Betterment vs. Vanguard: Both are Great, but Which is Best?

Betterment and Vanguard have each positioned themselves as leaders in the passive investing movement. I’ve used both of these companies for years now and can wholeheartedly recommend both. I currently have more invested with Vanguard than Betterment. But which one is a better fit for your money?

• Betterment is a robo-advisor offering an automated service that builds customized portfolios to match your risk tolerance. This company uses algorithms to offer services like tax-loss harvesting and automatic rebalancing on all of their portfolios for free.
• Vanguard is the premier low-cost index fund company. It requires a more hands-on approach, but the expense ratios on their funds are some of the best in the industry.

Let’s take a closer look at both companies.

Betterment vs Vanguard

We’ll start with the newest company, Betterment:

Betterment

Betterment claims to offer investors better returns. Their savvy use of technology promises to lower your taxes, lower your fees, diversify your portfolio more efficiently and enable better investor behavior.

Betterment says that their portfolios lead to an estimated 1.48% better return than the average investor’s approach. But if you’re investing with Betterment for retirement, they could offer even more value. They say that their recommendations could earn you 38.8% more after-tax retirement money. 

Investments

Betterment offers a mix of globally diversified exchange-traded funds that you can choose based on your desired risk tolerance. Their portfolios promise lower costs, lower taxes, and optimal risk exposure across all markets. Betterment has designed three custom portfolios for you to select from:

• Socially Responsible Investing: This portfolio is based on the Betterment Portfolio Strategy, which includes an increased allocation in companies that meet various social, environmental, and governance criteria.
• Goldman Sachs Smart Beta: This is a diversified portfolio aimed to outperform the traditional market-cap strategy.
• BlackRock Target Income: This portfolio is composed 100% of bonds that help the investor limit risk exposure. Bonds have various yields to help limit market volatility.

If you would prefer to build your own portfolio, you can select a Flexible Portfolio. If you have external investments or would like to select different asset classes from Betterment’s recommendations, the Flexible Portfolio will better suit your needs.

Personal Financial Advice

Betterment helps you connect with financial experts to answer all of your money questions. You can seek professional advice around the clock and get information about topics including investing, college saving, retirement planning, tax advice, and more.

If you sign up for Betterment’s Premium plan, you have the option of contacting financial professionals directly. This plan will also match you with a Certified Financial Planner® if you need a more comprehensive financial plan. With your CFP®, you will be able to build a personalized relationship and receive regular investing advice.

If you’d like to schedule a one-time CFP consultation, you can do that as well.  Below are the prices for their various CFP packages:

• Getting Started – $199
• Financial Checkup – $299
• College Planning – $299
• Marriage Planning – $299
• Retirement Planning – $299

Tax-Loss Harvesting

Tax-loss harvesting is the practice of selling a stock or security that has experienced a loss. This can help the investor to offset the taxes they will owe on both regular income and investment gains. Once the security is sold, it will be replaced with a similar asset so the portfolio can maintain balance and give the investor the optimal return.

Automatic Rebalancing

Over time, portfolios tend to move away from their original asset allocation mix. This usually happens when the stocks in your portfolio grow faster than your bonds.

For instance, let’s say that you originally set an 80/20 mix for your portfolio (80% stocks and 10% bonds). If your stocks perform very well, their growth will outpace your bonds. Within a short time, the weightings of your portfolio could be closer to 90/10 (90% stocks, 10% bonds). 

But with Betterment, you don’t need to worry about your portfolio getting out of balance. They automatically rebalance all of their customers’ accounts. This means that they will sell stocks and buy bonds to bring you back to your desired risk level. Automatic rebalancing is a great feature that some brokers charge for, but Betterment provides to its customers for free.

Goals

Betterment believes that goals are vital for anyone who wants to succeed as an investor. Their goal-based investing can help you develop a personal financial plan that’s tailored specifically to your needs. Currently, you can choose between five types of goals.

