Wealthfront Review – Best For Tax Efficient Investing

Wealthfront
  • Review of: Wealthfront
  • Reviewed by:
  • Published on:
  • Last modified: July 21, 2015
  • Editor Rating

    Rated 4 stars

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 the 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 $2.5 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.
  • $500 Initial Deposit (New) – You only need $500 to open an account with Wealthfront
  • First $10,000 Managed For Free – With our special promotional link you get up to $15,000 managed.
  • Custom Asset Allocation – Based upon your risk profile and account type (taxable vs tax deferred) the asset allocation is customized for you
  • 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 $500, and there is also a minimum withdrawal amount, which is $250. You cannot draw your account below the $500 minimum.

Fees. There’s a lot of good news here. With our link, the first $10,000 in your account is managed for free, and amounts above $10,000 have an annual 0.25% fee.

On a $100,000 account, for example, the fee would be $225 for a full year — The first $10,000 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.

We do have a special promotional link that offers the first $15,000 under management for free. I should also state there’s another way to have more than $10,000 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.

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 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

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 ResourcesEnergy Select Sector SPDRXLE
Wealthfront - Risk Tolerance
Wealthfront creates your portfolio from the answers to their questions

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 (New) – 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 five 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 to cover the gains in ETFs with the loss of other ETFs owned with Wealthfront.

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. Though of course this return is not guaranteed and is partially dependent upon market performance.

Wealthfront - Actual vs Projected Performance
Wealthfront displays your projected future performance

Mobile App

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.

Pros

  • 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 $2.5 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.

Cons

  • No Fractional Shares - It's possible with your account to have cash sitting in your account not invested
  • No Android App - For individuals using Android phones you cannot access your finances via an app.

Summary

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 as well.

Have you tried Wealthfront? What was your experience?

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Reader 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.

  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.

    • Andrew Zimmerman says

      Thanks for letting us know about WiseBanyan. I like how the signup process is similar to Robinhood. I like Robinhood. This is gonna be good!

  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

  6. stan says

    wealthfront is nothing but index fund tracking us markets. you can do it yourself by buying SPY.
    This is just for people who know nothing about investing. No edge, no alpha.

      • stan says

        Hi Kai,

        You can do your own research like I did. I am a sophisticated investor and trader, so I know how this market works.

        You can go answer those questions when you click invest with wealthfront kind of button on their website. You will then get your risk profile and a chart of historical performance and future projected performance.
        First, read carefully the disclaimer. It says “hypothetical performance”.
        Second, look at the chart. I bet your chart looks similar to mine, and their performance is “tracking” S&P500 or benchmark index. It moves up and down in similar manner to index. It is correlated. If you measure it statistically, I guarantee you that their performance strongly correlated to S&P500.

        Now, why would you invest with a fund manager or financial advisor or robo advisor that sounds cool with tons of big-name programmers and book author, if their performance is similar to S&P500? Please ask their customer service, where is your actual performance, not hypothetical one. I asked them and they just beat around the bush and never gave an answer. You should try to ask them.
        Look, mutual funds has actual performance. Many Hedge funds have verified performance. Many CTA (commodities trading advisor) have it. Most money management firms have it. Why don’t they have it?
        You should ask these questions before you put money everywhere:
        1. Where is your actual performance results?
        2. What is your actual risk-adjusted results?
        3. What is your volatility profile, sharpe ratio or similar data?
        4. How did you do DURING BEAR markets, like in 2008? I bet if they were managing money in 2008, they would lose as much as the general markets. Why? look at their correlation with market.

        So, your job is to find fund management that can beat the market with edge and proven alpha. The ones that have sound risk management to avoid or at least manage bear markets properly.

        Remember, EVERYONE looks good in bull market like 2009 to now.

        If you just want to follow general market or S&P500, just buy those vanguard index funds yourself or SPY. Why needs WF?

        • Andrew Zimmerman says

          Solid advise. I was thinking the same thing.
          There is value in the GUI.. but just remember what you’re getting for the money.

  7. Ronald says

    What’s to prevent you from just handing WF $15,000 and then mirroring their trades with the rest of your money to avoid any fees on any size investment account?

    • Stan says

      Exactly, Ronald.
      It is because 99% people don’t have a good financial education. WF targets are those people, even by, sorry for harsh word, fooling them with fancy website, book author as chief, bunch of overrated dotcom bubble programmers, jargon like “robo”, etc.
      What does programmer know about investing?
      That is why wf clients advertised to be silicon valley people. Because they lack of investing education and robo thing sounds cool.

      Also, may argue the book author, an economist, know what he is doing. Ok, but economists have the worst track records in prediction and investing. Look at Alan Greenspan. He blew a hole in housing market.
      And if he knows investing, why the performance of WF portfolio looks like snp500? Where is the edge?
      And the performance is hypothetical as descrubed in the disclaimer!

      I wont put money there but may buy their IPO, sinve it is good enough to fool people and make money out of them.

      • Andrew Zimmerman says

        I’m curious about the Tax Loss Harvesting.
        From what I read, it’s in direct opposition to a buy-hold strategy that I employ.
        Sure, if you’re intentionally selling losing stocks…go right ahead I guess.

        I am following the advise of Warren Buffet…Benjamin Graham… and buying dividend investments and never spending the principle.

        Solid investments that pay dividends…and hold for a long period of time.
        Diversification is for the simpleton.

  8. MPC says

    Well this is interesting. I understand the negative and the positive opinions. I have reservations with any fund that the owner of the money cannot get in and out at their leisure, say via a money market. I understand the concept of low expenses, but at such a low rate of returns(approx 6%) expected over a 10 year cycle, is not to my liking.

    For those who do not want to do anything to manage their finical resources, I guess this program is better than putting it under a mattress, and I guess we will see in the future.

    I will make this prediction, if these type funds do not produce any better returns than predicted, over time, especially when the markets get back to normal, with normal interest rates etc… then these fund will lose any luster they may have now.

    If these type funds can make changes to the matrix of the calculations and capitalize, even a little bit, to get into the 8% to 10% rate of return,then they have something. Or if they limit downturns to a significant degree, there you go.

    Good luck, but they will not see any of my money.

  9. EB says

    I use wealthfront, and I like how I can just deposit 250 bucks a month without having to figure out re-balancing myself. I don’t have many bad things to say about it.