Vanguard and Betterment are two of the industry’s leading brokerage solutions specifically designed for long term retirement investing. Vanguard has been around a lot longer, founded with the purpose of providing mutual funds and ETFs at the bare minimum cost. Betterment has emerged much more recently, coming into its own within the past five years.
They simplify the retirement investing process even more than Vanguard and other competitors such as Schwab and Wealthfront, while keeping costs lower than most other retirement investment alternatives, particularly those involving a personal investment manager. Both platforms have qualities which will appeal to different kind of Investors, whether they have any knowledge of the stock market or not. Here are some things to consider before setting up your IRA with one or the other in order to manage your own investments effectively and meet your financial goals. Let’s start by taking a brief look at the role of robo advisors in helping investors to develop an investment strategy.
The role of Robo-advisors
Technology now plays a major role in all aspects of everyday life and it’s certainly involved in the world of finance. For instance, robo-advisors make use of algorithms to do some of the work that would normally be the remit of a human investment advisor. They use the algorithms to provide support to investors who want some help to optimize their investments, rather than opt for a completely DIY solution.
As Matt Becker writes for The Simple Dollar, the mission of robo advisors is to;
“… take the hard work off your plate by creating and managing the investment portfolio themselves, allowing you to focus solely on contributing money and getting on with your life.”
The investment solutions that are recommended by robo-advisors are based on several different items of information including the financial goals of the individual and their risk tolerance. Most robo-advisor providers offer human advice in addition to the robotic solution, such as Vanguard personal advisor services or access to certified financial planners at Betterment. These human advisors are a much needed supplement when it comes to helping investors understand investment opportunities such as commission-free etfs. Having looked at the basics of robo-advisors, let’s go on to compare two of the biggest names, Betterment and Vanguard.
Betterment is one of the best known robo-advisor platforms around. It helps investors with several vital services that are expected from a brokerage account. These services include:
- Personalized investment advice that is based on personal financial goals and risk factors. This includes the facility to message advisors using the mobile app.
- Access to tax smart investing so that an investment portfolio is as tax efficient as possible. This is obviously one of the most advantageous Betterment uses for many people.
- Exchange Traded Funds (ETF) portfolios – this means that investors have access to several groups of securities (etfs).
- Location of assets. This means that assets under management are located in the most financially beneficial place. For example, municipal bonds which do not attract federal taxes are placed in a taxable account whereas high-tax assets are placed in tax-advantaged IRAs.
- Rebalancing of asset classes using deposits and dividends.
- Advice about the impact that withdrawal would have on an investment account.
- Tax loss harvesting that involves the selling off of losing investments and the purchasing of similar investments, in order to reduce the demands of tax on investments.
- Advice about retirement planning. The retirement tool that Betterment provides helps those who want to invest for their retirement to make the best decisions. It provides information about the value of a savings account plan and identifies asset allocation that is detrimental to the financial advice that is provided. Betterment also helps people to create a diverse retirement portfolio by providing access to low-cost index funds.
- Help with cash management. There is a wealth of different cash management advice available at Betterment. This includes the ability to automate savings including the movement of funds from a checking account to an investment account when the money in the checking account reaches a certain level.
Vanguard manages more than $5.3 trillion in assets. It’s known as a leader when it comes to the provision of low-cost investing. It’s also known as a major provider of mutual funds and ETFs that have low expense ratios and low fees attached. Some of the services that investors can expect from Vanguard include:
- Less of a hands-off provision than Betterment which means more interaction with human advisors.
- Access to a range of different investment products including mutual funds, ETFs, stocks and bonds. The Vanguard ETFs that are available are commission free.
- Short term investment options. For investors who are looking for a 3-6 month investment opportunity, Vanguard provides several options including CDs for which an investment of $10,000 is required.
- Several account options available including traditional IRAs, 529 savings plans and retirement account plans for small business owners.
Similarities and differences between Betterment and Vanguard
When choosing the best investment platform option for you, it’s important to look at the similarities and differences between Betterment and Vanguard.
