- Review of: Wealthfront
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Wealthfront is a robo-advisor that emphasizes low fees and automated investing. The service shines when you have a taxable account, and the service is free for accounts under $10k. The negative is it doesn't support fractional shares.
Robo-advisors seem to be the wave of the future — each of them offering something different to entice investors. But Wealthfront is making moves to become one of the best in the industry, especially for tax-efficient investing. In a sea of robo-advisors, this service certainly stands out.
In fact, with our latest review update, we now rate Wealthfront as the best robo-advisor.
What Is Wealthfront?
Wealthfront is a robo-advisor with an emphasis on tax efficiency for taxable accounts, but it also works well with IRAs. It uses Modern Portfolio Theory (MPT) to create an automated asset allocation.
Wealthfront doesn’t hold your portfolio; it uses the Apex Clearing Corporation. Apex is used by most of the other players in the robo-advisor space.
Wealthfront invests in Exchange-Traded Fund (ETF) index funds. They diversify your investment by allocating into many ETFs and continually make sure the asset allocation is correct by automatic rebalancing.
It’s like having a financial advisor that’s software based. Wealthfront manages both personal accounts and retirement accounts, including 401(k) rollovers and various forms of individual retirement accounts.
Launched in December 2011, the company recently announced it has over $5 billion of assets under management (AUM).
|Account Fees||First $10k managed free; 0.25% annually for anything over $10k; See special promotion for $15k free (see below)|
|Accounts Available||Traditional IRA, Roth IRA, rollover IRA, SEP IRA, trusts, non-profit, individual, joint, and 529 (New)|
|Tax-Loss Harvesting||Yes — All taxable accounts|
|Portfolio Rebalancing||Yes — Threshold-based|
|Automatic Deposits||Yes — Weekly, monthly, quarterly, and 1st and 15th of the month|
|Mobile App||Yes — Apple iOS and Google Android|
|Customer Service||Phone: M–F 10A–8P ET; Email: 24/7|
|Promotions||First $15,000 Managed Free with our special promotional link|
- Tailored Transfers — Exclusive to Wealthfront. If you are moving from an advisor or existing brokerage account into other robo-advisors, you typically have to sell all your holdings and move in cash. Instead of selling your holdings, Wealthfront will transfer into a diversified portfolio over time. This will reduce your tax bill.
- Selling Plan (New) — For individuals with a large amount of company stock. Wealthfront service sells company stock tax-efficiently and commission-free. Instead of selling all your shares at once, the firm’s tailored transfer process migrates your investments tax-efficiently into your diversified Wealthfront portfolio.
- Referral Program — For every customer you refer, you get an additional $5,000 managed free. So it’s possible to have more than $15,000 managed free.
- Tax-optimized Direct Indexing — For larger taxable accounts of $100,000 or greater, it makes investing even more tax efficient.
- External Account Support — Organize all of your accounts in one place with advice on fees, taxes and excess cash.
- 529 College Savings Plan (New) — Free for the first $10k — Nevada residents get $25k free and then all-in fees of 0.43%–0.46% per year after that amount deposited.
- Path by Wealthfront (New) — Plan for your major life goals. Get answers to the major questions in life like: What’s the impact of saving more today?
- Portfolio Line of Credit (New) — A unique feature to Wealthfront. For accounts larger than $100,000, take out a line of credit against your investments. Loan rates are currently 3.25% – 4.50% APR and can borrow up to 30% of the current value of your account.
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. From our research, for accounts under $10,000, Wealthfront is one of the cheapest robo-advisor, including ETF fees. With our link, the first $15,000 in your account is managed free, and amounts above $15,000 have an annual 0.25% fee.
On a $100,000 account, for example, the fee would be $212.50 for a full year — the first $15,000 is excluded from their annual fees, using our exclusive promotional link. The amount of the annual fee will be prorated and withdrawn on a monthly basis. Wealthfront is cheap when compared to the thousands of dollars in fees typically charged by financial advisors.
And as mentioned above, there’s another way to have more than $10,000 managed free under Wealthfront. After becoming a Wealthfront customer, refer friends to their service. Each new signup 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 ETF fees averaged 0.18%. That gives Wealthfront an advantage over even the deepest discount brokers.
|—||Read the Review||Read the Review|
|Rating||Rated 5 stars||Rated 4.5 stars||Rated 3.5 stars|
|Fees||First $10k Free; 0.25%/yr||0.25%/yr||Under $5k – Free; $5k-$100k – 0.50%/yr; $100k+ – 0.40%/yr|
|Promotions||First $15k Managed for Free||One Month Free w/$10k+ Deposit||Up to $100 Bonus|
|Compare More Robo-Advisors|
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,” which I recommend reading. Malkiel is Wealthfront’s Chief Investment Officer.
Wealthfront has some similarities to Betterment and other robo-advisors, in that you start by completing a questionnaire. Wealthfront’s has four objective questions and six subjective ones. The purpose of the survey is to determine your risk tolerance and to set asset allocations.
Once established, the allocations will remain constant regardless of the amount of money you have invested. After specific thresholds are crossed within your account, the portfolio will automatically be adjusted to ensure it stays in line with the proposed asset mix.
This service is available in taxable accounts. The purpose is to save on taxes, and annual fees an ETF charges. In effect, Direct Indexing is something like an ETF but managed directly by Wealthfront.
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 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) is 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 companies, and the Vanguard Small-Cap ETF (VB) is used to represent small-capitalization stocks.
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. All clients receive this feature at no additional cost.
