Betterment Vs. Empower - Which One Is Right For You?

(Personal Capital is now Empower)

Direct comparisons between investment platforms can help investors determine which service will work best for them. Some investment services, such as robo-advisors, are easy to compare. But things get more complicated when you’re attempting to decide between two very different services, such as a robo-advisor and a personal wealth management service.

That’s the challenge we’re taking on here with Betterment vs. Empower. On the surface at least, the two platforms can seem very similar. But they’re actually substantially different, and you have to decide which will work best for your investment needs.

For example, while Betterment is a pure robo-advisor – that’s gradually adding human financial advisory services – Empower is a two-part platform. The first is Empower’s Financial Tools software, which provides financial account aggregation, investment analysis and limited budgeting capability, and is offered free. But then it offers its premium Wealth Management service, which provides direct management of your investment portfolio.

While we’ll be spending some time discussing the free Personal Financial Tolls software – because it’s available to all Empower users – we’ll focus primarily on the Wealth Management side. That’s the service that’s most comparable to Betterment.

Betterment vs. Empower summary

The table below summarizes and compares the basic service levels and other features offered by both Betterment and Empower:

Betterment is not a licensed tax advisor. Tax Loss Harvesting+ is not suitable for all investors. Investing involves risk. Performance not guaranteed.

About Betterment

Betterment is a robo-advisor – in fact, it’s the largest independent robo-advisor in the market – but one is gradually making its way into offering comprehensive financial advice.

Betterment was founded in 2008, and is based in New York City. The company currently has about $33 billion in assets under management. It’s a fully automated investment platform, that both creates and manages your portfolio for a very small annual advisory fee.

Betterment uses Modern Portfolio Theory (MTP) to create and manage your investment portfolio. It’s an investment strategy commonly used by robo-advisors and other investment management services, that emphasizes proper asset allocation.

To learn more about Betterment read our full review or visit their website!

Signing-up with Betterment

When you sign up with Betterment, you’ll be required to complete a questionnaire that will indicate your investment time horizon, goals, and risk tolerance. Betterment will then build a portfolio comprised of six different stock classes and six bond classes. Each of the 12 asset classes will be represented by a single low-cost, index-based exchange traded fund (ETF), that will enable you to invest in entire markets, comprised of thousands of different securities.

As is typical of robo-advisors, your portfolio will be fully managed for you. Your only responsibility will be to provide additional funds for your account. Portfolio management will include dividend reinvesting and periodic rebalancing to maintain target asset allocations.

All taxable Betterment portfolios also provide tax-loss harvesting.

About Empower

Based in San Carlos, California, Empower was founded in 2009. It offers its popular (and free) Financial Tools software that provides a wide range of investing, budgeting, and financial management tools. But its Wealth Management service is its core investment offering, and currently has more than 19,000 clients with over $9 billion in assets under management.

Although its Wealth Management service is often referred to as a robo-advisor, it’s actually more comparable to traditional human directed investment management. Investors receive not only portfolio management, but also high-level financial advice.

Management fee

But the main difference is in the fee. Wealth Management’s fee starts at 0.89% for the first $1 million under management, dropping down to 0.49% for portfolios of $10 million or more. This is just a fraction of the fee structure typically charged by traditional investment managers, which ranges between 1% and 2% of assets under management.

So while Empower Wealth Management has similarities to robo-advisors, like Betterment, it’s more comparable to higher priced, traditional investment management services. It even offers comprehensive financial planning services, making it a one-stop financial shop for its clients.

To learn more about Empower read our full review or visit their website!

Betterment vs. Empower: Investment performance

One of the major factors determining the difference between investment services is obviously the return on your investment. Unfortunately, it’s not possible to do a direct comparison between Betterment and Empower – or any other two investment platforms – due to timing differences and specific portfolio mix.

For example, while Betterment’s non-stock allocations are concentrated solely in bonds, Empower’s non-stock allocations include real estate, gold, and commodities, in addition to bonds.

While recognizing these differences, we did our best to provide a comparison of the investment returns between the two platforms over a similar timeframe. It isn’t exact, but it’s useful nonetheless.

Betterment

Note: Betterment’s historical performance tool has been deprecated. The information below was collected by Money Under 30’s editorial team via the tool in 2019.

Betterment’s deprecated historical performance tool provided limited data on investment returns. It went all the way back to 2004, even though Betterment wasn’t launched until 2008. As well, investment results cut off at July, 2018. Still, it offered a basis of comparison to match returns with other platforms, like Empower.

We set the graph from January 2012, to better align it with the performance results of Empower. Through the end of July 2018, Betterment had a cumulative return of 75.8% on a portfolio of 80% stocks, and 20% bonds.

Since we used Empower’s Growth allocation, that includes a 75% stock allocation, we did an average between Betterment’s return on a portfolio comprised of 70% of stocks – with a 67% cumulative return – plus the 75.8% return on the 80% stock portfolio above. This produces a cumulative return of 71.4% for a portfolio invested 75% in stocks.

The average annual return on the blended Betterment portfolio allocation covering 79 months (January 2012 through July 2018) works out to be about 8.6%.

