Review of: Wealthfront
Reviewed by: Larry Ludwig
Last modified: May 24, 2018
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 $5K if you use the Investor Junkie promotion or if you are referred by a current Wealthfront client. The negative is it doesn't support fractional shares.
In a sea of robo advisors, a few “big fish” stand out. Wealthfront is one of them, offering a focus on setting and reaching your goals and taking into account your entire financial picture. The service has a huge appeal for Millennials — after all, they have time on their side when it comes to saving for retirement. But there’s enough here for anyone who’s interested in growing their wealth through automated investing.
In fact, we rate Wealthfront as one of the best robo advisors on the market. Let’s take a further look at this platform to find out why.
What Is Wealthfront?
Wealthfront is one of many robo advisors on the market. These automated investing platforms have democratized investing by providing services that you once needed an expensive personal advisor to receive. And it’s proved enormously popular. Since its launch in December 2011, Wealthfront, has built up its assets under management (AUM) to $10.5 billion.
How it works is simple: You invest your money into a Wealthfront account (there’s a required minimum of $500). You can choose to use a tax-deferred individual retirement account (IRA) if you wish. Funds aren’t held by Wealthfront, but by the Royal Bank of Canada (RBC).
Wealthfront then allocates your investment into an assortment of exchange-traded funds (ETFs).
Like many robo-investing services, Wealthfront uses Modern Portfolio Theory (MPT) to create an automated asset allocation, taking into account your risk tolerance and financial needs. The platform continually makes sure that the allocation is correct with automatic rebalancing.
But let’s back up a step — Wealthfront uses a savings model called Path that was developed by a team of Ph.D.s to help you reach your goals. Using Path, you can set savings goals for the big stuff: retirement, college and/or a home purchase. This service takes all of your accounts — including external savings, banking and even mortgage accounts — and creates personal financial advice. Path generates scenarios to help you determine if you’re on the right… well… path to meet your savings goals. And if not, it will suggest the best ways to go about doing so. Path is not a separate app; it’s built into everything Wealthfront does.
It’s like having a personal financial advisor that’s software based.
With Path, Wealthfront can help you answer these questions:
- How much should you save today?
- How much will you be worth then?
- Could you live your current lifestyle at retirement?
- Are you on track for your child’s college education?
- Are you saving enough to purchase a home?
Wealthfront Fees & Features
|Tax Loss Harvesting||— All Taxable Accounts|
|Automatic Deposits||— Weekly, Biweekly, Monthly and Quarterly|
|Socially Responsible Investing|
|Access||Website, iOS App, Android App|
|Customer Service||Phone: M-F 7A-5P PT; Email|
|Promotions||$5k Managed for Free Exclusive|
- Tailored Transfers — Exclusive to Wealthfront. Typically, if you are moving from an advisor or existing brokerage account to a robo advisor, you have to sell all of your holdings and move in cash. Instead of this, Wealthfront will transfer your assets into a diversified portfolio over time. This will reduce your tax bill. (However, Wealthfront still recommends that you sell incompatible assets such as stock options or mutual funds.)
- Referral Program — For every new customer you refer to Wealthfront, you get an additional $5,000 managed for free.
- Stock Level Tax-Loss Harvesting — This service is available for taxable accounts of $100,000 or greater and 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 — Free for the first $5,000 unless you’re a Nevada resident. Nevada residents get $25,000 managed for free (plus all-in fees of 0.43-0.46% per year after that amount deposited). (The reason for this is because Wealthfront's 529 plan is domiciled in the state of Nevada.) Wealthfront shows you how much you can afford to cover while taking into account your other goals such as buying a home or retirement.
- Portfolio Line of Credit — A feature unique 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 you can borrow up to 30% of the current value of your account.
- Smart Beta — Wealthfront’s service that helps enhance returns over the market indexes. You need at least $500,000 to enable Smart Beta.
- Retirement Savings with Path — Plan for your retirement using Wealthfront’s Path algorithms. Path will look at all of your accounts — including external accounts — and help you find the best way to reach your retirement goals.
- College Planning with Path (New) — Plan for your child’s college education via the Path app. Pick the college and Path will calculate exactly how much financial aid you’re eligible for and tell you if you’re on track.
- Home Planning with Path (New) — Plan and save for your next home purchase, along with receiving custom help and recommendations from professionals. Get mortgage estimates, do some “virtual house hunting” and learn the best way to save for your personal situation.
- Risk Parity (New) — Wealthfront’s newest portfolio addition is a mutual fund that uses a risk parity-based strategy. This means a deviation from the standard 60/40 stocks/bonds breakdown in an effort get higher risk-adjusted returns. All accounts with a minimum of $100,000 will automatically participate; however, you can opt out. See below and this article for more information.
|Fees||0.25%/year||Digital – 0.25%/year; Premium – 0.40%/year||$0 to $100k – 0.50%/year; $100k+ – 0.40%/year|
|Promotions||$5k Managed for Free||Up To 1 Year Free||Up to $100 Bonus|
|Review||—||Read the Review||Read the Review|
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 A 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 questionnaire 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.
