Wealthfront Review – Maximize Tax Efficient Investing

Wealthfront
Review of: Wealthfront
Reviewed by:
Rating:
4
On June 16, 2014
Last modified: March 29, 2015

Summary:

A software-based wealth management system with an emphasis on asset allocation with low fees. Wealthfront's service shines with taxable accounts.

Wealthfront is a robo-advisor with an emphasis on asset allocation with low fees. Wealthfront uses Modern Portfolio Theory (MPT) to create the optimal mix of asset classes.

Wealthfront doesn’t hold your portfolio, they manage it. The portfolio is with Apex Clearing Corporation. Wealthfront is no different than having your account with a discount broker like TradeKing, who also uses Apex.

Wealthfront invests in exchange traded funds (ETF) index funds. They offer diversified investment management with continual rebalancing in an extremely tax efficient manner.

It’s like having a financial advisor that’s software based. They manage both personal accounts and retirement accounts, including 401(k) rollovers and various forms of individual retirement accounts.

Wealthfront seems to be catching on with investors. Launched in December of 2011, they announced on March 3rd, 2015 that they have achieved over $2 billion under management.

How Wealthfront Works

Wealthfront uses a team of “world class financial experts” led by legendary economist Burton Malkiel. He’s the author of the investment classic, Random Walk Down Wall Street, and joined Wealthfront as Chief Investment Officer.

Wealthfront has some similarities to Betterment with the trend of robo-advisors. You start by completing a questionnaire with four objective questions and six subjective ones. The purpose of the questionnaire is to determine your risk tolerance. Once established, asset allocations will remain constant regardless of the amount of money you have invested.

Model Portfolio

Depending upon if your account is taxable or tax-deferred (i.e., IRA), the asset allocation and fund selection will be slightly different.

It’s interesting to note that Wealthfront’s portfolio does not contain a US Bond fund, but you aren’t completely out of the US bond market. Wealthfront does use a US TIPS ETF. I suppose they did this because of the 30+ year bull-run in the bond market. In all likelihood, rates will go higher, and US Bond funds could yield negative returns.

The portfolio they create for your will be based the ETFs listed below.

Stock Portfolio Makeup

SectorETFTicker
USVanguard US Total Stock MarketVTI
ForeignVanguard FTSE Developed MarketVEA
Emerging MarketVanguard FTSE Emerging MarketsVWO
DividendVanguard Dividend AppreciationVIG

Bond Allocation

SectorETFTicker
USnot used-
US TIPSSchwab US TIPSSCHP
MuniiShares National AMT-Free Muni BondMUB
CorporateiShares Corporate BondLQD
Emerging MarketiShares JPMorgan Emerging Markets BondEMB

Alternatives Allocation

SectorETFTicker
Real EstateVanguard REITVNQ
Natural ResourcesiPath DJ-UBS CommodityDJP
Wealthfront - Investment Mix

Customize your asset allocation

Wealthfront Fees and Minimum Balances

The minimum account size is $5,000, and there is also a minimum withdrawal amount, which is $2,500. You cannot draw your account below the $5,000 minimum.

Fees. There’s a lot of good news here. With our link, the first $15,000 in your account is managed for free, and amounts above $15,000 have an annual 0.25% fee.

On a $100,000 account, for example, the fee would be $225 for a full year — The first $15,000 is excluded from annual fees. The amount of the annual fee will be prorated and withdrawn on a monthly basis. Wealthfront is a real bargain when compared to the thousands of dollars in fees typically charged by investment managers.

I should state it’s possible to have more than $15,000 managed for free under Wealthfront. You have to become a Weathfront customer, and refer friends to their service.

The only other fee you incur is the very low fee embedded in the cost of the ETFs you own that averages 0.15%. That gives Wealthfront an advantage over even the deepest discount brokers.

Direct Indexing

This service is available in taxable accounts. The purpose is to save on taxes by being more efficient, and even further maintenance fees that the ETFs Wealthfront uses. In effect, Direct Indexing is akin to Wealthfront creating their own ETF.