There are several similarities between the two investment platform options.
- Regular rebalancing provided. There is a difference between how this rebalancing is provided as automatic rebalancing exists at Betterment whereas rebalancing is usually quarterly at Vanguard.
- Tax-loss harvesting which is automatic for anyone who has the premium plan with Betterment, due to monitoring by financial advisors and which is periodic at Vanguard.
- Betterment offers the same investment account types as Vanguard. The types offered include Roth IRA, Traditional IRA, Rollover IRA and SEP IRA.
- Both are hybrid options but there is more human interaction provided by Vanguard.
Some notable differences exist between the two investment brokerage options. One of the biggest differences relates to account minimum investment. There is no minimum deposit for someone to start investing with Betterment. However, the premium plan does require an account balance of $100,000. Anyone wanting to make use of the robo-advisor provision at Vanguard needs to invest at least $50,000. However, it’s possible to start a traditional IRA account for $1,000-$3,000, amongst other low-cost account options.
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Vanguard prides itself on being bare-bones in its costs with lower fees. Average user costs are .19% of the account balance, as of 2015. However, the fee structure may vary depending on how often you buy funds and ETFs, how much you use Vanguard’s advisor service, and other options paid for a la carte. It’s not uncommon to see Vanguard users report monthly fees of .06%! That is usually for very simple allocations: 3 or 4 funds bought and never touched again, but it’s a great option for people willing to research their own funds for a long term portfolio.
Betterment charges one flat fee, tiered according to how much you have invested. New users can start an account with no money at all, providing they are willing to pay $3 per month. New users who commit to contributing $100 a month pay .35% of their account balance per month. Lower monthly fees of .25% and .15% kick in at $10,000 and $100,000 respectively.
Here is where the differences between Vanguard and Betterment really start to become clear. Betterment’s motto is “set it and forget it”. It is meant to be an easy retirement investment solution that truly automates the process. As such, Betterment doesn’t offer the investor much in the way of detailed control. Investors select target dates for retirement and risk tolerance (portfolio balance of stocks vs. bonds). Betterment shows detailed stats of how each ETF performs, but the weight of each in the investor’s portfolio is determined by Betterment.
Vanguard leaves all of this up to the investor. Investors research their own funds and take on all responsibility for the long term performance of their portfolio. A Vanguard customer would likely point out that this allows the investor to truly learn about the ETFs they’re invested in, while saving money in the process. Of course, if you make a choice that you want to change later, you’ll pay more for the adjustments.
Betterment likely won’t be the best choice for the sophisticated investor. Betterment doesn’t make it possible to allocate across accounts that are not managed by Betterment. Vanguard allows this. Betterment also doesn’t allow the direct transfer of securities into a Betterment account, just cash. This means that if you want to move securities that have appreciated greatly in another account, you’d have to sell them, then move the cash to Betterment.
But are these behaviors that the average Betterment user is performing? For the most part, no. Betterment has been successful because they understand how much time and energy a certain kind of investor is willing to commit to retirement investments. While experienced or high net worth investors will do well to invest elsewhere, and will often find ways to lower annual investment costs by tenths or hundredths of a percentage, most new investors don’t have this kind of commitment, for better or worse.
The choice is yours. If you want to get your hands dirty and dive into what retirement investments really mean, you’ll love Vanguard. In the end, it’s not even that hard to create a basic portfolio with a few ETFs, and you’ll pay less than you would at Betterment. Betterment actually buys their ETFs through Vanguard anyway! But if you don’t want to bother with it, Betterment is for you. They have a snazzy website that explains everything you need to know about your portfolio’s performance. They make an automated retirement plan easy. And in the end, your portfolio will probably perform about as well as your Vanguard account, because they would each contain many of the same funds.
This is a very general guide, but it gives new investors what they need to know. If you are craving hands on control and many more details, go with Vanguard. If you want to build wealth for retirement but don’t want to think much about it, go with Betterment. Both serve the needs of different kinds of customers, and both are essential players in the retirement investment landscape.