Wealthfront’s automated investment service offers five levels of tax minimization:
- Wealthfront Direct Indexing — Uses a mix of individual stocks and 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 — 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.
These are important things every passive long-term investor should be considering but in most cases don’t. It’s because either there’s no easy way to deal with these, or it takes too much time to research this information. Wealthfront makes the process trivial.
Wealthfront states tax-loss harvesting and use of its Wealthfront Direct Indexing could add more than 2.03% to your portfolio’s annual after-tax investment return, though of course this return is not guaranteed and is partially dependent upon market performance.
Path by Wealthfront (New)
In competing with Betterment and Personal Capital, Wealthfront finally introduced a goal-setting and financial planning. Wealthfront Path allows you to plan for your future income and spending needs. With the accounts you have with Wealthfront and combined with linked external accounts, they create a “what-if” scenarios.
Path can help answer these key questions:
- How much should you save today?
- How much will you be worth then?
- Could you live your current lifestyle at retirement?
Wealthfront’s Portfolio Review is now built into the Path experience. It’s designed to analyze outside investment portfolios and brokerage accounts and generate a set of data-driven recommendations to improve prospective net-of-fee, after-tax, risk-adjusted returns.
The service is free to use by anyone and does not require you have an existing account with Wealthfront.
Wealthfront checks your investment accounts against these four important metrics:
- Fees — Your portfolio’s total annual expenses, which include advisory fees, transaction fees, and product fees.
- Tax Efficiency — If in a taxable account, the portfolio’s ability to minimize your tax burden each year.
- Cash Drag — The amount of excess cash held in your portfolio, either temporarily or as a permanent allocation, beyond what is required to address potential short-term liquidity needs.
- Diversification — Your portfolio’s use of a broad cross-section of relatively uncorrelated investments as measured along three sub-dimensions
In my opinion, the cash drag metric is an often missed metric when comparing investment options.
To get started, you just supply Wealthfront your brokerage account login information. This is no different from what other financial aggregators, like Mint and Personal Capital, do. Once you validate your information, Wealthfront will display its findings and how to fix any problems. The report shows from now till your retirement age how much money might be possible with Wealthfront’s recommended plan.
Wealthfront 529 College Savings Plan (New)
Paying for college is a costly endeavor. It is expected the average cost for college in 15 years will be well north of $100,000. As they have done for retirement planning, Wealthfront has introduced a service to automate saving for college.
529 plans are just like Roth IRA accounts in that they are created with after-tax money, but gains are not taxed when taken out. This means the money saved in your 529 plan is taken out tax-free. The problem is not all 529 plans are created equal. Some state plans are more costly than others and also may offer no guidance on asset allocation. Wealthfront wraps low-cost ETFs and asset allocation advice all into one package.
As with their other accounts, the first $10,000 is managed free. Wealthfront's 529 plan is domiciled in the state of Nevada, so Nevada residents get an additional $15,000 managed free, for a total of $25,000. Wealthfront Brokerage Corporation serves as the distributor and the underwriter of the 529 Plan. The Plan is administered by the Board of Trustees of the College Savings Plans of Nevada (the “Board”), chaired by the Nevada State Treasurer. Ascensus Broker Dealer Services, Inc. (“ABD”) serves as the Program Manager.
After this, all-in fees will be 0.43% to 0.46% per year. Some states are a much better deal than others. For example, New York, where I live, has an all-in fee of 0.16%, though New York State is more the exception than the rule. Morningstar cites the average 529 plan annual fee is 0.74%. Vanguard’s Nevada state plan is similarly priced to Wealthfront’s, though with Wealthfront you are getting asset allocation guidance as well. So Wealthfront’s 529 plan is a much better deal.
Depending upon whether your account is taxable or tax-deferred (e.g., an IRA), the asset allocation and fund selection may be slightly different.
It’s interesting to note 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 you will be based on the ETFs listed below.
|US||Vanguard US Total Stock Market||VTI|
|Foreign||Vanguard FTSE Developed Markets||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|
- Free for Accounts Under $15,000 — With our special promotion link. Even more is possible with the refer-a-friend offer.
- Tax-Loss Harvesting for All Accounts — This is Wealthfront's specialty. It helps with taxable accounts and according to Wealthfront helps increase returns.
- Direct Indexing — When investing over $100,000, it's a further way to decrease taxes and fund expenses by avoiding ETF fees.
- 529 Plan Option — This option makes Wealthfront somewhat unique in that most robo-advisors focus only on retirement planning.
- Free Portfolio Review — Analyze external accounts to determine if you can lower your fees, save on taxes, or give recommendations on improving your returns. It’s free for new and existing clients.
- Two-Factor Authenication — Either via a SMS text message, or an app installed on your phone you can be assured that your account is protected from hackers gaining entry.
- No Fractional Shares — It's possible to have cash sitting in your account, not invested.
- Portfolio Review Not Comprehensive — Wealthfront's free tool, while not bad, isn't as flexible as Betterment's or the recommended free tools from Personal Capital.
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 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 is the lack of recognition of non-Wealthfront assets in the investment mix.
In the battle between Betterment vs. Wealthfront, we now give Wealthfront a slight edge. Wealthfront is now our recommended robo-advisor. Wealthfront is now rated 5 stars, whereas Betterment is now rated 4.5 stars. We made this change for for two reasons:
- Wealthfront’s introduction of their Path feature
- Betterment changed in pricing as they are no longer the best deal
If you are looking at goal setting, Betterment might be a slightly better fit. For individuals who are looking for a more comprehensive online financial planning app with optional financial advisor advice, Personal Capital is a good option as well.