Wealthfront clients can access Direct Indexing at three levels:

  • Wealthfront 100 – Available to taxable accounts with a minimum of $100,000. Wealthfront uses individual stocks in up to 100 of the largest US companies and two smaller-sized company ETFs to represent the broad US stock market.
  • Wealthfront 500 – Available with a minimum of $500,000. The account uses up to 500 individual large company stocks and a single ETF of smaller-sized companies to represent the broad US stock market.
  • Wealthfront 1000 – Available with a minimum of $1 million. It extends the previous options and uses up to 1,000 stocks in large and mid-sized companies as well as an ETF of small companies to represent the broad US stock market.

Wealthfront Emphasizes Tax Efficiency

Tax-loss harvesting works by taking advantage of investments that have declined in value. A tax deduction is generated by selling investments at a loss – which lowers the investor’s taxes. Tax-loss harvesting could result in a larger benefit than what comes from the manual end-of-year approach taken by traditional financial advisors.

Wealthfront’s automated investment service offers six levels of tax minimization:

  • Index Funds. Unlike actively managed mutual funds, index funds have very little turnover, which means you incur much lower capital gains taxes.
  • Intelligent Dividend Reinvesting. Using dividends to rebalance your portfolio throughout the year minimizes sales, leading to lower realized capital gains.
  • Tax location. All clients receive different asset classes and asset allocations for taxable and retirement accounts to optimize their after-tax performance.
  • Daily Tax-Loss Harvesting. – Available in taxable accounts.
  • Wealthfront Direct Indexing – Uses a mix of individual stocks as well as ETFs to mirror the US stock market.

Wealthfront states tax-loss harvesting and use of its Wealthfront Direct Indexing could add more than 1.6% to your portfolio’s annual after tax investment return.

The Good

  • Tax-Loss Harvesting available for all accounts – Previously taxable accounts over $100,000 only had this option. Now every Wealthfront account qualifies.
  • Direct Indexing – When investing over $100,000 it’s a futher way to decrease taxes and fund expenses by avoiding ETF fees.
  • Largest Robo-advisor – With currently over $2 billion assets under management (AUM) this makes Wealthfront the largest robo-advisor. This also means they are getting closer to the threshold to being a self-sustaining business not requiring more venture capital.

The Bad

  • No Fractional Shares – It’s possible with your account to have cash sitting in your account not invested
  • $5,000 Minimum – While not extermely high in an intital deposit amount, you cannot start with nothing saved.

Wealthfront Limitations

The emphasis on Modern Portfolio Theory in combination with an extremely low fee structure make a compelling case for using Wealthfront’s services. But it isn’t for everyone, and there are a few things you may want to consider if you’re thinking about signing up.

It’s not an investment democracy. You won’t be able to move all of your investments into an account and continue the investment do-it-yourself route. Wealthfront sets the allocations — which are entirely comprised of a very narrow selection of ETF’s — and you have no input at all. Any other type of investing you’re interested in doing will have to be carried on through an unrelated account.

Very high growth orientation. Most of the ETF’s are in growth type investments, so this seems like a portfolio that would do extremely well in strong markets, but take a heavy beating when the bear bites. It won’t be a good fit for someone who’s over 40, or close to retirement, who might be looking for some safety with his portfolio.

Outside investments aren’t recognized. Unlike Personal Capital which can get a comprehensive portfolio view, Weathfront isn’t set up to incorporate any holdings you have outside of the Wealthfront portfolio. That means if your accounts with other brokers or in a retirement plan are too heavily weighted toward real estate or foreign stocks, Wealthfront will not be able to adjust it’s portfolio to reflect the heavy risk exposure you’re already carrying.

It’s not for the DIY crowd. You won’t be able to move all of your investments into an account and continue the investment do-it-yourself route. Wealthfront sets the allocations — which are entirely comprised of a very narrow selection of ETF’s — and you have no input at all. Any other type of investing you’re interested in doing will have to be carried on through an unrelated account. The service provides no investment advice and has no intention of ever doing so.