Empower

Empower provides their Composite Personal Strategy & Comparable Benchmark Returns to enable users and potential clients to view Wealth Management portfolios performance from 2012 to 2018.

The full table – the one below is only the top half – includes six different portfolio mixes:

• Aggressive
• Growth
• Moderate
• Balanced
• Conservative
• Tactical America (this is the best performing portfolio by far, with seven-year average annual return of 12.9%)

For comparison with Betterment, we’re going to focus on the Growth portfolio. It includes 75% in stocks (50% US, 25% international), 15% US and international bonds, and 10% alternatives (real estate, gold and commodities).

The seven-year average annualized return for the growth portfolio is 8.5%, compared to the comparative benchmark of 7.8%.

Betterment vs. Empower investment performance conclusion  

What we have is an 8.6% average annual return for Betterment from January 2012 to July 2018. For Empower, the average annual rate of return for exactly seven years is 8.5%.

Due to the timing and portfolio allocation differences, this doesn’t represent an exact comparison. But it’s as close as we can get, and as you can see the difference between the two is only 1/10 of 1%. That may further be explained by the fact that Betterment’s results don’t include the fourth quarter of 2018, which was generally unkind to the stock market.

It’s entirely possible then that the performance of Empower might have matched or even exceeded Betterment, had Betterment’s results extended through the very end of 2018.

Betterment and Empower pros

Betterment:

• $0 to get started
• One low investment advisory fee of 0.25% on all account balances up to $2 million, then 0.15% on higher balances
• Portfolio allocations include investing in value stocks for small, medium, and large cap stocks
• Smart beta and socially responsible investing options available
• Human assisted investment advice
• Tax-loss harvesting feature available on all taxable investment accounts
• You can get a dedicated personal financial advisor with a minimum account balance of $100,000 or by purchasing packages.

Empower:

• The Financial Tools software is free to use, and provides valuable financial tools including investment analysis
• Considers employer-sponsored retirement plans and non-managed investment accounts in determining your portfolio allocation
• Despite the higher annual advisory fee for Wealth Management, the portfolio performance matches up well against Betterment
• More comprehensive tax minimization strategies, including tax allocation and the use of individual stocks in the generation of tax loss harvesting
• More advanced investment and financial services available for higher net worth individuals

Betterment and Empower cons

Betterment:

• Account analysis performed on non-Betterment accounts, but portfolio compositions don’t affect asset allocations in Betterment portfolios
• Unlike Empower, Betterment portfolios don’t diversify into alternative investments, like real estate, gold, or commodities

Empower:

• Minimum $100,000 initial investment for Wealth Management is beyond reach for many investors
• The Wealth Management advisory fee starting at 0.89% is well above the robo-advisor fee range of 0.25% to 0.50%
• If you sign up for the free Financial Tools software you will be frequently solicited to trade up to the Wealth Management service

Why choose Betterment?

Flexible portfolios

Betterment will determine a portfolio based on your answers to the questionnaire when you open your account. But you will still have the option to make adjustments in individual asset class allocations in your portfolio.

This will give you some measure of control over the asset allocation in an otherwise automated investment portfolio.

Betterment Cash Reserve

Betterment Cash Reserve offers a 2.25% APY.

There’s no minimum balance and you’ll pay no monthly fees. Plus, you’ll also be able to make an unlimited number of withdrawals (typically, you can only make six).

Betterment Checking

Betterment also now offers a checking account that comes with no fees, no minimum balance, mobile check deposit, and reimbursed ATM fees.

You won’t just save on fees with your Betterment Checking account, though. Thanks to Betterment’s partnership with Dosh, your connected Betterment Visa® Debit Card will also earn you cash back on certain purchases both online and in-person (for online shopping, make sure to shop through Betterment’s “Earn Rewards” section).

Just spend with one of the thousands of participating merchants and the rewards will be automatically deposited in your checking account – no need to wait for weeks or take any extra action. You’ll also get a notification every time Betterment finds you rewards, so you can easily keep track of how much you’ve earned. 

Another benefit of Betterment’s cash back rewards is that you’ll see offers that are customized to your own buying preferences. Over time, as you spend money using your Betterment Visa® Debit Card, you’ll find that the offers match your habits even better. 

There’s also no need to worry about security, as Betterment won’t share any details, such as your name and account number, with Dosh.

Smart Beta

This portfolio is managed by Goldman Sachs, and requires a minimum investment of $10. It offers investments with the potential to outperform the general market, by investing in an actively managed portfolio. As is typical of any actively managed portfolio, Smart Beta offers both higher returns and higher risk.

Socially Responsible Investing (SRI)

This isn’t a complete SRI portfolio, but rather a partial one in which certain equity investments are replaced with SRI ETF alternatives.

Under the current methodology, Betterment drops large-cap US stocks and emerging market stocks in favor of SRI ETFs. It will give you an opportunity to invest in what you believe in.

Investing in value stocks

Betterment’s large-, medium-, and small-cap asset allocations are in value stocks. These are stocks that are largely ignored by the general market, often due to recent but resolved bad news about the company or the industry.

