The Bottom Line: Wealthfront is a force among robo-advisors, offering a competitive 0.25% management fee, free management of balances under $5,000 (with RetirementInvestment’s promotion) and one of the strongest tax-optimization services available from an online advisor.
Wealthfront is a mammoth leading automated investment service that caters to tech-savvy users.
Considered a ‘robo-advisor’, the platform merges technology and modern investment theory to offer ultra low-cost investing and financial planning to its clients.
One of the first robo-advisors to emerge from the 2008 financial collapse, Wealthfront continues to lead the way in the burgeoning automated investing market.
As of this writing, Wealthfront has over $13 billion in assets under management.
Account Minimum: $500
Fees: .25% /year
Promotion: $5,000 (amount of assets managed for free)
This review will provide a comprehensive, in-depth look at Wealthfront: the costs, benefits, drawbacks, interface, and other important information.
First, let’s take a step back and zoom out to get a birds-eye view of Wealthfront’s offerings.
What is Wealthfront?
Wealthfront was founded in 2008 by Andy Rachleff and Dan Carroll. Rachleff had successfully founded a Venture Capital firm and was spending his days teaching entrepreneurship at the Stanford Graduate School of Business.
The Wealthfront system was designed to create tailored financial solutions based on customer needs, goals, and risk settings.
Portfolios followed MPT and used Exchange Traded Funds (ETFs) to create well-diversified portfolios. The system was to use
What is a Robo-advisor?
Wealthfront is classified as a robo-advisor investment service. Robo-advisors offer financial advice and portfolio management using technology and minimal human intervention.
The removal of the classic financial advisor when combined with technology allows robo-advisors to offer financial services very low costs.
The first robo-advisors appeared during the financial crisis of 2008. At the time of this writing, there are over 100 robo-advisors in the market.
While increasing in popularity over the past 11 years, robo-advisors have important drawbacks:
1. Lack of personalization
2. Potentially more expensive than traditional advisors
3. Focus on ETFs and MPT
The discerning investor will do the proper research to determine if automated trading is right for him or her.
How Wealthfront Works
Now that we have a good grasp of the background on Wealthfront, we’ll dive into how this robo-advisor works, and just what you will need to know to make a good investment decision.
Passive Investing: The Foundation of Wealthfront
Passive Investing is the investment philosophy that underpins the Wealthfront approach.
Customer capital is invested in accounts that mimic major indices for certain investment classes: domestic markets, emerging markets, and municipal bonds, among others.
Passive investing is a hands-off approach that seeks a diversified portfolio in accordance with the tenants of MPT.
How Wealthfront Builds Your Portfolio
Select ETFs form the bedrock of an investment portfolio on Wealthfont.
These ETFs are selected by Wealthfront in order to match the required portfolio allocations. Portfolios are automatically re-balanced daily.
ETFs, usually Vanguard ETFs, are bought and sold to create a weighted portfolio of diverse asset classes: US stocks, dividend stocks, foreign, emerging, natural resources, TIPS, bonds, and cash.
The exact mix of asset classes is determined by a customers risk score.
Automatic Balancing: Keeping Your Portfolio on Target
Wealthfront uses complicated algorithms to continually determine your ideal portfolio composition.
In order to keep your portfolio on target, Wealthfront continuously re-balances portfolios based on your risk score and the optimal asset allocation. Any gains, such as dividends, are automatically reinvested.
In order to determine asset allocation, Wealthfront uses some behind-the-scenes magic to generate a risk score for each customer.
A risk score questionnaire based determines how risky a portfolio will be.
As a managed service, Wealthfront does not allow the customer to select or change ETFs in a profile.
An advantage of Wealthfront is that it can trade ETFs commission-free, which helps to lower costs.
Wealthfront maintains a fixed list of ETFs that it purchases.
Tax Loss Harvesting: How Wealthfront Pinches Pennies for You
The Tax Loss Harvesting system built into Wealthfront is designed to maximize total returns for customers.
The system, called Passive Plus™ by Wealthfront, is a tiered system meant to further pump of a portfolio’s returns.
There are four levels of tax harvesting that seek to minimize or utilize taxable events from the sale of ETFs and related instruments.
Each tier implements a different methodology. Higher tiers are reached by having a specific account balance.
Passive Plus™ Tiers
Tax Loss Harvesting
As an ETF declines in value, Wealthfront sells the ETF and then purchases a highly correlated ETF.
This loss is taxable and is said to be “harvested” for end-of-tax-season gains.
Stock-level Tax Loss Harvesting
Only applicable to accounts with $100,000 to $500,000. Groups of stocks are purchased in addition to ETFs.
This exposes the portfolio to more overall stock movements and therefore more potential for tax loss harvesting.
Available for accounts at or above $100,000, Risk Parity adjusts MPT with a different theory of investing called Mean-variance optimization in an attempt to generate higher returns.
However, Risk Parity complicates tax loss harvesting and is only used in a percentage of the total portfolio.
