Wealthfront vs. Betterment: Why I Don’t Recommend Either

Robo advisors now hold more than $60 billion of investor assets. This pace of growth is a promising sign that the number will continue to increase in the years to come.

The two critical questions are; 1). What are the pros and cons to robo advisors, and 2). Which one robo advisor do we choose?

Here’s my review pitting two of the largest robo advisors against each other for your entertainment and educational enjoyment: Wealthfront vs. Betterment.

Why Robo Advisors


What is the value proposition from robo advisors? Why are more people switching?

Robo advisors offer automated services without the use of a team of analysts and traders.

By eliminating pieces of the operating puzzle, robo advisors have a cost advantage in many investing services.

One positive trend is people are moving away from high cost investment vehicles such as hedge funds and mutual funds. Often these fees can be as high as 2% or 3%, sometimes even higher.

People pay the high fee because they expect to beat the S&P 500.

As Warren Buffett highlighted last year, the performance from these hedge funds isn’t shaping up.

Given that you’re reading this now, you know how the personal finance blogosphere feels about fees.

Wealthfront vs Betterment: Why I Don't Recommend Either photo

What About those Fees?

Here’s the blunt of it:

Betterment’s .15% annual fee results in 2.65% of my retirement portfolio at age 67.

Wealthfront’s .25% annual fee turns into 4.48% of my retirement portfolio at age 67.

In an effort to further accentuate the stat:

Robo Advisor fees may exceed six figures.

Even with a 2 million dollar retirement, fees could result in $100,000.

A small fee is still likely to cost many tens of thousands of dollars.

Thanks to companies like Vanguard offering online services where we can buy and sell shares with incurring a management fee, investing has become remarkably easy. (If you’re looking to get started, check out my first two steps.)

Investing is not as difficult as robo-advisors and others will have you believe.

But…. But Tax Loss-Harvesting is amazing, right?

At the peak,  if we received the maximum tax-loss harvesting benefit each year then our total robo advisor benefit would be $750.

Compare this with the total fees taken from your portfolio mentioned above, again 2.65%+ or six figures in fees.

When the cost outweighs the benefit, I’m not sure why the assets under management (AUM) is at $60 billion and growing.

For the best write up I’ve seen disassembling the “tax loss harvesting is amazing” discussion, check out the post mentioned below. 

Other Pro’s to Robo Advisors

Another pro that robo-advisors offer, is removing the emotions out of our investing strategy. Think about it; if we decide the stock market is too low and we want to sell, we still retain the option to do that via a robo-advisor, albeit it may take an extra few steps.

The access to funds is not 100% eliminated, so we are still exposed to the standard emotional turmoil each investor will face.

Another benefit is rebalancing. Vanguard (and others) offer the same ability to rebalance via one click of a button. If eliminating one button press is a strong enough benefit to remove 10% of your portfolio, then by all means, sign yourself up and send me some of that spare cash while you’re at it!

Final Recommendation

Do not use either service. Investing is easy enough where we don’t need to pay someone else 5% of our retirement portfolio. 

🙂

The money tools used by the Distilled Dollar Household are free. Check out services like Personal Capital and Mint if you haven’t already.

The same topic of robo-advisors was discussed on the podcast a few weeks back:

What is your take on robo-advisors?

-Matt

P.S. The comments section was not up on the site for a bit but it is back now so share your opinion if you care.

P.P.S. For more numbers and charts, check out this fantastic post on a real case scenario.

17 comments… add one
  • Financial Coach Brad May 11, 2017, 7:08 am

    First, Betterment raised their rates. Everyone pays .25% now.

    I have >$2mm invested with Betterment. Is it worth the $5k/year? To me, right now at least, it is. Not only have I found that going DIY I slip on regular management of standard investing tasks, but my own picks (which I hold at Fidelity) haven’t performed as well. YTD my Betterment account is up .83% over my Fidelity account and up .28% over my Motif account. That doesn’t mean it will always outperform of course, or that I couldn’t get better at doing it myself, but the reality “today” is that its working better for me. Also, they cap the fees at $5k/year, so with $3m invested it works out to just .16% and it continues to drop (as a percentage) as the balance grows.

    • Distilled Dollar May 11, 2017, 7:25 am

      $5,000 fee for investing each year is still too high in my opinion. Plus as you highlighted, the fees can raise at any time if users become used to the platform and stick to it.

      Are there particular funds you are investing in through Betterment that are unavailable in index funds?

      • Financial Coach Brad May 11, 2017, 8:31 am

        $5,000 is a lot. What if you had $100,000 invested though. Is $250/year also too much? If you had $50m invested, would $5k still be too much? Is it the % or total amount that is the most concern? Just curious.

