Investing

Betterment vs. Vanguard: A Financial Planner’s Comparison

Betterment vs Vanguard
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Betterment and Vanguard both provide users with a way to invest their funds safely, but each has its own unique advantages and disadvantages.

So which is the right choice for you?

In this Betterment vs. Vanguard comparison, we’ll help you answer that question by taking an in-depth look at factors such as the two platforms’ investment offerings, features and fees.

Our Take

Before we dive into the details, here’s a top-level summary of what you need to know.

The Case for Betterment

Betterment works best for those who are new to investing and may need additional help learning the ropes. As a robo-advisor, the company charges a reasonable fee to take most of the responsibility of investing off your shoulders.

Betterment doesn’t have a minimum balance, making it ideal for younger investors who might be short on cash. However, it only allows you to invest in a limited number of pre-built portfolios; you can’t pick and choose your own stocks and mutual funds.

In short, using Betterment means you’re giving up some control in order to start investing quickly and put your money in more experienced hands.

Betterment portfolios are based on modern portfolio theory, which one can say is a bit more advanced than what Vanguard offers with their Target Date retirement funds. In theory, these should offer a slightly greater reward with no additional risk.

As they offer tax-loss harvesting, Betterment is also a solid choice for hands-off investors in higher tax brackets who are looking to invest within a taxable portfolio. However, one thing to watch out for when investing in a taxable account with Betterment (or any robo-advisor) is that you can’t simply move your portfolio to another brokerage. Instead, you have to sell the entire portfolio — which means realizing capital gains from the sale — and then deposit the cash into your new brokerage.

Betterment offers a full suite of financial services, including an FDIC-insured checking account and a high-yield savings account called Cash Reserve. While most investors utilize Betterment to invest in index funds, the company also offers crypto investing and a Smart Beta portfolio that aims to beat the market.

The Case for Vanguard

Alternatively, Vanguard offers the best of both worlds. Their Target Date retirement funds allow you to utilize a completely hands-off strategy. If target date-retirement funds don’t align with your goals, there’s also Vanguard Digital Advisor, a service that automatically rebalances your portfolio. Digital Advisor fees are 0.20% for the assets you’re having Vanguard manage and primarily used for those investing for retirement

You can also take more control over your investments — by investing in individual stocks,  mutual funds and ETFs, among other vehicles — if and when you’re ready.

Additionally, many of Vanguard’s offerings come with relatively low fixed annual fees. That’s due in large part to the company’s unique organizational structure — it’s essentially owned by its investors, which allows it to keep its costs (and thus its fees) as low as possible.

Depending on how you set up and use your account, you may save a significant amount of money using Vanguard compared to Betterment.

One big difference between the two platforms is that Vanguard does require more capital ($1,000) to open an account. While that may not seem like a big sum to many investors, it can be a prohibitive barrier to those who are just getting started investing.

Vanguard portfolios follow an index fund approach but are not necessarily optimized for modern portfolio theory. As you can see, they contain fewer asset classes overall than Betterment.

Vanguard portfolio allocation

Unlike Betterment, there’s no monthly fee for Vanguard users. Instead, there’s only a $20 annual fee, which can be waived by signing up for e-delivery.

For clients with larger accounts ($500,000 and above), Vanguard offers dedicated financial advisors (CFPs) to help manage your wealth.

How to Choose

Our view is that it’s important to start investing as early as possible. The market goes up and down, but it has consistently produced solid returns when viewed from a long-term perspective.

The earlier you get started, the more your investments will compound and grow over time — and the better off you’ll be when you’re ready to start drawing on those funds.

In other words, it’s about time in the market rather than timing the market.

Also, choosing a passive investment strategy — such as choosing between Betterment’s optimized portfolio and Vanguard’s Target Date funds — is really a toss-up. In all likelihood, the 10-year and 20-year returns of each will be very comparable. In other words, both are good options.

So if you have limited cash on hand, or very little knowledge about the markets, using a platform like Betterment is a great choice. Its low barrier to entry makes it easy to get started and you don’t need to know the first thing about investment strategy, which reduces your risk of loss.

But if you’re more comfortable with investing and have the required capital, Vanguard gives you considerably more flexibility, as well as access to features and services that will be valuable as your net worth increases.

