Overview: Top Betterment Competitors
Robo advisors are on the rise. While this may sound like something out of a science fiction movie, it accurately captures the increasing prevalence of companies like Wealthfront, WiseBanyan, Vanguard and, arguably one of the biggest and better known, Betterment.
Betterment, established in 2010, is currently the largest independent robo advisor, with over 175,000 customers and more than $5 billion in assets under management (AUM). However, there are other robo advisor websites like Betterment out there. How do they fare in a side-by-side comparison?
After a brief overview of the history of robo advising, this article will take a look at Betterment, as well as some of the Betterment competitors in the market, in order to answer the question, “What are the Betterment alternatives?”
What Are Robo Advisors?
Put simply, robo advisors rely on the automation of complex algorithms to manage your money, rather than the “traditional” human financial advisor, and at a fraction of the cost.
Robo advisors recognized that the creation of a sustainable, long-term investment portfolio, was, for many people, overly-complicated, time-consuming, and expensive. By automating investment decisions based on the responses to online user preferences, robo advisor sites like Betterment and Betterment competitors have cut out the need for lengthy discussions, time-consuming research, and painstaking decision-making.
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They are particularly attractive to a tech-savvy, younger generation of Millennials – the type of people who might be more comfortable entering their personal details into a webpage than they would be sitting across a financial advisor in a stuffy office.
One of the firm’s unique selling points (though arguably not so unique anymore) is that, by using its complex algorithms and automated investment strategies, it takes the complexity out of investing and, in doing so, opens it up to a new potential customer base of younger professionals that are more at home with technology and web-based investment platforms.
Betterment and other robo advisor Betterment competitors, like Wealthfront and WiseBanyan, invests its clients’ money in exchange-traded funds. ETFs are the “core of Betterment’s portfolios.”
ETFs, first established in the early 1990s, now comprise around $2 trillion of assets in the U.S. and around $3 trillion globally. An ETF is a security that tracks an index, commodity or basket of assets, like an index fund. They differ from “traditional” mutual funds, particularly those that are actively managed, in a number of ways.
ETFs are cheaper, for a start – they have none of the costs associated with funds managed by an investment company on behalf of investors. ETFs cut out this complexity and cost and, since they are linked to indexes rather than hand-picked, they are not trying to outperform any particular market. Their aim, instead, is to replicate the performance of an entire index.
And, unlike mutual funds, ETFs can be traded like stocks; that is, shares can be bought and sold throughout the day.
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And while past performance is no guarantee of future success, organizations like EY predict ETF annual global growth rates of between 15% to 30% in the next five years – a pace that could surpass the hedge fund industry in assets under management during the next 12–18 months.
By leveraging technology to automate investment strategies, Betterment and robo advisor Betterment alternatives seek to capitalize on this growth. Through focusing on cutting out opacity and clearing away the complexity that most of us associate with investing, websites like Betterment have redefined the investor landscape.
How It Works
So how does it work? Potential clients visit the Betterment website and fill in a few details, such as age and annual earnings. Then, the algorithms go to work to recommend a number of investment “goals” based on your personal circumstances.
Goals are a mix of short- and longer-term targets, such as:
- A safety net: a 3–7 month “buffer” to cover unscheduled expenses
- Retirement: a target annual retirement income
- General investing: the “utility player” of investment goals – when a client may not be sure of a specific purpose but understands the importance of investing for capital growth
Based on this and other information, such as an investment time horizon, Betterment recommends how to invest your money so that it is properly adjusted for risk as well as recommending monthly deposits based on affordability and goals. The advanced algorithms get to work, and it’s as simple as that – investment at its most passive state.
Other Betterment Alternatives:
One of the major factors that sets Betterment and websites like Betterment apart is really the fact that investment decisions are made by complex algorithms rather than humans, and minimum investment requirements are low or, as we have seen, non-existent.
WiseBanyan is one organization that provides a more robust comparison in the search for an alternative to Betterment. As with Betterment, it invests your money in exchange-traded funds and, like Betterment and robo advisor websites like Betterment, offers many of the same automated features to select investments that meet a client’s specific targeted milestones (such as buying a home, saving for a vacation or retirement).
Once these goals are identified and a saving budget is decided upon, WiseBanyan recommends an auto-deposit plan and investment allocation for each milestone. The benefit of this approach, according to the firm, is that you can create, monitor, and customize multiple goals separately without the need to open multiple investment accounts.
