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Financial Planning

Low-Cost Investing? Betterment Picks Up Where Vanguard Ends

It's not just about comparing products. It's about understanding the changes that are revolutionizing how you handle your finances.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: October 8, 2013

Betterment offers a personalized allocation of stocks and bonds, versus a DIY or all-in-one portfolio with pre-set allocations.

You can use a single account to manage all your investment goals.

You receive automated tax-optimization on every dollar coming in or going out of your account.

One of the most common questions we hear is, “You guys are great—but what’s the difference between Betterment and Vanguard?”

We love this question, because while we do share an underlying investing philosophy, ultimately Betterment is quite different—as different as the 21st century is from the 20th.

Both Vanguard and Betterment preach passive investing, a strategy that employs low-cost index funds to manage risk and earn market returns. But Betterment is not just an innovative, online-savvy imitation of this great company, widely viewed as the granddaddy of passive and low-cost investing.

We are creating the next generation of investing services by expanding on Vanguard’s 20th century innovations, and allowing investors to build wealth in an increasingly complex, fast-paced world via sophisticated algorithms and an online platform. Our products are easy and intuitive to use, not unlike what Apple did for personal computing when it created its revolutionary graphic interface.

We want to help you dig into the Vanguard-Betterment distinction because it’s not just about us, it’s about understanding the changes that are revolutionizing how we handle our finances.

Back to the future

Think about it: One day 30 years from now, while humming along in our electric cars, we’ll regale our 20-something kids with tales from the old days of investing. Back in the early-aughts we spent hours slogging through spreadsheets and charts, rebalancing portfolios on our own and trying to minimize taxes.

Our grown children will respond, wide-eyed with horror, “You did all that by hand?”

Seriously though, if you think about the way things are going, 20th century financial services already seem outdated.

Until recently, there have generally been only two buckets for investors to pick from: You can either be a DIY investor (which is time-consuming and tricky) or you can opt into a one-size-fits-all product like a target-date fund that offers investors little flexibility when their lives or priorities change. It’s like having to choose between building your own car, or opting for the most basic economy car.

Betterment is the place that builds you a car with automatic features, power steering, built-in navigation and optimized fuel injection.

Call it innovation or call it inevitable, Betterment is part of a trend that is remaking financial services—and part of a wave of automation and personalization that’s sweeping through transportation, appliances, music, and more. (Think about what Orbitz has done for travel booking or Netflix is doing for movies and television, to name just two.)

Passive gets personal

Our CEO Jon Stein decided to launch Betterment in 2010, because he wanted to close a gap he saw for smart, professional—but not always expert or DIY-inclined—investors. Big companies were harnessing technology to enable cheaper and faster trades but there was little thought as to how or whether these would help the typical investor, who had no interest in day trading.

Jon saw an opportunity for a more efficient, thoughtful financial services firm that would be in sync with working professionals’ lives.

Betterment broke new ground by building a product that investors could customize according to their needs, time horizons, and stomach for risk—all with “almost radical simplicity” according to the New York Times.

Today, a customer can invest in a fully diversified portfolio with a personalized allocation of stocks and bonds—in less than 10 minutes. That means you start earning the best possible risk-adjusted returns from the moment you fund your account. Every aspect of your account is fully automated, which means your portfolio will be rebalanced and kept tax-efficient, without you having to do a thing.

Generic mass-market funds don’t provide the kind of personalization we have come to expect in all other walks of life. Vanguard has done amazing things and offers great individual funds (hey, we have a few of the company’s funds in our own portfolio), but as always, the next wave of innovation is not coming from the establishment.

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