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 definitely one of the frontrunners.
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 from having your account with a discount broker like TradeKing, who also uses Apex.
Wealthfront invests in Exchange-Traded Fund (ETF) index funds. They diversify your investment by allocating into many ETFs. They continually make sure the asset allocation is correct by automatic rebalancing.
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 2011, they recently announced they have over $4.3 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|
- 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.
- Wealthfront portfolio review (New) — A comprehensive portfolio analysis tool linking external accounts to Wealthfront.
- External account support (New) — 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.
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 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.
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. He’s Wealthfront 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, as well as maintenance fees of the ETFs Wealthfront uses, by being more efficient. In effect, Direct Indexing is akin to Wealthfront creating their own ETF.
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.
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’s tool makes the process trivial.
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 Portfolio Review (New)
Wealthfront’s Portfolio Review is a brand-new free tool that analyzes your existing investment accounts outside of Wealthfront. The tool 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.
You are under no obligation but can then proceed to transfer your account(s) to Wealthfront if you want. Unlike other robo-advisors, it appears Wealthfront has some flexibility when transferring funds. Full or partial account transfers are possible and can include just cash and assets as well. Wealthfront provides a detailed transfer plan for each investment in your account based on its fees, compatibility with your Wealthfront portfolio and tax status. To the extent your transfer is expected to generate taxable gains, Wealthfront also provides an estimate of the taxes you’ll owe. You can transfer all or just part of your account and specify precisely which investments to include.
In my testing, I discovered two limitations of Wealthfront’s tool but suspect these are somewhat edge-cases for the demographic they target. The first was the lack of ability to include multiple brokerage accounts from different firms in the report. If you have accounts with, say, Fidelity and also with TradeKing, then you could analyze only one of them at a time. So it would be wise to pick the firm you have the most assets with and which you believe costs you the most in annual fees.
The second limitation in the analysis was you weren’t able to exclude specific accounts with the brokerage firm. Though you can exclude accounts when asked to transfer them to Wealthfront. So perhaps this is a minor oversight in the implementation.
Otherwise from my testing, the report generates some useful information you can take action upon yourself if you choose not to use Wealthfront, though Wealthfront’s tool does make many compelling reasons to use them after running the report.
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. The Wealthfront 529 investment product is distributed by Wealthfront Brokerage Corporation, an affiliate of Wealthfront, Inc. a registered investment adviser
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.
Stock Portfolio Makeup
|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 — Look at accounts outside of Wealthfront to determine if you can lower your fees.
- 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.
- Not Cheap for Large Accounts — From our research Wealthfront isn't the cheapest firm with tax-deferred accounts of $100,000 or larger.
- 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.
If you are looking at goal setting, Betterment might be a 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.
Have you tried Wealthfront? What was your experience?