Wealthfront Review – A Software-Based Financial Advisor

Wealthfront
Review of: Wealthfront
Reviewed by:
Rating:
4
On June 16, 2014
Last modified: July 3, 2014

Summary:

A software-based wealth management system with an emphasis on asset allocation with low fees.

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.

Investments are based on 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) roll-overs and various forms of individual retirement accounts.

Wealthfront seems to be catching on with investors. Launched in December of 2011, they announced on June 4, 2014 that they have achieved over $1 billion under management.

How Wealthfront Works

Wealthfront uses a team of “world class financial experts” led by legendary economist Burton Malkiel, who is also the author of the investment classic, Random Walk Down Wall Street & Princeton Emeritus, 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.

The portfolio is based on a mix of these asset classes with these ETFs:

  • US Stocks (VTI)
  • Foreign Stocks (VEA)
  • Emerging Markets (VWO)
  • Dividend Stocks (VIG)
  • US Government Bonds
  • Corporate Bonds (LQD)
  • Emerging Market Bonds (EMB)
  • Municipal Bonds (MUB)
  • TIPS (SCHP)
  • Real Estate (VNQ)
  • Natural Resources (DJP)

On aggregate, an investor can hold close to 10,000 underlying securities covering the global markets in a small account for very low cost. Asset allocation is dependent upon if the account is taxable or tax deferred (ie IRA) so your investments are the most tax efficient.

Wealthfront - Investment Mix

Customize your asset allocation

Minimum Balances and Fees

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. The first $10,000 in your account is managed for free, and amounts above $10,000 are assessed an annual 0.25% fee. It is possible to get up to $15,000 managed for free since Larry Ludwig is already a client of their services. All you have to do is click on one of the buttons in the article.

On a $100,000 Wealthfront 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 0.15%. That gives Wealthfront an advantage over even the deepest discount brokers.

Wealthfront Emphasizes Tax Efficiency

Tax-loss harvesting works by taking advantage of investments that have declined in value. By selling declined investments at a loss, a tax deduction is generated – which lowers the investor’s taxes. Wealthfront’s investing software makes daily tax harvesting possible. This 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:

  • 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. Clients with $100,000 or more invested in a taxable account can take advantage of their daily tax-loss harvesting service at no additional cost.
  • Tax-Optimized US Index Portfolio. Clients with $500,000 or more invested in a taxable account can take advantage of the Tax Optimized US Index Portfolio that provides enhanced tax-loss harvesting by harvesting losses among the individual stocks in the S&P 500.

Wealthfront’s analyses show that tax-loss harvesting and use of its Tax-Optimized US Index Portfolio could add more than 1.6% to your portfolio’s annual after tax investment return.

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.

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 for a 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 a good option.

Have you tried Wealthfront? What was your experience?

Disclosure: Larry Ludwig (Founder and Editor in Chief) has $5,000 invested with Wealthfront

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.

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