Key Facts

 BettermentVanguard
Minimum Balance$0$1,000 to $3,000 (varies by account type).
Supported AccountsIndividual and joint taxable accounts, IRAs (inherited, Roth IRA, SEP IRA, and traditional), and trust accounts.Brokerage, individual and joint taxable accounts, IRAs (Roth IRA, SEP IRA, and traditional), SIMPLE accounts, 401(k), 529 savings plan.
Investment TypesPre-built portfolios, high-yield savings accounts.Bonds, exchange-traded funds, money markets, mutual funds, and individual stocks.
Fee Structure $4 per month for investment balances under $20,000. 0.25% annual fee for balances over $20,000.Starts at $20 and varies depending on account type and usage.
Human AdvisorsAccess to CERTIFIED FINANCIAL PLANNERS™ for an additional fee, or free with a Premium plan ($100,000 minimum investment required).Unlimited access with Vanguard Personal Advisor Services, which costs up to 0.30% (per year) of your assets managed on the platform and has a minimum investment of $50,000.
Automatic RebalancingBetterment offers investment vehicles that rebalance automatically based on your goals and a number of factors.For an additional 0.20% annual fee, you can utilize Vanguard Digital Advisor for automatic rebalancing.
Socially Responsible InvestingBetterment offers one pre-built socially responsible investment portfolio.Vanguard offers four ESG funds, which focus on environmental, social and governmental factors.
Tax Loss InvestingYes.No tax-loss harvesting services are available.
SIPC InsuredYes.Yes.

 

About the Companies

Betterment and Vanguard differ in their structures, mission statements and target demographics.

Here’s a closer look at how these investment platforms operate.

Founded in 2008, Betterment has quickly become one of the most popular robo-advisors. As of August 2022, the company reported more than $30 billion in assets under management.

Since the beginning, the company has aimed to make investing simple and accessible to the masses with their pre-built portfolios and no account minimums.

Even though many seasoned investors enjoy Betterment’s advanced UI and tax-harvesting algorithms, it’s primarily used by less experienced investors who want to safely put their money to work.

Vanguard has been in the business of wealth management since 1975 and has over $8 trillion in assets under management (the largest number of any brokerage). The company introduced index funds to individual investors, helping promote diversification for millions of portfolios.

Vanguard’s low-risk approach to investing remains largely unchanged, though they have worked to spread their investment experience to a wider demographic through lower account minimums and an easy-to-use mobile application.

Nonetheless, Vanguard is still one of the best platforms for those who want a more traditional brokerage experience without the high fees.

Betterment Perks

Betterment is one of the leading robo-advisors on the market for a reason. It tailors its features to inexperienced (typically young) investors who are investing for the first time. As a result, it includes a plethora of features that make it suitable for newcomers.

  • Investment strategies designed for you. When you first sign up for Betterment, the company asks you a series of questions about your age, income, risk tolerance and financial goals. Then, Betterment uses these answers to recommend the best account(s) and asset allocations for you. You can make slight adjustments to the final results, but the algorithm is designed to help you reach your goals without needing a degree in economics.
  • Simple language and user interface. Many investment platforms overwhelm new users because they have a thousand different ways of displaying information. With Betterment, everything is presented in an appealing, easy-to-digest format. For example, on the “Portfolio” screen, you can quickly see your total balance, your risk preference, and how much weight different funds have in your investment portfolio.
betterment asset allocation example
  • Automatic tax-loss harvesting. With many brokers, you have to manage taxes on your own. This can get tricky, as you want to earn as much as possible from your investments, but you don’t want to pay out a huge chunk for taxes. Fortunately, Betterment works to reduce your tax burden by taking advantage of any losses in your portfolio.

Vanguard Perks

Vanguard has been around for a while, giving it significant authority and respect among investors. However, it doesn’t just succeed on the laurels of its fanbase. Vanguard also has a set of unique features that help it stand out from the pack.

  • Superior wealth management for larger accounts. Vanguard provides tiered wealth management beginning with accounts over $50,000. This may not be particularly useful for those who are low on funds, but it will come in handy once your account starts growing. Vanguard wealth managers can help ensure that you’re investing smartly and staying on track to meet your goals.
  • College savings plans. Most robo-advisors don’t offer 529 plans, which are tax-advantaged accounts to help pay for higher education. With Vanguard, students or parents of students can begin saving for college in an investment account that avoids high tax rates.
  • Set annual fees. While fees vary with larger accounts, the standard fee for Vanguard accounts below $50,000 is just $20. As your account grows, you end up saving hundreds (even thousands) of dollars on percentage-based fees. The longer you trust your money with Vanguard, the more you save. Additionally, this fee can even be waived if you sign up for statement e-delivery.
  • Estate planning. Are you worried about how your funds will be managed once you’re gone? If so, Vanguard offers estate planning services to ensure that your funds can continue to grow for future generations.
  • Lower minimum to access financial planning. If you’re looking for low-cost financial planning and have $50,000 in assets, you can sign up for Vanguard Personal Advisor Services (Betterment’s minimum is $100,000 to access financial planning).

Summary

If you’re a new investor, have limited cash to invest, or simply don’t want to take on too much responsibility, we recommend starting with Betterment to learn the ropes. Its lineup of pre-built portfolios makes it easy to get started even if you have zero knowledge of the stock market, and it has relatively low fees.

If you’d like more control over your investments, have a larger account balance, or are looking for easier access to financial advisors, Vanguard has a lot to offer.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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