Betterment Or Vanguard? The Best For Managing Your Money

Both Betterment and Vanguard are premier financial services firms to help you invest and grow your wealth. However, Betterment was built from the ground up as a pure robo-advisor (digital wealth advisor). Vanguard is more like a financial behemoth.

Vanguard was founded in 1975 to become one of the largest pass index fund managers in the world. Not only did Vanguard pioneer passive index investing, it also offers various kinds of accounts and investment options. These include Roth and Traditional IRAs, i401(k)s, 529 savings plans, stocks, bonds, mutual funds, and ETFs.

More recently, Vanguard launched Vanguard Personal Advisor Services. This is a digital wealth advisor service or robo-advisor that competes with Betterment, the leading pure play robo-advisor today.

In this article, I'm here to argue why investing with Betterment is better than Vanguard Personal Advisor.

I've personally been investing since 1995 and worked in the financial services industry from 1999 – 2012. Further, I have researched both firms thoroughly since both offerings began.

Introduction To Vanguard

Introduction to Vanguard

Vanguard was founded in 1975 by John Bogle, the godfather of passive index investing.

Bogle realized the fallacy of trying to outperform theS&P 500. Therefore, he created a low-cost ETF to help everyday investors save on fees over the long run.

Since Vanguard's launch, it has become a behemoth by creating multiple types of products and services. This includes Vanguard Personal Advisor Services, which charges 0.30% and requires a minimum investment of $50,000.

The main problem I have with using Vanguard Personal Advisor Services is that it is part of a massive organization. It's not a pure play digital wealth advisor like Betterment, which was created first as a digital wealth advisor from the ground up.

Going to Vanguard is like buying a Nike watch. It probably works fine. But, watches are not Nike's core competency, shoes are.

Going to Betterment is like buying a Rolex watch. Watches are Rolex's core competency. This, you know you're getting the best with what you pay for.

I'm all for buying Vanguard low-cost funds. But, I'm not sold on using their digital wealth management services.

Introduction To Betterment

Betterment Logo 2021

Betterment was founded in 2008. They are the largest online-investment advisor with over $21 billion in assets under management (AUM).

With $275 million in total funding since inception, it’s clear Betterment is here to stay for the long term.

In the past, retail investors like us needed at least $250,000 to use a wealth management firm like Merrill Lynch. Now, we can have our money managed digitally managed by Betterment with no minimums on most accounts.

In addition to requiring a lot of money, investors used to also have to pay a ridiculous 2% – 3% a year in AUM fees. With Betterment, you can pay as little as 0.25% a year. That’s a significant difference. Saving on AUMS can help you retire earlier, all else being equal.

Betterment invests in a portfolio of passive index-tracking equity and fixed income exchange-traded funds (ETFs) to help build your retirement nest egg.

Too many people just hold cash because they don’t know how to invest in or find the fees too high. Betterment is solving both problems. Betterment offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs).

Betterment’s core portfolio optimization incorporates insights of Modern Portfolio Theory, the Black-Litterman model, and Behavioral Asset Management.

Modern Portfolio Theory (MPT) relies on diversification and asset allocation to attempt maximum portfolio return for an amount of given risk. Black-Litterman enables passive asset allocation by using world market capitalizations to attempt to estimate expected returns.

Why Betterment is better than Vanguard

Betterment's recommendations are made based on the answers you provide when creating your account. Betterment builds your portfolio with a mix of 13 ETFs, six stock ETFs and seven bond ETFs. The percentage is based on your investor profile.

Betterment Has Flexibility

For investors who prefer more control over their portfolios, Flexible Portfolios allows manual adjustments but this is only to those with accounts of at least $100,000.

I'm not a fan of using Flexible Portfolios because the whole point of using Betterment is to set it and forget it based on your risk tolerance and objectives.

Betterment's basic plan has an annual fee of 0.25% and there is no minimum balance required. The Premium Plan has an annual fee of 0.40% and requires a minimum investment of $100,000 and provides unlimited phone access to financial consultants.

How Does Betterment Differ From Vanguard?

When you are investing with Betterment, Betterment builds you a customized, low-cost portfolio using Vanguard ETFs.

