Wealthfront Review – A Software-Based Financial Advisor

Wealthfront is a wealth management system with an emphasis on asset allocation with low fees. It’s based on Modern Portfolio Theory (MPT) and they believe the optimal mix of asset classes is more important than security selection.

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

They offer personalized, diversified investment management with periodic rebalancing. The rebalancing is based on asset performance and not at specific times.

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

How Wealthfront Works

Wealthfront has some similarities to Betterment. 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.

On November 12, Burton Malkiel, author of Random Walk Down Wall Street & Princeton Emeritus, joined Wealthfront as Chief Investment Officer. Dr. Malkiel has helped and advised Wealthfront in their choice of asset classes, investment mix makeup at each risk level, and ETFs used to represent each asset class.

The portfolio is based on a mix of six asset classes:

  • US Stocks
  • Foreign Stocks
  • Emerging Markets
  • Real Estate
  • Natural Resources
  • Bonds

Like I mentioned, asset allocations are determined by your risk tolerance, and will remain constant regardless of the amount of money you have invested.

Wealthfront uses exclusively exchange traded funds, or ETF’s, in the asset allocations. The ETF’s are also primarily through Vanguard. They state that it’s not a business relationship, but that Vanguards ETF’s “often come out on top”. They look for a combination of low expenses, close tracking of the base investment category and high liquidity when researching ETF’s.

Wealthfront investment mix

The company explains it’s asset diversification within the ETFs: “Wealthfront uses ETFs that capture broad market exposure for the asset classes and chooses the asset classes and mix based on the guidance from Burton Malkiel and Wealthfront’s investment team. The number of underlying securities held by each of the ETFs is as follows:

  • US Stock ETF (VTI) ~ 3000
  • Foreign Developed Stock ETF (VEA) ~ 800
  • Emerging Market Stock ETF (VWO) ~ 800
  • REIT ETF (VNQ) ~ 100
  • Natural Resource ETF (DJP) ~ 20
  • Bond ETF (BND) ~ 5000

On aggregate, an investor can hold close to 10,000 underlying securities covering the global markets in a small account for very low cost.”

They recently announced two new major enhancements to the investment management service:

Differentiated Asset Location: Wealthfront now offers different asset allocations for taxable and retirement accounts. Tax-efficient asset classes are weighted more in taxable accounts to minimize your taxes.

Improved Bond Diversification: They added five new income-producing asset classes to help increase returns (for the same level of risk).

Wealthfront also added five income-producing asset classes to increase portfolio returns without exposing you to more risk. The new asset classes are as follows:

  • Municipal Bonds
  • Corporate Bonds
  • Treasury Inflation Protected Securities (TIPS)
  • Emerging Market Bonds
  • Dividend Growth Stocks

Minimum Balances and Fees

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

Fees. There’s a lot of good news here. The first $10,000 in your account is managed for free. Amounts above $10,000 are assessed an annual 0.25% fee. On a $100,000 account, for example, the fee would be $187.50 for a full year. The amount of the annual fee will be prorated and withdrawn on a monthly basis. This is a real bargain when compared to the thousands of dollars in fees typically charged by investment managers.

The only other fee you incur is the very low fee embedded in the cost of the ETFs you own that averages 0.17%. The program used to have transaction fees to Apex Clearing at a rate of $2 per trade, plus 0.0025% per share, but those fees have recently been waived for Weathfront customers. That gives Wealthfront an advantage over even the deepest discount brokers.

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 there are a few issues you may want to consider if you’re thinking about signing up.

Target market. According to Wealthfont’s own website, they are “catering to the young and tech-savvy Silicon Valley community”. The staff even includes engineers from successful internet companies. That describes significantly less than 1% of the population.

Maybe they’re just trying to cash-in on the image of the Silicon Valley entrepreneur who makes quick millions from a successful internet start-up.

[Editor's Note: Wealthfront commented this viewpoint is incorrect. Wealthfront states it's just one entry point into the general investing market. While this maybe true, our opinion of their marketing material and features state otherwise.]

They have tools that help tech workers determine a fair salary and equity package in the tech start-up market. There are others that deal with employee stock-options, a practice most common to tech companies and start-ups in particular. For most other people however, this offers very little in the way of traditional investment support.

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.

No truly risk-free investment choices. Notice that five of the six asset categories are in risk type investing. Only one fund they offer — bonds — carries any hint of being low risk. That’s an open question too, since bond funds can hold all kinds of bonds, not all of them risk-free or even low risk. There is no option for an investor to switch into the typical vehicles of choice during periods of uncertainty, like money market funds or Treasury bills. Any such alternatives will need to be held in an unrelated account, which means you as the investor will be back to making your own portfolio allocations.

Wealthfront account

Is Wealthfront a Good Choice For You?

Wealthfront could be a solid addition to an already broad investment portfolio. If you already have a fairly well balanced investment mix — complete with risk-free holdings and your own collection of your favorite individual stocks — Wealthfront could function like a an aggressive mutual fund. It has a heavy concentration in growth, and that could make it a top hold in a rising market.

And 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. It could work well for a novice who simply keeps half of his money with Wealthfront, and the other half in super safe investments to limit any downside risk.

Overall, Wealthfront appears to be a pretty good investment service, especially for the tech-savvy and DIY types. If you are looking for low cost provider who’s using MPT to allocate your account, 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 better option.

Rating: 3 out of 5 stars

Have you tried Wealthfront? What was your experience?

Comments

  1. 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

  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.

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