        Nothing in Betterment can’t manually be done elsewhere. The fees are for the convenience of someone else handling it for the investor.

        Two things I forgot to mention earlier:

        1) The real cost is only a couple thousand after the TLH+. We’re early-retired so do draw investments. TLH helps offset taxes for sure. And yes, I could also do this on my own but it can be tricky.

        This is a BIG ONE for us…

        2) My wife hates dealing with investments. If I die tomorrow I know she won’t have to make any changes. If I self-managed and died, she’d have to hire someone to help – likely paying 4 times as much. So we look at part of these costs as a sort of “insurance” if you will. It’s peace of mind because she understands Betterment without having to understand (and perform) the standard management tasks of good portfolio management.

        (* BTW, to the “raising fees” comment, if they raised the fees to a level I didn’t like, I can very easily just move the money at that point.)

        NOT trying to convince you. Just sharing our personal thoughts on it.

        • Distilled Dollar May 11, 2017, 8:55 am

          Yes, I agree 5,000 is too much. If you’re considering investing $50MM with Betterment, then you should give me a call first! Hah.

          My chief concern is relying on an “easy system” that could, A) increase fees, and more importantly, B) be eliminated by some DIY steps like you highlighted in your first comment.

          I agree with your approach on leaving it with a Robo Advsior over an active manager. In the “good, better, best” model, this would be the good to great choice, but I stick by my “best” choice of DIY to save on fees.

          I have seen it work in some families where a son or daughter handles investments at a certain age.

          Probably more important than fees is the self-reliance aspect of not needing to pay another company for software or an extra tool that helps us invest.

          Sorry to harp again on fees, but obviously I’m against them! 🙂

          • Financial Coach Brad May 11, 2017, 8:59 am

            “Sorry to harp again on fees, but obviously I’m against them!”

            I’m with ya!

            There is no free-lunch here though. There is always some fee; it’s just a matter of what an acceptable fee is to the individual.

            Plus, it needs to be considered if the fees – whatever level they run – are worth it or not. Study after study has shown that “investor” returns are only about 60% of “investment” returns. This is because most people aren’t good at managing their own investments. For the 90% of people in that group, they’d likely come out ahead by accepting the fees and letting someone else (or a service) handle the investments for them.

            People like yourself who are diligent, enjoy it, and savvy enough to take the correct actions at the correct time, of course are better going it alone and paying the minimum fees possible.

          • Distilled Dollar May 11, 2017, 9:18 am

            In the case of investing via Vanguard index funds vs having a Robo Advisor invest in index funds – then yes, you can consider a free lunch since Vanguard does not charge a 0.25% fee.

            I agree we are unable to eliminate the fee on the index fund entirely, but I’ll gladly take 0.04% over 0.29% if it means $100K plus in my pocket.

            As for diligence and discipline, my only actions are buy and hold so I’m not actively moving money around.

            If you’re trading, then a Robo advisor might work but I’m not into trading so won’t comment here.

            If you’re investing with Vanguard, they offer free advice and calls for those who need assistance.

            Long story short, we agree that lower fees = better.

        • Financial Samurai Jul 13, 2017, 6:27 pm

          I didn’t know they capped fees at $5,000! That’s a nice incentive to keep on adding money well past $2,000,000.

          At the end of the day, it’s the bull market that makes the biggest difference.

          The older and busier I get with family responsibilities, the MORE I’m happy to have someone manage my money and set up an auto debit. I missed out on a couple months of equity contribution this year that hurt me returns since the market is up b/c I was sidetracked AND fearful of a market correction. Now my cash position is very large, which is good in a bear market, but not so good when everything just goes up, up, up!

          The wealthier one gets, the more you are willing to pay for services to help simplify life.

          Sam

  • Jason Valentino May 11, 2017, 7:55 am

    Matt,

    I’ve been enjoying your blog for a few weeks now, digging back into the archives and reading up many of your past posts. I’ve enjoyed each of the mm quite a bit. I think this one is a bit lopsided.

    It’s actually quite coincidental timing of this post. Rather than write paragraphs to defend the active management position, American Funds just put this out recently, illustrating how they’ve outperformed indexes for quite some time:

    https://www.americanfunds.com/advisor/insights/investment-insights/lifetime-of-index-beating-results.html

    My personal opinion.? Active v. Passive is just another opportunity to diversify and take more volatility out of your portfolio. Hedge one against the other by owning both positions. To assume that active managed funds won’t once again be outperforming passive counterparts with regularity seems like an extreme assumption to me. And the greater the continued flood to passive there is, the more opportunity that active managers will be presented. Sounds quite a bit like chasing returns, in my opinion.