Account Minimums. 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 advisors, including ETF fees. Annually, expect to shell out 0.25%. However, with our promo link, the first $5,000 in your account is managed free, and amounts above $5,000 have an annual 0.25% fee.
Let’s break it down. On a $100,000 account the fee would be $237.50 for a full year — and with our exclusive promotional link, the first $5,000 would be excluded from annual fees. 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.
As mentioned above, there’s another way to have more than $5,000 managed free under Wealthfront. After becoming a Wealthfront customer, refer friends to the 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.
Wealthfront Stock Level Tax-Loss Harvesting
This service is available in taxable accounts. The purpose is to save on taxes, as well as the annual fees an ETF charges. In effect, Stock Level Tax-Loss Harvesting is something like an ETF but managed directly by Wealthfront.
Wealthfront clients can access Stock Level Tax-Loss Harvesting 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 U.S. 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 Stock Level Tax-Loss Harvesting — Uses a mix of individual stocks and ETFs to mirror the U.S. 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 losses of other ETFs owned with Wealthfront.
These are important things every passive long-term investor should be considering but in most cases don’t. That’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 that tax-loss harvesting and the use of its Stock Level Tax-Loss Harvesting 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.
This is Wealthfront’s entry into “Smart Beta” to enhance returns over the core market indexes. The option is available to customers who have at least $500,000 with Wealthfront. Best of all, unlike Charles Schwab’s robo advisor service and the ETFs it uses, Wealthfront Smart Beta is available at no additional charge. Smart Beta is paired with Stock Level Tax-Loss Harvesting to reduce the impact of taxes on your returns. According to Wealthfront, no other Smart Beta service or fund offers this option.
Wealthfront also announced that its tax-loss harvesting, Stock Level Tax-Loss Harvesting and Smart Beta options are all merged into one combined service called PassivePlus.
Depending on whether your account is taxable or tax-deferred (e.g., an IRA), the asset allocation and fund selection may be slightly different.
The portfolio Wealthfront creates 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 TIPSSchwab US TIPSSCHP
|US Government||Vanguard Total Bond Market||BND|
|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|
Risk Parity Fund
The newest investment product offered by Wealthfront — and the company’s first mutual fund — the PassivePlus Risk Parity fund aims to deliver higher risk-adjusted returns in different market conditions. It does this by giving your portfolio more exposure to asset classes with higher risk-adjusted returns.
The fund is based in part on a similar offering from Ray Dalio’s hedge fund, Bridgewater, which requires a $100 million account minimum. It will take up 20% of your portfolio or less, depending you your personal settings. Wealthfront aims to democratize this strategy with a requirement of only $100,000.
All Wealthfront clients with a minimum of $100,000 deposited will be gradually entered into the Risk Parity fund by default. However, you may opt out if you wish. The fund has an annual fee of 0.25%, which will translate to only a 0.05% fee hike. If you do not opt out of Risk Parity, your Wealthfront total fees will be around 0.30% annually.
All Wealthfront clients are entered into the Risk Parity fund by default. However, you may opt out if you wish.
The Risk Parity fund is available only for taxable accounts (no IRAs) at the moment.
|Structure||Investment Minimum||Expense Ratio|
Pros and Cons
- Free for Accounts Under $5,000 — 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.
- Stock Level Tax-Loss Harvesting — When investing over $100,000, it's a further way to decrease taxes and fund expenses by avoiding ETF fees.
- Risk Parity — The recently added risk parity option may smooth out returns compared to the traditional 60% stock/40% bond portfolio. However, we question at what cost, and Wealthfront's performance remains untested.
- 529 Plan Option — This option makes Wealthfront somewhat unique in that most robo advisors focus only on retirement planning.
- Two-Factor Authentication — 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.
- Path Considers External Accounts — The Path planning tools consider all of your accounts, even those held outside Wealthfront, to give you a complete picture of your goals.
- No Fractional Shares — It's possible to have cash sitting in your account, not invested.
Overall, Wealthfront appears to be an excellent investment service. It shines with taxable accounts. Now that Wealthfront offers tax-loss harvesting for all accounts, its service can minimize your annual tax expenses.
If you’re a beginning investor who’s leery of jumping into individual security selection and management, Wealthfront would be an excellent choice. And it’s a superior vehicle for any passive investor, since the selection and maintenance of individual securities is completely unnecessary. Such an investor should supplement their Wealthfront position with substantial cash-type holdings outside.
But more active investors can find use here if they supplement with a self-directed account.
But it’s the everyday savers whom Wealthfront is particularly looking to reach. With its Path planning model, you can “set it an forget it” and let Wealthfront do all of the heavy lifting.
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.