betterment versus vanguard investing comparison

Betterment vs Vanguard: A Ridiculous Comparison

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The question isn’t Betterment versus Vanguard but which website is right for your needs

Robo-investing and passive index investing are quickly becoming the most popular investing concepts of 2017. The aim of both is to take the stress out of meeting your long-term goals, lower investing costs and provide a stable return.

The popularity of these two concepts have made two investing platforms superstars among individual investors. I get a reader question about Betterment versus Vanguard at least once a week and sometimes it feels like every day.

The problem is, Betterment and Vanguard are two different types of investing platforms. Sure, there’s some overlap in what they do and how they can help you reach your investing goals but their core services are very different.

That means, it isn’t really a question of Vanguard vs Betterment and which is better. The question is, which is better for YOU!

I’ll review Betterment and Vanguard after the summary box below but for those of you that just can’t wait until the end:

  • Betterment is better for people that want a completely hands-off investing approach. The platform looks at your investment needs and automates your investing from buying a diversified portfolio to managing your investments to reduce your taxes.
  • Vanguard is better for the do-it-yourself investor, the person that still wants to pick their own investments and manage the portfolio. There are some advisor services available but nothing is automated.
  • If stress-free, robo-investing sounds good then check out Wealthsimple. They're a new competitor to Betterment offering lower fees plus your first $5,000 managed free. I negotiated a special offer for readers, a bonus $50 when you sign up through the link.

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betterment versus vanguard investing comparison
Betterment vs Vanguard Side-by-Side Comparison

What is Betterment?

Betterment was one of the first robo-advisors and now manages more than $7 billion in assets.

No, robo-advisors aren’t a terminator that’s going to turn your money against you. It’s simply a computer program that takes all of your investor profile information to create and continuously adjust your investment portfolio for the most benefit.

As an investment analyst for large institutional investors as well as individual investors, I can tell you that 90% or more of what an advisor does can be handled by a computer. All you have to know is the investor’s age, current assets, tolerance for risk and investing goals. A robo-advisor does exactly the same thing as a human advisor, only it does it much faster and continuously updates.

Betterment takes the answers from your investor profile and creates a portfolio of exchange traded funds (ETFs) that hold hundreds of stocks and other assets. It immediately diversifies your portfolio so you aren’t dangerously exposed to one stock or asset class.

Betterment charges an annual fee but you pay no trading fees or commissions when it buys or sells an investment in your portfolio. The annual fee starts at 0.25% or just $25 on a $10,000 account. By comparison, that’s just two and a half trades made on just about any other online investing platform.

Betterment automatically invests any new deposits and rebalances your portfolio regularly to make sure it’s aligned with your goals.

The best feature is the automatic tax-loss harvesting. Betterment will automatically sell investments that have dropped in value so you can take the deduction off your income taxes. The platform buys similar investments so you don’t miss the opportunity for a rebound in the asset. It’s about as close to accounting magic as you get.

Betterment Fees and Returns

Betterment fees are simple, you pay one annual fee for the system to manage your investments. The fee ranges from 0.25% for the basic robo-advisor service to 0.50% for premium services that include access to an investment advisor.

You pay no fees or commissions for trading and can keep your account on the 0.25% digital plan for as long as you like.

Betterment returns are going to depend on your specific investor profile and the portfolio the system sets up. Older investors will have more in bonds and other safety assets while younger investors will have more in stocks and will see a higher, though more volatile, return.

Where Betterment really excels with returns is in the low-cost and tax-loss harvesting. Compared to investing with a traditional advisor where you would have to pay an annual fee plus a commission every time the advisor buys or sells from your portfolio, Betterment wins out big time.

betterment returns versus vanguard investing

Compared to the average private client investor, Betterment investors with 70% in stocks outperformed by 50% over the 13 years through May 2017. I played around with the stock allocation and found that Betterment investors did better than the average individual investor in nearly every case from 20% to 100% in stock allocation.

What is Vanguard?

Vanguard started out as an investment fund company, creating the funds that other advisors used for their clients, but has recently offered its own advisory practice and online investing platform.

Vanguard is best known for its low-cost ETFs that passively invest alongside an index. The Vanguard Total Stock Market ETF charges just 0.04% a year and most funds charge well under 0.20% a year.

You can invest in Vanguard ETFs with any online investing platform. The difference with investing directly with Vanguard is that you can buy the funds commission-free. You only pay the annual expense ratio on each fund you own.

Vanguard’s Personal Advisor Services is basically just a traditional investment advisor that helps you with your account. The service charges an annual fee of 0.30% on your total assets and beyond what you pay on the individual funds you own which means your total expenses will likely be at least 0.40% or higher.

Vanguard Fees and Returns

Access to Vanguard ETFs on a commission-free basis is great compared to other online investing platforms where you’ll pay at least $5 a trade. Vanguard charges a flat $20 annual fee plus the annual fees for each ETF you own. PAS subscribers also pay the 0.30% annual fee or $30 for every $10,000 in your account.

Your return on Vanguard funds will depend on the mix of funds you buy. Since Vanguard funds are passively-managed, they pick investments following index rules, they will track closely with major indexes like the S&P 500 or bond returns.

vanguard fund returns versus betterment

You won’t ‘beat’ the market with Vanguard funds because the funds invest in the entire market according to each index. Your return will only be lower by the expense ratio charged on each fund.

Should You Really Compare Vanguard vs Betterment?

I hope it’s a little clearer why you really can’t compare Betterment versus Vanguard as an investment option. The two websites clearly provide different services.

Betterment provides a hands-off, automated investment solution. You can opt for some of the premium advisor services but the robo-advisor platform is really the core offering. The advisors are just going to explain what the computer is doing and make any adjustments you request.

Vanguard is much more a traditional investing platform with advisory services. Beyond the ability to buy the funds commission-free, there’s really no difference with using Vanguard funds through another online account like ETrade or TD Ameritrade.

betterment versus vanguard investing comparisonBetterment is a do-it-for-me investing platform while Vanguard is a do-it-yourself platform.

Who Should Use Betterment?

Knowing what the investing sites do, it should be easier to decide which is better for you.

If you want a stress-free, automated approach to investing then Betterment would probably be the better choice. With Betterment, your work stops at the brief investor profile you complete when you set up your account. The software will take your answers and create your portfolio.

Betterment continuously optimizes your portfolio with any changes to your investor profile. It will automatically adjust your investments as you get older and closer to your goals. You’ll also be able to revise your profile with any major life changes that affect your investing needs.

With Betterment, all you do is make regular deposits into your account and the software does the rest.

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Who Should Use Vanguard?

There are some investors that will prefer Vanguard. If you want to do your own investing but just want to save money compared to other online investing platforms, Vanguard offers funds with the lowest expense ratios in the business.

Even after the $20 annual fee, the cost of maintaining a Vanguard account will be extremely low. If your funds average out to around 0.10% then you’ll pay $45 a year on a $25,000 account after including the annual fee.

If you do choose Vanguard over Betterment, make sure you understand the concepts of diversification, rebalancing and tax-loss harvesting. They aren’t super-difficult ideas but you’ll have to make all the changes yourself. It isn’t something that will take more than a few hours a year but you will have to watch your account regularly.

The question shouldn’t be Betterment vs Vanguard but which website is best for your investing preference. Both are relatively comparable on fees and provide all the investment diversification you’ll need to reach your goals. I like Betterment for its automated tax-loss harvesting and most investors will appreciate a hassle-free approach. Other investors will prefer the DIY solution on Vanguard and it’s selection of low-cost funds. Which investor are you?

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