A Complete Guide to Robo-Investing
What is robo-investing?
Is that like when Robocop puts down his huge robot gun, pulls on a green accountant eyeshade and starts handling your investments?
“Citizen, my programming indicates that your portfolio requires more mutual funds.”
No. That’s not it at all. Not even close.
Robo-investing is when online financial companies use sophisticated software instead of human stockbrokers to manage your investments. That way, the companies can keep fees super low.
Two of the dominant robo-investing companies are Betterment and Wealthfront. In many ways they’re very similar. But there are important differences between the two, so let’s compare them.
Launched in 2008, Betterment is considered the pioneer of robo-investing. It’s now managing $9.5 billion in assets. Wealthfront, which moved into robo-investing in 2011, is managing $5 billion in assets.
Betterment is based in New York, Wealthfront in Silicon Valley.
The Epitome of ‘Set It and Forget It’
The two companies are strikingly similar. They have the same basic business model, designed for long-term investors who want a professionally managed portfolio at a rock-bottom price.
Each company’s website asks you about your age, when you hope to retire, and your tolerance for risk.
Based on your answers, it’ll funnel your investment money into a portfolio of low-cost index funds that track the stock market as a whole.
Both companies use software robots — proprietary programs that act as automated advisers — to steer your investments and cheaply do things stockbrokers and money managers would charge you high fees to do.
The Robo-Adviser Industry, Nearly a Decade Old
If you’re trying to decide between Betterment or Wealthfront, consider how they’re different:
Wealthfront requires a minimum deposit of $500 to open an account. (It used to be $5,000.) In contrast, Betterment requires no minimum deposit.
Let’s assume you’re opening a tax-deferred account like an IRA. That’s what most people do with these companies.
Betterment and Wealthfront each charge the same annual management fee of 0.25% of your investments. For example, if you invest $10,000, you pay them $25 a year to manage it.
Except that Wealthfront doesn’t charge any fees for your first $10,000. And if you invest more than $2 million with Betterment, it caps its fees at a maximum of $5,000.
Types of Accounts
Both companies handle 401(k) rollovers and several kinds of investment accounts — traditional and Roth IRAs, trusts, and taxable accounts. However, Wealthfront also offers 529 college savings plans. Betterment doesn’t offer a 529 plan, but has goal-setting tools to help you save.
Refer a Friend
For every friend or relative you refer to them, Wealthfront will manage an additional $5,000 of your assets for free. Betterment offers one free month of service for every referral, and one free year for every three referrals.
Speak to a Human
For an additional fee, Betterment will arrange for you to speak with an actual human advisor, not just a robo-adviser.
A plan called “Betterment Plus” charges 0.40% instead of 0.25%, but gives clients unlimited advice via email and one financial planning call per year. “Betterment Premium” charges 0.50% and offers unlimited email and unlimited phone calls with advisors. These plans require a minimum balance of $100,000.
Goal Setting & Guidance
Both websites offer retirement planning tools. Betterment has “RetireGuide,” while Wealthfront has “Path.”
However, Betterment also helps you create personal savings goals right from the beginning when you sign up and answer their questions. You can customize your Betterment accounts to aim for four different kinds of goals: “retirement,” “safety net,” “wealth building,” or “major purchase.”
Socially Responsible Investing
Betterment recently launched socially responsible investing (SRI) portfolios. The site explains that this is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact. For example, companies that profit from poor labor standards or environmental devastation. These portfolios also increase exposure to companies that are thought to have a positive social impact, like fostering inclusive workplaces or committing to environmentally sustainable practices.
Betterment vs. WealthFront: Which is Best for You?
Here’s the million-dollar question, and it’s a tough one.
Which is better?
“The answer to that question depends on many factors and is not a simple, straightforward answer,” says Investor Junkie, which compared the two. “Unlike other comparisons we’ve done, this one doesn’t have a clear winner.”
InvestorMint compared the two and concluded, “Management fees and expense ratios are almost identical at Betterment and Wealthfront … Both feature good retirement planning tools, though Betterment goes a step further in offering goal setting features.”
It was those goal-setting features that convinced business development strategist Michael Gardon. Writing for the personal finance website The Simple Dollar, he compared the two robo-advisers and chose Betterment because it helps you set financial goals.
“Novice investors and those saving for multiple goals at once would be a great fit for Betterment’s services. Just answer the questionnaire, set your goals, and forget it — Betterment takes care of the rest,” he wrote.
“What’s more,” he wrote, “Betterment requires no minimum investment, opening the door to first-time investors who might have minimal funds starting out.”
Mike Brassfield ([email protected]) is a senior writer at Codetic. He definitely needs to invest more.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can’t personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.