However, the companies themselves are fundamentally sound, and represent one of the best long-term investments available. Value investing is one of the most time-honored investment methodologies, and it’s a regular part of Betterment’s asset allocations.

Financial advisors for accounts over $100,000

This is where Betterment begins to move into direct competition with Empower Wealth Management. For an annual fee of 0.40% (or 0.30% on portfolios of $2 million or more) you’ll have unlimited access to a team of dedicated financial advisors.

The fee is less than half that charged by Empower, though the service levels are significantly different.

Why choose Empower?

Empower offers three different service levels, the free Financial Tools Software, Wealth Management, and Private Client

Let’s start with the free Financial Tools software. Even if you never sign up for the Wealth Management service, the software offers so many valuable tools:

401(k) analyzer

This is perhaps the tool the Financial Tools software is best known for, and for good reason. The tool can analyze your employer-sponsored retirement plan, showing you the fees being charged by each fund in your plan. It will then suggest lower-cost alternatives available in the plan.

Retirement planner

The retirement planner helps you plan for retirement by running “what if” scenarios. For example, it can show you the long-term effects of making certain changes in your plan. That can include saving more money, changing your investment allocation, making a career change, or even saving for college.

Investment Checkup

When you sign up for the Financial Tools software, you’ll add all your investment accounts. The investment checkup tool will help you optimize those accounts by making adjustments in your portfolio allocation to improve your investment results.

Cash Flow Analyzer

This creates a budget for you, then tracks your income and expenses through the various financial accounts you’ve included in the app.

You can also set financial goals, such as saving for retirement or getting out of debt. Strategies will be offered to help you reach those goals.

Budgeting

While the budgeting capabilities of the software aren’t as extensive as those of other popular budgeting software, they will help you track your spending patterns, as well as analyze spending categories. Through the use of monthly summaries, you’ll be able to track your spending patterns and make improvements.

Empower Wealth Management

This service is available to investors with between $100,000 and $1 million in investment assets. However, some services are available only if you have at least $200,000 to invest.

Alternative investments

Unlike Betterment, Empower goes beyond stocks and bonds in your portfolio, and includes alternatives, like real estate, gold, and commodities.

This will give you an even broader diversification, while providing extra protection against inflation.

Tax optimization

Like Betterment, Wealth Management offers tax-loss harvesting, but they go beyond the single strategy.

For example, tax allocation is used in which income producing assets are held in retirement accounts, while capital gains generating assets are favored in taxable accounts (to take advantage of lower long-term capital gains tax rates).

They also make use of individual stocks to provide greater flexibility in generating tax-loss harvesting.

Smart Weighting (a.k.a. Smart Beta)

This strategy improves on traditional index investing by maintaining more evenly balanced asset allocations. It’s a strategy that’s been found to outperform the S&P 500 over the long-term.

Socially responsible investing (SRI)

You have the option to choose investments based on compliance with environmental, social, and governance guidelines by the underlying companies. SRI will give you an opportunity to invest in companies that are more aligned with your personal beliefs.

24/7 Customer Service

Access customer service at any time, including weekends and holidays.

Financial Advisory Team

Access to a Wealth Management Financial Advisory Team member. But you’ll get two dedicated financial advisors with a minimum account balance of $200,000.

Financial Planning services

This includes advice involving insurance, home financing, stock options, and compensation.

Private Client

This service level is available for those who have over $1 million in investment assets, but with the same fee structure as Wealth Management. In addition to the services offered through Wealth Management, Private Client also comes with the following:

• Priority access to a certified financial planner, advisors, investment committee and support.
• Investment portfolio mix that includes ETFs, individual stocks and individual bonds, when deemed appropriate.
• Family tiered billing.
• Private banking services through BNY Mellon.
• Estate, tax and legacy portfolio construction.
• Donor advised funds.
• Private equity and hedge fund review.
• Deferred compensation strategy.
• Estate attorney and CPA collaboration.
• Access to private equity investments (requires a minimum of $5 million under investment).

Summary

In looking at both Betterment and Empower we see certain similarities. This is true in terms of basic investment management. Both use automated investing, in combination with index-based ETFs to provide low-cost investment management services. And in doing so, each service offers comprehensive management of funds invested on the platform.

Betterment is for you if…

…you’re primarily interested in investment management at the lowest possible fee. The annual advisory fee of 0.25% is well below the 0.89% charged by Empower. And while Empower’s fee structure goes down to 0.49% at $10 million, Betterment’s drops to 0.15% at $2 million.

Empower is for you if…

…you’re interested in comprehensive financial management. Sure, you’ll pay a higher annual fee, but you’ll get customized investment management, as well as access to human financial advisors. Betterment does offer access to financial advisors with a fee of 0.40%, and while that’s much lower than Empower’s fee structure, it doesn’t provide the detail of services that Empower does.

In summary, Betterment is likely the better choice for small and medium-size investors. But as your portfolio and income grow, and your financial situation becomes more complex, it may be time to make the switch over to Empower.

Read more:

• Empower Review: My Experience Using Empower
• Betterment Review: The Way Investing Should Be