets under management (AUM).
Betterment, based in New York, now has over $3 billion under management. The company uses software to automate several value-added tasks that brokers typically charge hefty fees to complete.
Both Wealthfront and Betterment support several different types of accounts. Each supports traditional and Roth IRAs, trusts, and taxable accounts. In addition, Wealthfront also offers support for SEP IRAs, 529 College Savings Plans, and non-profit accounts. Since I’m going to be rolling over my 401(k) into a traditional IRA, either of these companies would work for me.
Wealthfront vs. Betterment: Features
This table compares some of the most important features that Betterment and Wealthfront offer:
Comparing the features offered by Wealthfront and Betterment, it’s easy to see that both companies provide many of the same benefits. However, a couple of things jump out at me:
- With Wealthfront, I really like that the first $5,000 is managed without a fee if you sign up through a referral. Meanwhile, the $5,000 worth of free management for each additional referral is also appealing.
- With Betterment, I see having the ability to set individual goals as a stand-out perk. Meanwhile, the automatic fractional share investing they offer could mean higher returns for my managed accounts over time.
Deciding Factors Between Betterment and Wealthfront
One of the most important factors to me when deciding where to invest is how the ongoing fees stack up. Here’s where Wealthfront and Betterment start to differ rather significantly. Let’s take a look at what these companies charge their investors, and how they ultimately make their money.
- One flat-rate fee of 0.25% of your average balance
- First $5,000 is managed for free if you sign up with a referral
- Betterment Digital: 0.25%, no minimum
- Betterment Premium: 0.40%, $100,000 minimum
Wealthfront’s flat-rate fee of 0.25% is low and easy to understand. Allowing the first $5,000 to be managed for free is not only an excellent perk for beginning investors, but it actually lowers the effective rate for any investor. For example, let’s say I sign up through a referral, and then convince a friend to sign up for an additional $5,000 in free money management. With the first $10,000 managed for free, my $85,000 would actually be charged an effective rate of about 0.22%.
Use of ETFs
In many respects, Betterment and Wealthfront offer a very similar investing experience. Both companies are able to offer such low management fees because they invest your money in a mix of low-cost ETFs (exchange-traded funds).
These are funds that allow you to diversify your holdings and exposure to the market — from blue-chip U.S. stocks to small foreign companies to corporate bonds, there is an ETF for nearly every investing occasion — while escaping the high management fees associated with actively managed mutual funds.
Both companies use their own software to create long-term, diversified investment portfolios based on factors such as your age, risk tolerance, and time horizon. Furthermore, both companies provide a wealth of value-added services, including automated portfolio rebalancing and tax-loss harvesting.
When it comes to dividends, most brokerages only give you the option to take dividend payouts in cash or reinvest them into the same mutual fund or stock that paid them. However, both Wealthfront and Betterment provide “smart dividend reinvesting.” Essentially, this means their software looks for areas in your portfolio that are underweight so they can reinvest the dividends and rebalance your portfolio efficiently.
In addition, Betterment is able to purchase fractional shares — meaning you never have money sitting in your account just waiting to be invested.
Betterment allows you to set multiple personal savings goals and pursue them all at the same time. For example, if you wanted to save for retirement, a new house, and your child’s college education all at once, Betterment would set up three different goal funds according to their time horizon. This isn’t something I plan on taking advantage of with my retirement savings, but it’s an option that would appeal to a lot of people.
In late 2015, Betterment also added a new aggregation feature to its revolutionary RetireGuide. With this improved version, users receive automated advice to determine how much to save and invest for retirement, along with a “personalized, dynamic plan” built around family retirement dreams and financial goals.
Still, one of the most intriguing features of Wealthfront is its invitation program, which is more generous than Betterment’s.
As I mentioned earlier, the first $5,000 of each person’s account is managed for free with Wealthfront when they sign up through a referral or an easy-to-find affiliate link. On top of that, for each friend or family member you refer, Wealthfront offers you free management of an additional $5,000, with no cap.
Who Are These Automated Investment Advisors Good For?
Wealthfront and Betterment are both good for long-term, passive investors with modest account balances. As I said before, my main goals are to pay low fees and to minimize my time commitment, so anyone looking to achieve those two goals with their retirement investments would be well served by either option.
Obviously, with your first $5,000 being managed for free, Wealthfront comes out slightly ahead if you have a low balance. The minimum investment is only $500 and having your first $5,000 managed for free can really help you save.
Wealthfront is also a great choice for people with the ability to influence their friends and family into joining: The more referrals you make, the more money you can have managed for free. Influencers with large social circles may be able to refer enough new members to drive down their costs to zero.
Novice investors and those saving for multiple goals at once would also be a great fit for Betterment’s services. Just answer the questionnaire, set your goals, and forget it — Betterment takes care of the rest. What’s more, Betterment requires no minimum investment, opening the door to first-time investors who might have minimal funds starting out.
After comparing apples to apples, I’ve found that both Betterment and Wealthfront have a lot to offer novice investors and those who would simply prefer to “set it and forget it.” Both firms offer low fees when compared to traditional financial advisors, and manage to stand out with their smart features and perks.
I don’t think I could go wrong with either option, but I am determined to choose the firm with the best long-term potential for my retirement fund. I’ll let you know my final decision in the last segment of this series.