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Wealthfront Versus Betterment

Author: Michael Jackson

Wealth management typically refers to investment advisory strategies encompassing financial planning, portfolio management and a number of financial services. However, as Internet startups continue to mature, the field of financial services and investment strategies has expanded as well. (For more, see: Financial Planning: It's About More Than Money.)

Ubiquitous access to the Internet has exposed individuals to financial information customarily held by banks, brokerage firms, and other financial institutions. Traditionally, licensed wealth managers or financial advisors provided clients with financial products offering long-term positive returns. Today, robo-advisors supply online investment management and financial advice through desktop platforms and mobile apps. The utilization of robo-advisors gives clients limited human interaction, tax optimization, individual control over assets with professional trading advice, and opportunities for investment in a variety of securities.

Internet startups Wealthfront and Betterment are at the forefront of robo-advisory, managing client investments through unique algorithms. While similar on the surface, the two companies offer different services and products for client investments.

Betterment

Since its inception in 2008, Betterment has become a financial services industry leader providing diversified investment advice through a fully automated investment management platform. Costing a fraction of the price of traditional financial advisors, Betterment offers an online platform for individuals to manage and grow their wealth.

Opening an account with Betterment gives clients investment management particularly focused in 401K and IRA retirement plans. Betterment creates a low cost portfolio that invests a client's money in globally diversified exchange traded funds (ETFs). ETFs are securities that track an index, commodity or basket of assets while trading like a stock on an exchange.

Betterment's investment process follows modern portfolio theory, which seeks maximized returns through asset allocation and diversification while maintaining a particular level of risk aversion. With no minimum initial investment, Betterment charges management fees from .15 percent to .35 percent and an ETF fee of .15 percent per year.

Wealthfront

To a similar degree, Wealthfront is an automated investment management service that aims to achieve optimal investment returns. The platform also uses modern portfolio theory to deliver maximized long-term returns with a low probability of significant downside. After incorporating a client's tolerance for risk, low cost ETFs are used to represent each asset class.

Wealthfront's mix of ETFs resembles those used by Betterment, with stock allocations in U.S., foreign and emerging markets. Likewise, bond allocations include municipal, corporate and emerging markets. Wealthfront differs from Betterment through its incorporation of alternative allocations in real estate and natural res.

A minimum initial investment is required in the sum of $5,000 to open a Wealthfront account. Investments under $10,000 are free of management fees, while investments over $10,000 require a .25 percent advisory fee.

The Pros and Cons

The advent and rapid growth of the Internet has transformed the landscape of many industries, including financial services. Automated investment management, or robo-advisory, provides financial advisory services with low management fees and little to no initial investment – an alternative to to wealth management services from banks and brokerage firms.

Wealthfront and Betterment are leading the charge in the robo-advising industry. Both companies were founded in 2008. Wealthfront currently boasts more than $2 billion in assets under management while Betterment controls $1.4 billion in client assets.

The biggest difference between Betterment and Wealthfront, however, lies in the low cost ETFs used by each company. Unlike Betterment, Wealthfront does not offer U.S. government bonds in its asset allocation. Meanwhile, Wealthfront does use real estate and commodities ETFs. Betterment believes real estate exposure is properly accounted for within its equity portfolio. Commodities, on the other hand, are not included due to their cyclical nature, which may result in less than optimal long-term growth.

The Bottom Line

As a means of investing, Wealthfront and Betterment have emerged as popular alternatives for individuals without the large endowments required from traditional wealth managers.

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