What makes it even more compelling is that it’s being held between the CEOs of the two firms, Jon Stein and Andy Rachleff, respectively.
Stein (Betterment) used the following framework to describe why he thinks Betterment is the better solution:
- automation: Users seem to agree that Betterment is better integrated and more fully automated
- for serious investors: There’s more personalization available for Betterment users, as you can change your allocation and make trades square away.
- integration: Probably related to #1, but Betterment is both a broker and investment advisor, which means everything is branded Betterment, making a smoother ride for clients (Wealthfront uses Interactive Brokers as its brokerage and clients have to contact IB with questions on the actual account).
- better deal: lower fees
- tuned to behavioral finance: Betterment realizes how poorly most of its users would probably behave so it uses smart defaults to automate decision making.
- customization: Instead of just getting a model portfolio like you would at most RIAs, you can tweak things on Betterment to get it just the way you want.
Rachleff (Wealthfront) counters
Andy takes a different approach when sizing the two firms up. Here’s his framework why Wealthfront beats out Betterment.
- focus: WF targets young tech employees.
- sophistication: WF uses Modern Portfolio Theory (MPT) and therefore, Betterment should return less for every level of risk.
- determination of risk: WF uses a 10 question survey to set risk parameters and allocation while Betterment requires you do it yourself.
- minimums: $5k minimums at WF and they don’t charge until a client tops up to $25k or more. Betterment charges a subscription fee for small accounts.
- fees: it’s interesting to see that both firms feel they’ve got the better model here
- transparency: you get an allocation and portfolio recommendations before you open an account with WF, which you can then take and manage yourself. At Betterment, you don’t get rec’s until you open.
Of course, CEOs should behave as beknighted cheerleaders of their firms, so readers should understand where both Jon and Andy are coming from.
But what an awesome world we now live in where CEOs are engaging in the conversation to help users/investors understand which investing platform is right for them.
***FYI, I was contacted by Betterment’s Community Manager with the following clarifications:
Betterment is actually founded on modern portfolio theory. As you mentioned, it is intersected with Behavioral Economics so people actually implement the practices of MPT.
Regarding risk – Betterment makes recommendations for allocation based on goal type, time to goal i.e. if saving for retirement in 30 years, I can allocate more to stocks, say 80% stocks, 20% bonds. If saving for a major purchase, Betterment would recommend I allocate more conservatively. Then, the product shows me, in real time, the best and worst case scenario. Based on this information, I will understand my appetite for risk, and adjust the sliders accordingly.