No pure cash options. Though the platform has increased the number of fixed income options from one to five since our last review, there is no cash option, such as a money market account. The platform even recommends that you maintain cash reserves equal to six months living expenses outside the plan. But what do you do if you want to take a partial or total breather from your regular investment activities?

Wealthfront - Projected Performance

Wealthfront displays your projected future performance

Is Wealthfront a Good Choice For You?

Wealthfront’s diversification has improved substantially in a short space of time. It could function as a primary investment account for a beginning investor. Since all the investment management is done for you, it could be excellent for a novice investor who lacks the inclination to jump into individual security selection and management. Or it could also work for a more active investor if supplemented with a self-directed account.

It will be a superior vehicle for investors who prefer truly passive investments, since selection and maintenance of individual securities is completely unnecessary. Such an investor should supplement the Wealthfront position with substantial cash type holdings outside.

Wealthfront’s service really shines with taxable accounts. If you have over $100,000 to invest in a taxable account, Wealthfront’s service can minimize your annual tax expenses.

Overall, Wealthfront appears to be an excellent investment service. The major limitation if the lack of recognition of non-Wealthfront assets in the investment mix.

If you are looking goal setting, Betterment might be a better fit. For individuals who are looking for a more comprehensive online app with optional financial advisor advice, Personal Capital is a good option.

Have you tried Wealthfront? What was your experience?

Comments

  1. Evan says:

    Saw an interesting article in a financial planning trade magazine about the service. The article flipped between the idea that they are taking customers the traditional planners don’t really want (less than 25K of investable assets) and what if it works and they go up the vertical and take other clients.

    Interesting business decision not to charge for less than 25K

    • Kevin Mercadante says:

      Hi Evan–That’s an interesting take, and probably an accurate one. It’s an excellent strategy too because small investors eventaully become large investors and the clientele becomes more lucrative.

    • Larry Ludwig says:

      I think you are going to see more and more services target the under $250K crowd typically not touched by financial planners.

  2. Andrew says:

    I recently moved half my portfolio to WealthFront… their service team was fantastic – answered several complex questions and helped us with the logistics of transferring accounts. I’ve used the other services mentioned on this page – WealthFront’s customer service is the best.

  3. John voishan says:

    Am I diversified. Part social security, Pension Benefit Guarantee from an air line bankruptcy@25 cents/$, advisor managed IRA, and self directed IRA/Roth IRA. As you can probably tell I am not 30 something. Split out part of my self directed to Wealthfront. If you believe in John Bogle concepts of low expense and the long run you can’t beat it and play with grandchildren. Don’t try to find the needle, buy the hay stack and with market fluctuations don’t just do something, stand there. Bogle ism to the tee. With a near term, mid term and long term allocation of funds (thank you Ray Lucia) the Wealthfront is in the long term bucket. Oh what we learn later in life.

  4. Hrant says:

    Tried Wealthfront.
    Put in 25G now about 27G as of opening 6mo ago or so.
    No negatives, on auto pilot.
    Opened Betterment, plowing some serious money there to be able to reach their 100G under management to get .15 in fees. You definitely want to open an account there, as very easy, and friendly, very knowledgeable staff.
    Also opened WISEBANYAN account- a very noble idea of no fee money management on line as well.
    Opened about a month ago, working as it should. Very eager, yet nascent co., on the road to capturing mass, as has very deep pockets backing, and trying to make money down the road w/new products to be introduced…which I can’t wait for- ex. dividend option generating cash, etc…
    Thanks you for all you are doing. Very much enjoy your blogs.

  5. Tony C says:

    Horrid customer service and bureaucracy. Had my money tied up with them based off loose reasons. Would not recommend giving them control of your money

    • Dirk V says:

      Tony ~ Can you elaborate on “… off loose reasons.”? I am unable to interpret your meaning there. Thanks.

Leave Your Comment Below

*