• Retirement Savings – for those saving for retirement
• Retirement Income – for retirees making withdrawals
• Safety Net – for growing an emergency fund
• Major Purchase – for making a future expenditure
• General Investing – for investing when you’re not sure of the specific future expenditure

Depending on the type of goal that you choose, Betterment will recommend a certain asset allocation mix. And it’s easy to track your goals over time through their site or their mobile app.

Cash Accounts

Recently, Betterment debuted their new cash account products, Betterment Cash Reserve and Betterment Checking. Betterment Checking accounts charge no fees whatsoever and even offer ATM reimbursement worldwide.

Check out Betterment’s website to learn more and get the latest interest rate.

Charitable Giving

Betterment makes it easy to donate shares to your favorite charity. By donating shares instead of cash, the charity gets to keep 100% of your contributions and you get to save on capital gains taxes.

Betterment isn’t the only broker that allows you to donate shares to charities. But they’ve streamlined the process and have made it super simple. Their goal is to make it just as easy to donate shares as cash.

Learn more about Charitable Giving by Betterment.

Is Betterment FDIC Insured?

Betterment Cash Reserve accounts are FDIC insured up to $1 million. And Betterment Checking accounts are FDIC insured up to $250,000.

Investment accounts with Betterment are insured through SIPC for up to $500,000 of missing assets and $250,000 in cash. If your account value is higher than $500,000, it may worry you that Betterment’s SIPC insurance doesn’t go above that. But even if Betterment were to go out of business, there is little chance that you’d need to take advantage of their SIPC insurance. 

In fact, Betterment says that fewer than 1% of SIPC-member brokerages are ever subject to SIPC proceedings. And of those that were, 99.9% of claims were fully satisfied.

Learn more about SIPC insurance.

How Much Does it Cost to Use Betterment?

Betterment offers two fee structures for investors.

The basic Digital Plan has an annual fee of 0.25% of invested assets, and it has no minimum balance requirement. If your account total is $2 million or more, Betterment will give you a .10% discount on their advisory fee, bringing it down to 0.15%

The Premium Plan has an annual fee of 0.40% of invested assets, and it requires a $100,000 minimum investment. It also gives you a more in-depth look at your personalized financial plan and offers customized financial advice from a CFP. For accounts over $2 million, Betterment Premium costs 0.30 of your account balance.

Related: Betterment Vs Wealthfront: Which is the Better Robo-Advisor

Can You Take Your Money Out of Betterment?

Yes, you can take your money out at any time. With Betterment cash accounts, you can expect your funds to arrive within 1-2 business days. For investment accounts, Betterments estimates that withdrawals will take 4-5 business days.

Betterment also makes it easy to transfer IRA accounts to a different provider or to close your account completely. All withdrawals are completely free. And if they do need to sell some of your investments to satisfy a withdrawal request, they’ll do their best to minimize your taxes.

Check out our full Betterment review.

Vanguard

Vanguard has made their name on lowering investment fees. According to their site, the average expense ratio for Vanguard mutual funds and ETFs is 83% less than the industry average–which means you keep more of what you earn.

Investments

Vanguard offers a wide variety of accounts and investment options. You can select from stocks, bonds, exchange-traded funds, mutual funds, or cash options. Vanguard also has developed their own investment vehicles including:

• Vanguard Mutual Funds: Vanguard claims their mutual fund’s expense ratios are 83% less than the industry average. It also states that 85% of their mutual funds have performed better than similar mutual funds for the past 10 years.
• Vanguard Exchange-Traded Funds (ETFs): With Vanguard ETFs, you get the benefit of diversification with the professional management of the mutual fund. It will also provide the flexibility of an individual security.

Personal Financial Advice

You can partner with a financial professional using the Vanguard Personal Advisor Services®. Your financial advisor will get to know your financial goals and then develop a personalized financial plan for you.

Once you agree to the personalized financial plan, your financial advisor will put it into action. They will also be there to support you and answer any financial questions you may have.