    • Distilled Dollar May 11, 2017, 8:12 am

      Jason – thanks for the comment and the article you linked to. I’ve seen plenty of articles from American Funds since they often act as the barber telling us we need haircuts.

      One item I notice many times in cases like the article you sent me, is that they suffer from what’s known as survivorship bias. While 18 funds are outperforming the market, the results of closed down funds is removed from the pool, thus making the “current” results look great. Additionally, past performance is not indicative of future results + the 18 funds ignore the 1000’s+ other funds that have cumulatively lose investors billions of dollars in fees.

      I agree active management has a place in a diversified portfolio, so the focus on this article was the fees incurred if investors are looking to use robo advisors to gain access to passive investments. If you’re looking to diversify into active funds, I first challenge you to see if you can gain access to that investment via a low cost index fund. If not, then an active fund is an option.

      One last point on the “assumption”. It isn’t an assumption as much as technology allowing lower costs to access the same investments. As mentioned above and in the article, the focus here being on robo advisors giving us access to the same investments (S&P index fund for example) that we can gain access to with no fees via Vanguard for example.

      I hope that clears up the “lopsided” aspect.

      • Jason Valentino May 11, 2017, 8:46 am

        Matt,

        Great response and thanks for the clarification. Indeed, it does not make much sense to pay any kind of an additional fee tied directly to an investment in a passively managed/index fund. I got the impression from your post that you struggled to see value in any kind of an actively managed portion of a portfolio, but this is clearly not the case. And the analogy you share about the haircut is great. At the same time, I feel for the barber that’s doing the right thing all the time and in it for the right reasons, as it’s quite an uphill battle to establish him or herself as objective. Keep up the great work!

        • Distilled Dollar May 11, 2017, 8:59 am

          Great to see we agree! This may be one of the more productive conversations I have today. 🙂

          I’ll need to do an “active vs passive” post soon as I have seen scenarios where index funds do not offer exposure to certain types of investments. In that case, active makes sense. That being said I’ve seen plenty of cases where active didn’t make sense, so I’ll detail those in that future post.

          Thanks again for the comment and checking out the site!

  • The Grounded Engineer May 11, 2017, 7:56 am

    I think it was one of your podcasts on Millennial Money where Grant discussed being a huge fan for robo advisors? I could be wrong. My point is I get the value for robo advisors if you are just starting to invest or you don’t have any time to choose your investments.

    On the flip side, if you read the Simple Path to Wealth by Jim Collins and realize that you could easily invest in VTSAX and be well-diversified, you could save yourself money in fees by DIY. The other issue with investing yourself is Vanguard and Fidelity have minimum investment amounts to get started. However, you could invest in ETFs until you reach the limit to invest in index funds.

    • Distilled Dollar May 11, 2017, 7:58 am

      Yep! The robo adviser podcast episode is featured at the end of this post.

      Your second paragraph summed it up well – the DIY approach is better in the long run. Sure there is an initial of $1,000 for Vanguard funds, but with ETF’s you can gain access sooner. Plus, a $1,000 investment hurdle is never worth $100,000+ in fees over the long haul.

  • Mike May 11, 2017, 12:30 pm

    Robo advisors take out the human element, better off doing it on your own…i like Personal Capital too…take care, Mike

  • earlyretirementnow May 11, 2017, 5:13 pm

    I couldn’t agree more. Wealthfront and Betterment offer very little to justify the 0.25% fee p.a.
    You can do the Tax Loss Harvesting yourself very easily.
    Investing with Wealthfront/Betterment in a retirement account is the worst of the worst. There is no Tax Loss Harvesting and you pay 0.25% fee plus the ETF expense Ratio when you can get the same exposure at Vanguard/Fidelity/Schwab at a fraction of the cost.

    Also, it always amazes me how otherwise sophisticated investors claim that the TLH benefit is $3,000 p.a. That’s not the benefit. It’s the tax deduction. If you pay 25% marginal tax your TLH/Roboadviser benefit is only $750, not $3,000. Thanks for pointing this out!

    I also pointed out one very troubling issue with the Roboadvisers here:
    https://earlyretirementnow.com/2016/08/24/we-just-saved-a-ton-of-money-by-not-switching-to-betterment/
    If you really want to invest with them, make sure you only transfer assets without built-in gains!

    • Distilled Dollar May 11, 2017, 8:58 pm

      Hah the graph of savings vs benefit is great. I’m linking your post at the bottom of mine in case folks want to learn more especially with some great numbers and charts too!

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