Vanguard and Betterment have positioned themselves as leaders in the passive investing movement.
Vanguard has established itself as the premier low-cost index fund company. Of course, it requires a more hands-on approach, but the expense ratios on their funds are some of the best in the industry.
Betterment is the original robo-advisor and has been around since 2010. Betterment offers an automated service that builds customized portfolios to match your risk tolerance. In addition, algorithms are used to offer services like tax-loss harvesting and automatic rebalancing on all of their portfolios for free.
Modest Money has an excellent in-depth analysis of Betterment which is worth a read.
As usual, with a standoff between robo-advisor offerings, the real issue is what do you need your robo-advisor to do for you. The offerings of themselves are excellent. It depends on your strategy, how hands-on you wish to be, and your personal requirements.
Each offering has its approach and pros and cons. So let’s dig a little deeper.
Vanguard was established in 1976, 25 years after its founder John Bogle first observed that mutual funds were underwhelming in their performance compared to broad stock market indexes. So he launched an indexed investing product that changed the way many people invested from that time onwards, with excellent results.
Vanguard released their robo-advisor called Vanguard Personal Advisor but had some catching up to do in the robo-advisor space.
Betterment launched in 2010 and was a disruptor in the financial services industry. It was the world’s first robo-advisor. Just like Vanguard, Betterment offered a low cost, passive investment approach.
In 2021 Betterment had AUM of $29 billion, whereas Vanguard, a much older and more established company, had AUM of $7.50 trillion.
In terms of volume, Vanguard is the largest issuer of mutual funds globally and the second-largest issuer of exchange-traded funds (ETFs). In addition, Vanguard Group is the second-largest investment firm globally, after BlackRock.
If bigger is better, then obviously Vanguard wins the day, right?
Not so fast. It all depends.
Let’s Look At Fees
The average cost of accounts managed by human advisors is around 1%.
Betterment charges an annual management fee of 0.25% AUM if you have less than $2 Million under management.
This is further discounted to 0.15 if you have more than $2 million under management, a highly competitive rate in the market for what you get.
Vanguard, however, manages to come in even lower than this, with a management fee of 0.20%.
So Vanguard wins in the fees department.
However, when fee structures are analyzed, the difference in fees is nominal.
Let’s See What Portfolio Types Are Offered
Robo-advisers typically request information from customers and then propose different portfolios.
Some clients need this hand-holding and are happy to accept non-customizable packages, while others prefer to tweak their portfolios according to their needs.
Vanguard offers one portfolio and five risk tolerance levels, whereas Betterment has nine portfolios and three risk tolerances, making it more flexible.
Recently, Betterment has indicated it will launch diversified crypto portfolios to their range.
Betterment wins out in portfolio choice.
Types of Accounts Offered
Different accounts enable investors to pursue different goals and keep them separate.
Vanguard Digital has four account types, whereas Betterment has nine. Betterment wins.
What About Minimum Investment Requirements?
Again, with a zero minimum requirement, Betterment beats Vanguard with its requirement of $3 000.
High minimum investments tend to dissuade new investors. No or low minimum investments tend to indicate that there is an effort at inclusion.
But What If I Need to Speak to a Human?
Betterment provides access to human advisers, whereas Vanguard Digital does not.
Access to human advisors is a distinct advantage for both newbie and seasoned investors.
Auto Balancing And Tax Considerations
Betterment offers automatic portfolio balancing.
Betterment also offers tax-loss harvesting. Investing in a tax-optimized way helps your money grow faster.
Vanguard offers neither tax-loss harvesting nor automatic portfolio balancing.
What Sayeth The Experts?
There are many comparisons between Vanguard and Betterment online.
Modest Money published their direct comparison of the two robo-advisors.
It is also worth reading their direct comparison between M1 and Vanguard if you are considering who to use for your robo-advisor.
Lastly, Jeremy Bibedorf has published an insightful comparison between Vanguard and Betterment review on Techbullion.
So What is the Bottom Line?
Betterment and Vanguard have different approaches, reflected in their robo-advisor offerings.
Betterment is best suited to investors who:
- Are brand-new investors
- Seek tax optimization
- Are socially responsible
- Need human interaction
- Want to customize asset allocation
- Are lower net worth investors
Vanguard is ideal for investors who:
- Are ultra-high net worth investors
- Are experienced
- Have existing Vanguard investments
- Like simplicity
- Are more hands-off
- Like meagre management fees
It seems to us that the best approach is to start with Betterment until you have grown your investment portfolio significantly and then to consider whether you wish to move across to Vanguard as a more serious and invested individual.
Remember that you have access to Vanguard investments through Betterment.
The more complex your investments become, the more you should appoint a qualified financial advisor to help you to plan your investments and financial future. This is where the benefits of the Vanguard Group come into play.