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.
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
|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||iPath DJ-UBS Commodity||DJP|
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.
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.
- 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.
- 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.
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?
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?