Available for accounts at or above $500,000. Smart Beta attempts to increase returns by trading stocks based on factors such as value, momentum, dividend yield, market beta, and volatility.
Machine-assisted Advice for Your Financial Future
As a robo-advisor, Wealthfront is a dual-purpose platform that blends new financial technologies with modern investing principles.
You effectively get two tools for the price of one: automated investing and financial advice.
Path is Wealthfront’s technological advisor service. Created by the brain trust at Wealthfront, and headed by Burt Malkiel, Path takes into account your financial goals, assets, and risk preferences in order to create a financial “path” for you to follow.
You can track your progress on specific goals, such as retirement, purchasing a home, time off for travel, or saving for college.
Wealthfront creates its financial advice by integrating with third-party sources such as:
- US Census earnings growth data
- Bureau of Labor Statistics retirement spending data
- Real-time property prices from Redfin
- Freddie Mac mortgage data
- Department of Education’s projected college costs
New Wealthfront customers fill out an entry questionnaire and link their financial accounts, including bank accounts, brokerages, loans, and credit card accounts.
Wealthfront Pros and Cons
To help you make the most informed choice of robo-advisors, we’ve compiled a list of the pros and cons of using Wealthfront.
- Relatively low fees: .25% + variable yet small ETF fees
- Tax loss harvesting
- Far fewer costs due to automation and technology
- Financial advice
- Simple, straightforward interface
- Lots of extras: cash account, line of credit, tax documents, mobile apps
- Leader in the robo-advisor space
- Lack of control: you buy, hold, and sell per the system
- Beholden to a black box system based on Modern Portfolio Theory
- Link all of your financial accounts
How much does it cost?
Our planning experience is absolutely free. You don’t even have to invest with us to get access to it.
Will I get pestered with calls?
Nope - no pressure, no judgment, no follow-ups from a salesperson.
How long will it take me to sign up?
Less than 10 minutes.
Why should I need to link my accounts?
Linking to your financial accounts is how we get to know you and your finances. It helps us project your net worth over time and deliver the relevant insights and advice.
Will you only recommend Wealthfront accounts?
No – we will make saving and investing recommendations that are in your best interest, such as maxing out your employer 401(k) first or keeping more in cash for upcoming, short-term goals.
How To Get Started With Wealthfront
So far we’ve spent time understanding Wealthfront from above. Now, we’re going to take you step-by-step into the Wealthfront world.
But before that, we’ll back up and start at the front door.
Getting started with Wealthfront is a relatively straight-forward process. As of this writing, Wealthfront presents its new customers with two ways to kick-off the relationship.
If you’re ready to jump right in you’ll create a Wealthfront account by filling out basic personal information.
However, maybe you are still on the fence and want to learn more. Wealthfront gives you the opportunity to explore your financial planning in more detail. Later, you can still sign up and fund your account.
Either road will eventually bring you to a prompt to create your account.
You’ll then take three steps that will have your account up and running.
The questionnaire asks your questions about your goals and financials. The system is gathering information about you and your needs.
In the next step, you answer questions that determine your risk score, from the least risky at .5 to the riskiest at 10.
Wealthfront needs to understand how much risk you are willing to take, which is based on your goals and your current financial plans.
This will influence how your portfolio is built and maintained when your account is active.
You also will be asked to link your financial accounts to Wealthfront so it can get an accurate picture of your financial situation.
Create Your Account
Here you will have the opportunity to fund your account. You’ll verify your identity and transfer funds into your Wealthfront account.
At the time of writing, Wealthfront offers four ways to fund accounts.
1. By cash deposit — ACH bank transfer
2. Roll over a 401k or other employer-sponsored plan
3. By check — for 529 college savings plans only
4. By transferring an account, such as an IRA
Your Minimum Investment & Yearly Costs
The minimum threshold to fund an account is $500. Wealthfront levies a flat 0.25% percent per year, deducted monthly. But this isn’t all.
Those ETFs that Wealthfront holds in your portfolios come with their own costs.
Each ETF in your portfolio charges an expense fee, a cost to owning the ETF. Wealthfront expense ratios range from .04% to .23% as of this writing.
The Wallstreet Journal quotes an average ETF expense ratio of .44%, something to keep in mind.
Expense ratio embedded in ETFs. These are fees charged to a portfolio that holds the ETF, a cost to owning the ETF.
Average expense ratios quoted by the Wall Street Journal are .44%. Wealthfront states that its ETF expense ratios range from.
Buddy Up and Get Discounts
At the time of writing, Wealthfront offers a promotion that can reduce the .25% yearly fee. For each friend you sign up, you both get $5,000 managed for free.
Sign up three friends and you get $15,000 for free, while each of them gets $5,000 managed for free.
An all-in-one solution that helps you earn more interest on your cash, get advice on how to manage your savings and automate your investments at a low cost.
Courtney Bower writes about investing, behavior economics, real estate, and psychology. He served as a US Peace Corps volunteer in Ukraine. He is originally from the Midwest.