There are a growing number of web-based investment management platforms. Two such platforms growing in popularity are Wealthfront and Personal Capital. The platforms might seem similar, but are they? How do you know which will work best for you?
In truth, it all comes down to personal needs and preferences. We personally use and have tested each of these services, so we break down the features of each one.
Now, you can start by understanding what each platform offers, and how it might best fit into your own investment strategy and style. See the differences of Wealthfront versus Personal Capital and how they compare.
In reality Wealthfront and Personal Capital serve different segments of the investing community.
Wealthfront (see our review) is an automated investment service based on asset allocation and low fees. Most refer to Wealthfront as a robo advisor. The service is built around Modern Portfolio Theory, or MPT, and your risk tolerance. This theory states the optimal mix of asset classes is more important than individual security selection.
Wealthfront accomplishes this through the use of exchange-traded funds (ETFs) focusing on a relatively narrow range of very broad investment classes.
The ETFs are centered on six asset classes:
- U.S. stocks
- Foreign stocks
- Emerging markets
- Real estate
- Natural resources
The bond ETFs are further broken down into municipal bonds, corporate bonds, Treasury Inflation Protected Securities (TIPS), emerging market bonds, and dividend stocks.
The use of ETFs enables an investor to hold as many as 10,000 underlying securities and to do so with extremely low fees.
Getting started with Wealthfront. Wealthfront is a portfolio management system, rather than a custodian. The platform puts a premium on risk tolerance. You start out by completing a short questionnaire used to determine your personal risk tolerance. Based on your answers, Wealthfront will design your asset allocation mix. This mix will remain constant regardless of the size of your portfolio.
Account minimums. The minimum account size is $500. There is also a minimum withdrawal amount, which is $250, and you cannot draw your account below the $500 minimum. This makes Wealthfront a real option for the truly small investor.
Wealthfront fees. Wealthfront is what you might call fee efficient. The entire platform is set up to make this possible, including the use of low-cost ETFs. Like many other wealth management systems, the fee structure is based on a sliding scale. The first $10,000 in your account is managed free of charge — amounts in excess of $10,000 are charged an annual fee of 0.25%. This means on a portfolio of $500,000, your annual fee would be just $1,225.
Wealthfront negatives. There are two significant weaknesses with Wealthfront. The first is the fact that the platform doesn’t recognize investment holdings held outside of the portfolio. This can include retirement accounts or other investment accounts not included in the platform. So if you have 100% of your retirement portfolio invested in growth stocks, Wealthfront will design your asset allocation without regard to this factor. This can lead to an overall investment portfolio that is not properly diversified.
The second negative is the absence of investment choice. Wealthfront offers a limited number of ETFs and no other investment options. If you wish to hold any other investments, particularly individual stocks, you’ll need to do so outside the Wealthfront platform.
Personal Capital (see our review) targets the investment mid-range — this includes primarily investors with a net worth of between $25,000 and $2 million in liquid assets. It is an investment platform in much the same way as Wealthfront, but with vastly different features.
It’s really two services in one. The free portion allows you to manage your personal finances all in one place. Somewhat similar to the Mint.com, but has much more investment reporting.
The platform offers a holistic view of your finances, giving you access to all of your finances on a single site. Personal Capital refers to this as the “360° View of Your Financial Life.”
Unlike Wealthfront, Personal Capital also offers an integrated investment portfolio. They will be able to take your various investment accounts — including retirement accounts — import them into the site, and give you the broadest possible view of your overall portfolio. This part of their service is free for anyone to use, and in itself is a reason to signup.
Individual account management. Each account under management is assigned a dedicated investment advisor, whether or not you use the wealth management service. This is an outstanding feature, given how low Personal Capital’s fees are compared to other investment advisory firms.
Investment management strategy. Much like Wealthfront, Personal Capital uses ETFs (for fixed income and alternative investments) to create portfolio models. like Wealthfront for taxable accounts, Personal Capital also uses a basket of at least 60 individual securities (for equities). The platform recognizes the investment value of minimizing fees and uses this investment methodology to keep them on the lower end of the investment scale.
Customer service. Personal Capital is building a reputation for outstanding customer service and features that serve their customers’ needs.
Personal Capital fees. The platform offers a limited free service, but the real benefits and tools come with fees attached. Even so, the fees are lower than what they are in most of the investment management world. The annual fee is 0.89% of the first $1 million under management; 0.79% on the next $1 to $3 million ; 0.69% on the next $2 million; 0.59% on the next $5 million; then 0.49% on balances above $10 million. Like Wealthfront, there are no trading fees.
Valuable tools. Personal Capital offers investment tools that can make a real difference to an investor. The 401(k) Fee Analyzer tells you how much your retirement plan is costing you, a fact many plan participants aren’t even aware of. The Investment Checkup determines your risk profile and makes investment allocations accordingly. The Asset Allocation Target can show you if you are overweight or underweight in any major equity categories. And the Fund Cost tool can show you the annual expenses connected with each and every fund you own.
The site also offers interactive investment graphs that will enable you to easily break down your investments with a visual picture.
Why You Might Prefer Wealthfront
With a low account minimum — $500 — Wealthfront is clearly tailored to the truly small investor. It will offer you professional portfolio management with a very small investment. Most investment managers won’t touch a portfolio this small.
Wealthfront also offers much lower fees, 0.25% vs. 0.49% on the lowest tier for Personal Capital. And let’s not forget Wealthfront has no annual fee for accounts of less than $10,000. This platform clearly has the small, upstart investor as its target market.
Still another advantage to the small investor — or any investor for that matter — is the hands off nature of Wealthfront’s investment management. Once your risk tolerance is determined, the platform creates your asset allocation mix, and you don’t need to do anything else. No security selection, no asset allocation — the platform does it all for you.
Why You Might Prefer Personal Capital
Like Wealthfront, Personal Capital also uses pre-determined investment allocations, like its own stock basket, as well as ETFs. However, the fact that Personal Capital uses the direct purchase of stocks as part of your portfolio provides greater investment flexibility than standard ETFs.
Personal Capital is also the better choice for investors with holdings beyond the platform itself. Personal Capital can give you a comprehensive portfolio view that accounts for assets held in your retirement portfolio and investment accounts not attached to the platform. Personal Capital will automatically adjust your asset allocation to reflect these outside positions.
It is also clear that while Wealthfront targets the small investor, Personal Capital aims for the middle-end investor who aspires to become a large investor. If you have significant holdings already, Personal Capital will be the choice in most cases.
In the case of Wealthfront versus Personal Capital, which would you choose and why?