Betterment vs Prosper Comparison

betterment vs prosper

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Betterment is a leading robo-advisor service while Prosper is a leading peer-to-peer lending platform, so how do you choose between them if you’ve got money to invest?

We compare fees, deposit minimums, and returns among other key factors to help you make a smart decision.

If you want a reliable income stream, Prosper is a better match. However, if access to your cash is a top priority then Betterment is likely the best fit.

But what else do you need to consider when you compare Betterment Vs Prosper?

Prosper vs Betterment

prosper logo
betterment
Although both Betterment and Prosper have built great reputations in their respective areas and both cater to investors seeking a return on capital, their services are very different.

What Is Betterment?

Betterment has become the leader in the robo-advisor industry by amassing billions in assets under management and serving hundreds of thousands of clients.

If features two services:

  • Betterment Digital
  • Betterment Premium

Betterment Digital is a pure robo-advisor service while Betterment Premium includes the bells and whistles of the lower tier service plus unlimited access to human advice.

Both services feature tax-loss harvesting, tax-coordinated portfolios, charitable giving, and socially responsible portfolios.

Portfolios are built to align with investor risk profiles and financial goals but are subject to the whims of the stock market.

What Is Prosper?

Prosper is a marketplace lending platform that connects creditworthy borrowers with investors seeking fixed-income returns.

As a peer-to-peer platform, Prosper doesn’t loan money out directly but rather matches investors to borrowers who fit certain risk criteria.

Investors can loan to borrowers across the entire risk spectrum. High risk borrowers pay higher interest rates on loans which in turn earns investors higher yields while lower risk borrowers pay investors less and are less likely to default.

Betterment vs Prosper: Fees

Betterment Fees

Betterment charges no account, transfer, or closing fees but each of the service offerings comes with an annual fee.

PlanFees
Betterment Digital0.25%
Betterment Premium0.40%

Prosper Fees

Prosper promises no hidden fees and delivers on its commitment. But no hidden fees doesn’t mean no fees.

Borrowers pay an origination fee between 2.4% → 5% on loan proceeds. For example, a $10,000 loan with a 3% origination fee would cost the borrower $300, which is deducted from the proceeds.

Late fees are also charged to borrowers who fail to make timely payments.

Investors do not pay fees but instead earn a return that is based on the interest rates borrowers pay.

Betterment vs Prosper:
Investment Minimums

Betterment Investment Minimum

Depending on which service tier you choose at Betterment, minimums will be starkly different.

For the basic service, Betterment Digital, the deposit minimum is $0. You can open a Betterment account and become familiar with the platform without investing a dime.

The higher tier service, Betterment Premium, has a much higher investment minimum of $100,000.

If you want access to unlimited phone calls with live advisors, you will need to meet a high hurdle. However, email access to live advisors is available to Betterment Digital clients.

Prosper Investment Minimum

To get started as an investor on the Prosper marketplace, you will need to invest a minimum of $25.

Prosper claims that over 83% of investors received returns on their investments that met or exceeded their expectations.

It is no surprise why when you discover that the average borrower has a FICO Score of 710 and an annual income of $96,441.

Performance Returns:
Betterment vs Prosper

Betterment Returns

Betterment portfolios vary according to the risk profile and financial goals of clients so no standardized return applies to all portfolios.

However, Betterment claims that its portfolios returns can be boosted by as much as 2.66% by intelligently and automatically managing tax implications.

Tax-coordinated portfolios place high-tax investments into qualified tax accounts and low tax impact investments into non-qualified accounts where possible.

Tax-loss harvesting also minimizes the tax impact clients experience. The process involves selling losing positions and replacing them with similar positions to ensure portfolios remain diversified while simultaneously enjoying lowering capital gains taxes.

Prosper Returns

The historical returns earned by investing Prosper loans vary depending on risk levels.

Risk CategoryHistorical Returns
AA → Bs3.7% → 6.9%
All Ratings Platform3.7% → 8.5%
C – HRs3.6% → 10%

Volatility & Liquidity

When deciding between Betterment or Prosper, the volatility of your investment should be a key consideration.

Investors with a higher risk appetite may favor Betterment portfolios that are exposed to stock market risks.

Prosper returns are designed to be more stable however borrower default is always a possibility. It is for that reason Prosper notes were created to spread investor risk across many borrowers versus a single person.

Liquidity

Another important decision-making factor is liquidity or access to your money.

At Betterment, you could decide to sell your positions and return to cash whereas your money will be tied up for longer at Prosper depending on the duration of loan terms.

If you expect you’ll need money in the near future to pay for a large purchase, Betterment is likely to be a better match for you.

Prosper Tax Implications vs Betterment

Perhaps more important than gross investment returns is how much you can put into your pocket after taxes.

Peer-to-peer lending has a drawback that stock market investing avoids. Earnings are taxed at ordinary income rates, meaning that when you invest and earn a yield you don’t receive tax break or special tax rate on interest earned.

In contrast, stock market returns enjoy preferential tax treatment when held for over one year.

Plus Betterment tax implications are front and center of its offerings, which is why if you plan to invest for the long-term you have a tradeoff to make: greater volatility in the stock market vs peer-to-peer returns that are taxed more heavily.

You may be able to invest in an IRA with Prosper and enjoy preferential tax treatment on gains but no such luck exists for standard, taxable account types.

Betterment vs Prosper
Overall Winner

Prosper WinsBetterment Wins
Fees: Prosper charges no fees to investors, only to borrowers. Betterment charges fees that range between 0.25% → 0.40% annually on managed assets.Performance Returns: Historical stock market returns have exceeded the average historical returns earned by Prosper investors.
Investment Minimum: Just $25 is needed to invest using Prosper’s online lending platform. Arguably, Betterment wins this category with a $0 minimum for Betterment Digital however Betterment Premium requires a $100,000 deposit minimum.Retirement Planning: RetireGuide by Betterment is a tool that links to outside financial accounts, analyzes your savings and tracks where you are compared to your financial goals to see if a shortfall exists and what amount needs to be invested to make up for it.
Passive Income Stability: Prosper returns are likely to be more stable than Betterment returns, which are tied to the performance of the stock market.Tax Implications: Betterment is superior when it comes to tax implications of gains. Its tax-loss harvesting and tax-coordinated portfolios can boost returns by as much as 2.66% collectively and preferential tax treatment is built into the US tax code for long-term holdings.
Liquidity: Investors who need access to cash should choose Betterment because money is tied up when investing in Prosper loans.

Betterment vs Prosper Comparison

Betterment and Prosper offer investors an opportunity to earn a return on their money, albeit in very different ways.

For investors who are risk-averse, Prosper is more likely to deliver stable returns but your money will be tied up longer.

If access to cash is your primary concern and you have a higher risk appetite then Betterment offers the chance to earn more.

Betterment also does a better job when it comes to tax considerations thanks to its proprietary algorithm that optimizes for after-tax returns.

Both companies have built stellar reputations in their respective industries so if you are not sure which to choose, a smart allocation strategy may be to put some of your eggs in one basket and some in the other.

 

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