Robo advisors seem to be the wave of the future — each of them offering something different to entice investors. But one of the robo advisors, Wealthfront, is making moves to be one of the best services, especially for tax efficient investing. In a sea of robo advisors, Wealthfront is quickly becoming a frontrunner.
What is Wealthfront?
Wealthfront is a robo-advisor with an emphasis on taxable accounts but also works well with IRAs. Wealthfront uses Modern Portfolio Theory (MPT) to create an automated asset allocation.
Wealthfront doesn’t hold your portfolio, they use 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.
Features and Pricing
- Available Accounts – Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts, Non-profit, Individual and Joint.
- First $15,000 Managed For Free – With our special promotional link you get up to $15,000 managed (normally it’s $10,000).
- Custom Asset Allocation – Based upon your risk profile and account type (taxable vs tax deferred) the asset allocation is customized for you
- $5,000 Minimum – To open an account with Wealthfront you must start with $5,000.
- Tax-Loss Harvesting – Helps minimize your taxable investments by offsetting gains with loses
- Tax-Optimized Direct Indexing – For larger taxable accounts it makes your account even more tax efficient
- Automatic Portfolio Rebalancing – When your portfolio gets out of whack Wealthfront will automatically buy and sell the ETFs within your portfolio.
- Automatic Deposits – Transfer money into your account on a scheduled basis. Options available are weekly, monthly, quarterly, and 1st and 15th of the month.
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 their 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 Wealthfront customer, and refer friends to their service. Each new sign up grants you an additional $5,000 of free management.
The only other fee you incur is the very low fee embedded in the cost of the ETFs. From our 60% stocks, 40% bonds portfolio test we found the ETFs averaged 0.18%. That gives Wealthfront an advantage over even the deepest discount brokers.
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 eventually 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
|US||Vanguard US Total Stock Market||VTI|
|Foreign||Vanguard FTSE Developed Market||VEA|
|Emerging Market||Vanguard FTSE Emerging Markets||VWO|
|Dividend||Vanguard Dividend Appreciation||VIG|
|US TIPS||Schwab US TIPS||SCHP|
|Muni||iShares National AMT-Free Muni Bond||MUB|
|Corporate||iShares Corporate Bond||LQD|
|Emerging Market||iShares JPMorgan Emerging Markets Bond||EMB|
|Real Estate||Vanguard REIT||VNQ|
|Natural Resources||Energy Select Sector SPDR||XLE|
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 the Vanguard Extended Market ETF (VXF) and the Vanguard S&P 500® ETFs (VOO) to represent the remaining smaller companies.
- Wealthfront 500 – Available with a minimum of $500,000. The account uses up to 500 individual large company stocks and the Vanguard Extended Market ETF (VXF) used to represent non-S&P 500 smaller companies
- Wealthfront 1000 – Available with a minimum of $1 million. It extends the previous options and uses up to 1,000 stocks in large and the Vanguard Small-Cap ETF (VB) used to represent small-capitalization .
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:
- Wealthfront Direct Indexing – Uses a mix of individual stocks as well as ETFs to mirror the US stock market.
- 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 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.
Wealthfront does offer a mobile app, but for iPhone users only. According to their website, “The Wealthfront for iPhone application has been designed for iOS 7 to give you a clear view of all your accounts at Wealthfront. For the first time you can see your rolled-over IRA accounts from old employers, Roth IRAs, and taxable accounts, all in one place.” At this time, they do not offer a mobile app for Android users.
- 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 $2.3 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.
- No Fractional Shares – It’s possible with your account to have cash sitting in your account not invested
- $5,000 Minimum – While not extremely high in an initial deposit amount, you cannot start with nothing saved.
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?