Related: Our Vanguard Personal Advisor Services Review: Have a Human Advisor Review Your Plan

Admiral Shares

Vanguard’s index funds are already incredibly inexpensive. But you can get access to even cheaper versions of Vanguard’s funds, called Admiral Shares, if you meet certain investment minimums.  Admiral Shares are on average 35% cheaper than the Vanguard standard fund and 83% lower than the industry average!

Some Admiral Shares funds have very high minimum thresholds (like $50,000 to $100,000), but many are much lower. In fact, Vanguard recently announced that they had lowered the investment minimum on 43 of their Admiral Shares from $10,000 to $3,000. 

Learn more about Vanguard Admiral Shares.

LifeStrategy Funds

Unlike Betterment, Vanguard doesn’t offer automatic rebalancing on all of their funds. But a few of their funds do offer rebalancing. Vanguard calls them LifeStrategy Funds and there are currently four choices.

• Income Fund: 20% stocks, 80% bonds
• Conservative Growth Fund: 40% stocks, 60% bonds
• Moderate Growth Fund: 60% stocks, 40% bonds
• Growth Fund: 80% stocks, 20% bonds

Vanguard states that the expense ratios on their LifeStrategy Funds are 85% less than the industry average.

Learn more about LifeStrategy Funds.

Target Retirement Funds

With a Vanguard Target Retirement fund, you tell Vanguard when you expect to retire. Then you pick the fund that matches your projected retirement date. The further you are from your retirement, the more aggressive the funds will be. But as you get closer to your retirement, Vanguard will shift the asset allocation mix to be more conservative.

All of my money in Vanguard (except the donor-advised money) is invested in one fund: VFORX. That’s a target-date fund with a .19 expense ratio, set for a 2040 retirement.

How Much Does it Cost to Use Vanguard?

There is a $20 annual account service fee applied to each of your brokerage and mutual-fund-only accounts. But you can get this fee waived if you sign up for e-statements. Most mutual funds have a minimum investment of $3,000, while the minimum investment for ETFs and stocks, bonds, and CDs is the price of a single share.

If you choose to go with the Vanguard Personal Advisor Services®, a 0.30% annual fee will be applied to your assets under management. There is a minimum investment requirement of $50,000 to work with a Vanguard Advisor.

Is Vanguard FDIC Insured?

No, Vanguard is not FDIC insured. But this shouldn’t be surprising as they’re not a bank and don’t offer savings or checking accounts. Vanguard is SIPC insured, however, up to $500,000 in total claims and $250,000 in cash per customer. 

But Vanguard actually has gone an extra step beyond the industry norm and has secured additional insurance coverage. The secondary coverage is through Syndicates at Lloyd’s of London and covers up to $49.5 million for securities and $1.9 million for cash per client.

Can You Take Your Money Out of Vanguard?

Yes, you can withdraw your funds from Vanguard at any time fee-free. If you’re wanting to transfer money from a Vanguard fund, it takes just one step. Simply navigate to the “Sell Funds” page on Vanguard’s website and select your bank when Vanguard asks you where the money is going.

If you’re selling a stock, bond, or non-Vanguard fund, you’ll need to take two steps. First, you’ll need to sell the security. Then, once the sale has settled you can initiate a transfer to your bank.

Vanguard doesn’t say how long it generally takes for funds to arrive in your bank account. But they use ACH to transfer funds, so 2-4 business days would probably be a good estimate. 

Start with Betterment and Move to Vanguard When You Can DIY

Ultimately, I would recommend that investors start their journey with Betterment, as it is a good introductory platform for newbies. They do a nice job of educating you on your risk tolerance and needs around asset allocation. And from a cost standpoint, Betterment is also going to be much better than some of the traditional options for those just getting started.

If Betterment had been around when I first opened my Roth IRA I would have seriously considered them over Vanguard.

Once you get going with your retirement investing and get comfortable doing it yourself (picking funds, rebalancing, setting up your own automation, etc.) then Vanguard (or any other direct fund company like Fidelity) may be a better spot for you, simply for the cost.

However, whether you choose Betterment or Vanguard, you can know that you’ll be getting some excellent passive investment strategies for low fees.

What has your experience been with Betterment vs Vanguard?