Therefore, you might be wondering what is the difference since Vanguard obviously constructs portfolios using Vanguard funds as well.

The key is that at Betterment, they built their entire company based off being a sophisticated digital wealth advisor. Their management, engineers, backend support, all have the one mission to be the best digital wealth advisor on the planet.

Given Betterment's focus, they believe they have the best investment algorithms to help make investments for you in a hands-off, risk-appropriate manner. Even a 0.5% performance difference makes a huge difference over time.

With Vanguard, you get access to hundreds of commission-free ETFs and mutual funds. With Betterment, you have a more simplified, hands-free approach, which is what I think most investors should have.

You don't want to overly complicate your investing strategy. In the simplest form, you can just buy an S&P 500 index fund and an Bond fund based on a proper asset allocation weighting and call it a day.

When you have hundreds of ETFs and funds to choose from, you sometimes end up with decision paralysis and can't choose any. The worst is not ending up investing for the long term.

To be a successful long-term investor, you need to invest regularly and preferably automatically in a risk-appropriate way. That's what Betterment allows you to do.

They also automatically rebalance your portfolio to keep your weightings. Finally, Betterment helps you sell losers to offset tax liability, call tax loss harvesting automatically for you.

Over time, your investments should compound and build you wealth for a health retirement.

Betterment Versus Vanguard Fees

Saving on fees is paramount. Betterment charges a 0.25% management fee on top of the fees you pay for the underlying funds, which are minimal. They also offer a Premium level service with a $100,000 minimum and a 0.40% fee – which gives you unlimited phone access to certified financial planners.

Think about the Premium level as a hybrid approach to wealth management whenever you have questions about the market, tax loss harvesting, ways to invest for your child's college education, estate planning and so forth. 0.4% is still much lower than the 1.5% – 3% firms like JP Morgan and Raymond James charges

Vanguard Personal Advisor Services charges 0.30% and requires a minimum investment of $50,000.

Vanguard has no fees for buying and selling their ETFs but they don't do any tax loss harvesting for you. You only get a financial planner (CFP) when you have over $1 million dollars with them, which not many people have.

Betterment Gets The Nod Over Vanguard

I prefer Betterment because it was built as a digital wealth advisor from the ground up. It's like buying a watch made by Patek Philippe or Rolex. Watches are all they make. I wouldn't want to buy a watch made by Gucci because the watch is outsourced by a OEM manufacturer.

To recap, here are some of Betterment's attractive features:

  • Tax-loss harvesting – to help you reduce your taxable income
  • Automatic Portfolio Rebalancing – so your asset allocation is always congruent with your risk tolerance –
  • Automatic Deposits – Weekly, Every Other Week, Monthly
  • Android and iOS Mobile App – you can always check your portfolio on the go
  • Customer Service M – F, 6am – 5pm PST
  • RetireGuide Calculator – to help you plan for your future retirement money needs.
  • Tax-Coordinated Portfolio – to help you reduce your tax liability

The signup process is easy and takes less than five minutes. During the process, you respond to a series of short questions about your investment needs. Betterment will then construct a model portfolio based on your answers.

You can either agree with the model portfolio or adjust the asset allocation according to what you believe is more suitable. Once the choices are selected, all you’ve got to do is link your personal checking account to fund and set up an automatic frequency deposit if desired.

When money is deposited, Betterment will begin to automatically build your portfolio using ETFs. Any dividends earned will be automatically reinvested. Each quarter, any portfolio that is off by more than 5% is rebalanced automatically.

Below is a sample of an aggressive model portfolio with a 90% stock and 10% bond weighting.

Why invest with Betterment - model portfolio

Betterment Or Vanguard?

If you're debating between the two, choose Betterment. Betterment currently has a promotion where you get between 1 month to 1 year of your assets managed for free, depending on your investment amount. Vanguard doesn't have any promotions.

Sign up for Betterment today and explore for free what the service has to offer. Invest regularly and invest often.

Let Betterment take out the guess work to investing so you can focus on things that truly matter in life.

About the Author: Sam worked in investing banking at Goldman Sachs and Credit Suisse for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.