The online questionnaire to gauge investors’ savings plans and risk tolerance, 0% cost (the company says it only makes its money selling add-ons that provide demonstrable value), and its automated investment decision-making processes mean that WiseBanyan can take its place alongside sites like Betterment in the new breed of online investment providers targeting younger, tech-savvy, self-directed investors.
Wealthfront, too, can join the newly-enlisted ranks of robo advisors. Like Betterment and Betterment alternative WiseBanyan, Wealthfront is relatively new: “an automated investment service…paving the way for a new generation of investors to achieve their financial goals.”
Like Betterment, Wealthfront’s investment strategy is based on Modern Portfolio Theory – basically, the idea that diversification is good, and that a single asset’s return is less important than how that asset performs against other assets in a portfolio.
As with Betterment and WiseBanyan, the site asks questions to gauge an individual’s risk tolerance. Not, Wealthfront is keen to make clear, the usual 25 long-winded questions financial advisors typically run through to assess aversion to risk, but rather a few simplified questions based on behavioral economics.
Investment vehicles are selected, and, as with Betterment and the methodologies of advisory sites like Betterment, these are ETFs that are chosen, according to Wealthfront, to “minimize cost and tracking error, offer ample market liquidity, and minimize the lending of their underlying securities.”
Finally, the emphasis is on monitoring and rebalancing in an effort to ensure returns are commensurate with the level of risk.
As with Betterment and Betterment alternative WiseBanyan, Wealthfront is cheap too. The $500 investment account minimum will get things off the ground, and after that, the first $10,000 is managed for free. Thereafter, annual costs are just 0.25%. Wealthfront show that, versus a traditional advisor and compounded over 30 years, savings could be worth some $535,000.
Vanguard Personal Advisor Service
While it’s not so straightforward to make a like-for-like comparison to the previous firms mentioned, Vanguard, for some investors, offers a very strong Betterment alternative.
For starters, its size could be seen as a massive advantage (it is one of the world’s largest investment companies and has over $3 trillion in global assets under management). Another potential advantage, perhaps because it can leverage its size as well as being a common factor among Betterment alternatives, are the relatively low costs passed onto consumers.
The organization claims that its 0.3% annual charge (of assets under management) is less than one third the industry average, though this is still more expensive than Betterment, where annual costs are 0.15% of AUM.
What really sets Vanguard apart, however, and one of the key factors that makes it one of the stronger Betterment competitors, is its Personal Advisor Service.
This service, included in the 0.3% charge, incorporates the provision of a human advisor, available via telephone or online via email or video conference, alongside the automated service provision provided by the likes of Betterment and investor sites like Betterment, including Wealthfront and WiseBanyan.
Vanguard’s offering promises that its advisor will:
- Get to know you, your goals, and your unique financial situation
- Partner with you to create a custom-tailored financial plan
- Put your plan into action, allowing you to be involved as you want to be
- Work with you to keep track of your plan’s progress
- Rebalance your portfolio as necessary and partner with you to revise your plan when important changes in your life occur
Where Vanguard does differ significantly from websites like Betterment and, for some investors, may not be a viable alternative to Betterment is in its minimum investment requirement, which is currently set at $50,000.
Where Betterment and Betterment competitors, such as Wealthfront and WiseBanyan, differ is in their minimum investments required. They are currently much, much lower:$0 for Betterment and WiseBanyan and $500 for Wealthfront.
So, perhaps Vanguard, given its relatively high minimum investment and the provision of human investment decision-making, shouldn’t really be counted among Betterment competitors. Or perhaps this is its strength – its combination of affordability, automation, and human advice might be a way for more established firms to re-disrupt this emerging market.
Choosing the Robo Advisor That’s Right for You
If you’re considering handing over your hard-earned cash to an online robo advisor, which one might be the best fit for you? Perhaps Betterment or one of the Betterment competitors? Knowing which one to choose can be tricky, and the best approach, as in all important financial decisions, is to do your research carefully.
And while there is no doubt that Betterment and dedicated robo advising websites like Betterment have disrupted the market and pioneered a more technologically-driven approach to investment, this is no guarantee of their future success.
Perhaps, then, the likeliest Betterment competitors will be the type of traditional, long-established firms that Betterment and standalone sites like Betterment sought to displace. The example of Vanguard’s move into the robo advisory market shows that more established firms are not averse to combining their long-standing reputation for tradition, with the kind of agility more often associated with startups and sites like Betterment. Whether or not these latter sites are going to be around for the long run is surely something to consider, but for the present, it is too early to tell.
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