Betterment vs. Vanguard 2020: Which One is a Better Choice?
Vanguard is a good choice for ETF and mutual fund investors interested in Vanguard-sponsored investments. However, read below for how it does compare to Betterment.
When it comes to investing in the stock market, there are a number of different providers to choose from.
Vanguard offers a more traditional approach of low fee ETFs and index funds. On the other hand, Betterment is a modern day robo-advisor that will build and automate a portfolio for you for a small fee.
Betterment is probably the most well-known of robo-advisors. Founded in 2008, Betterment is based in N.Y. and has managed over $15 billion of assets (as of the start of 2019).
Not surprisingly, that number continues to grow.
Before you begin investing with Betterment, you’ll be asked to complete a short quiz (e.g., questions about your income, age, risk tolerance, and retirement goals) which will help determine what kind of portfolio will work for your financial status and needs.
Betterment charges a 0.25% fee – but it does offer some highly advanced investing features which can help you invest efficiently, especially when it comes to paying tax on your investments.
There is a Premium plan for those whose accounts are worth $100,000 or more. On the program, you will have access to a Certified Financial Planner and more personal guidance on how to best manage and grow your money.
Interestingly, many of the exchange-traded funds (ETFs) Betterment offers come from Vanguard.
No minimum investment
Many customized portfolios
Automatically invest extra funds
Limited investment options
High fees for large investors
Founded in 1975, Vanguard is the largest provider of mutual funds and the second biggest provider of ETFs in the U.S.
Vanguard has about $5.2 trillion in global assets under management as of January 2019 (some of those assets are managed by Betterment).
Vanguard is considered to be the low-cost index fund pioneer – many of the other automated investment companies probably wouldn’t exist without Vanguard.
You can access automated investment as well as a human advisor, and there’s a fee of 0.30% for accounts up to $5 million. Your advisor will help you build your portfolio – as well as make sure your portfolio is tax-efficient.
Large selection of mutual funds and commission-free ETFs
Broker assistance is available at no additional cost
Easy to use
Commission structure penalizes frequent traders
Customer service wait times
Commission costs on non-Vanguard investment options
Betterment vs Vanguard Fees
Betterment Pricing and Fees
Two types of investment accounts are available with Betterment that determines the fee structure an investor will pay.
The first is the Digital plan, and this requires an annual fee of 0.25%.
The convenient thing with this plan is that it requires nothing more than a $0 minimum balance. However, clients will have no access to expert human consultations with this plan.
For a heftier, 0.40% annual fee and a substantial $100,000 minimum balance, an investor who wants a human financial advisor to be added to the mix can have it with the Betterment Premium plan.
However, unlike Vanguard, this is not a financial planner dedicated to them alone, but rather a team of financial advisors who are available through phone and email communications, which isn’t something to sneeze about.
Savings on Costs
Without argument, building and managing a portfolio by yourself will definitely save you money, especially if it is strictly on a fee basis.
But paying that extra fee for an online advisor for most investors is definitely worth it, especially the level-headed advice that might prevent you from behaving reactionary and say, selling stock at a moment of panic.
Betterment vs Vanguard Costs
Vanguard Pricing and Fees
Vanguard has a fixed fee (0.30%) that it charges for all assets under management. But unlike the practice of a couple of other wealth managers, this flat fee doesn’t vary since it provides no discounts for bigger accounts.
To put this into perspective, this fee will amount to only $150 annually for a $50,000 account. Or $1,500 yearly for half a million dollars.
However, this isn’t the only fee a Vanguard client will be paying. The underlying mutual funds and ETFs that comprise a Vanguard client’s portfolio also accrue costs in the form of expense ratios.
These usually varying as low as 0.04% for index funds, then rise up to 0.12% or more for a few actively managed funds.
Accounts at Vanguard have SIPC insurance which covers up to $500,000, plus excess coverage from Lloyd’s of London up to $50,000,000 for each account.
In addition, the advantage of being a behemoth like Vanguard is that you can become a one-stop-shop for related services. Vanguard does this by utilizing self-clearing through Vanguard Brokerage Services for all its trades and transactions.
Betterment vs. Vanguard: Investment Portfolios
Betterment offers professionally built portfolios to any investor, regardless of account size. Betterment will ask the investor a series of questions upon opening an account. They will use these questions to develop an investing profile to understand your risk, time horizon, and investment objective.
Betterment will then offer you a series of portfolios that fit your investment profile. This way you are investing in diversified, low cost funds that fit your specific investment objectives.
Betterment builds its portfolios using a variety of ETFs, many of them being from the Vanguard fund family. The ETFs they use are some of the lowest cost ETFs available today.
Vanguard will build your portfolio if you have an account minimum of $50,000. Once your account has reached this threshold, you will have the option to work with Vanguard advisory services for a 0.30% annual fee. You will work with professional investment advisors to develop a portfolio that meets your investment objective.
If you do not have $50,000 to invest with Vanguard, you will not be able to have professional guidance in building your portfolio. Betterment offers a professionally built portfolio tailored to your specific needs to anyone.
It is also worth mentioning that Betterment Digital is less expensive at 0.25% versus Vanguard Advisory Services at 0.30%.
Betterment vs. Vanguard: Tax Efficient Investing
One of the biggest differences between Betterment and Vanguard is the additional features Betterment offers.
Betterment offers a feature known as tax loss harvesting and this is a big part of the Betterment platform. As mentioned above, tax loss harvesting cuts down on your capital gains and lowers your investment taxes. This feature is available to any Betterment investor.
Vanguard only offers this service on a client by client basis if you have $500,000 and are working one on one with an advisor.
Betterment also offers a tax coordinated portfolio feature that you can turn on at any time. This will allocate assets across your different account types, putting your highest taxed assets in retirement accounts first then into traditional accounts.
This will help reduce taxable gains, saving you more in taxes. You also have the option to turn on tax coordinated portfolios across your accounts as well as your spouses to ensure maximum tax savings.
Betterment vs. Vanguard: Portfolio Rebalancing
Vanguard typically has quarterly rebalancing of their portfolios, but it can vary as stated in their advisor agreement.
This can be a disadvantage as portfolios may drift away from their target allocations and develop more risk as well as possibly harmful return characteristics.
Betterment, on the other hand, is always rebalancing in a tax efficient manner. Through the use of technology and algorithms, Betterment can make sure every portfolio is contains the right asset mix, maintaining its proper allocation.
They use tax minimization techniques in their rebalancing algorithms. This ensures you buy and sell assets in the most tax efficient manner.
Which One Is a Better Choice?
Are you ready for this? The answer is neither – because both of these tools are awesome.
I couldn’t choose one winner because, the truth is, both Vanguard and Betterment are incredibly useful for building wealth.
Betterment is a fantastic way to start, especially if you’re relatively new to the game (even though it’s also ideal for seasoned investors who don’t really have the time or want to re-evaluate their fund options).
Betterment will educate you about your risk tolerance, your needs around your asset allocation and different account types, helping you gain knowledge before you decide to manage your own investments (although no-one says that you should – Betterment could be your first choice even when you have enough experience to go it alone!).
Vanguard, on the other hand, is excellent if you enjoy managing your own money – and know what you’re doing.
So, perhaps, once you’ve gained confidence and are comfortable doing it yourself (e.g., picking funds, setting up your own automation, rebalancing, etc.), you could then open a direct fund with Vanguard.
Both – Betterment and Vanguard are superb investing platforms. It mostly comes down to the amount you have to invest and the level of guidance you are looking for.
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