This article gives a concise Wealthfront review, one of the tops and most well-respected automated investing services available today.Wealthfront focuses on setting and reaching your goals and taking into account your entire financial picture.
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 they’ve proved enormously popular.
Since its launch in December 2011, Wealthfront has built up its assets under management (AUM) to $11.5 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.
Wealthfront’s three newest features are free financial planning software, a high-yield cash account, and a portfolio line of credit
Wealthfront’s Free Financial Planning Software
Wealthfront offers free financial planning software to anyone who wants to use it. You don’t have to be a Wealthfront customer to use it.
The software connects directly to user’s financial accounts, so users can easily track their goals. If you’ve never set financial goals before, Wealthfront has a Financial Health Guide which provides a framework for helping you think about your financial and life goals.
Using the free software, you can make informed tradeoffs. The app helps you answer questions like: Should I take time off work now and work a few years longer before full retirement?
The software still can’t tell you exactly which questions to ask, so it doesn’t have quite the same value as a CFP or financial coach, but it will help you move in the right direction.
Wealthfont Cash Account
Wealthfront launched Wealthfront Cash Account as the next important step towards automating all of its client’s finances. A cash account is a secure place to stow away cash you may plan to invest, spend within a few years or use in an emergency.
The account offers an interest rate of 1.78% and is FDIC insuredfor up to $1 million. That’s nearly 20 times the national average interest rate and four times the insurance you’d receive at a traditional bank. Wealthfront clients can open a cash account with as little as $1.
The account isn’t subject to any market risk and offers unlimited and free transfers all for no fees. This account is separate from a regular managed account, so there is no management fee.
Portfolio Line Of Credit
If you’ve got at least $100,000 in a taxable brokerage account, you’re eligible for a portfolio line of creditworth 30% of your account value.
The loan is secured by your account, so the rates on the loan are often below most home equity lines of credit. You can pay back the loan on your own schedule, but interest accrues until the loan is paid in full.
This sounds like a great loan, but I’m skeptical about borrowing against assets in general. If you’ve got investments in a taxable brokerage account, and you need money to start a business or buy a car, you should probably liquidate the account to pay for your needs.
How Does Wealthfront Work?
Wealthfront’s primary product is automated portfolio management. It uses an investment philosophy called Modern Portfolio Investing to help clients invest their assets.
Modern Portfolio investors believe that it’s really hard to beat the market. As a result, these investors try to manage portfolio volatility and keep costs low.
Wealthfront is an investing platform for prudent investors who want to see their money grow, but don’t want to spend much time thinking about their investments.
First, Wealthfront always starts with your goals and your risk tolerance. Wealthfront asks 4 objective questions and six subjective questions. Then after assessing your risk, Wealthfront allocates your investments between stocks, bonds, and other asset classes.
If you have more than $100K at Wealthfront, they will allow you to use value-added features that are part of their PassivePlus investment suite. PassivePlus is a first of its kind suite of tax-efficient passive investment products that includes Smart Beta.
Smart Beta investing tries to used decreased downward portfolio volatility (Beta) to increase portfolio returns (Alpha). It’s clear that Wealthfront captures systemic tax advantages.
Wealthfront also makes the case that their five-factor investing model combined with indexing boosts returns.
That’s a claim you would have to investigate on your own. I don’t buy into the factor investing model as a long-term sustainable advantage (although I admit it worked in the past).
These are the elements of Wealthfront’s PassivePlus program:
Tax Loss Harvesting:
Wealthfront’s algorithms check for daily capital loss opportunities. Over the course of a year, an investor can claim a tax credit for $3000 in capital losses, plus you can offset any gains with losses.
Wealthfront virtually guarantees that you’ll never pay the government more than you have to.
If you’ve got a big after-tax brokerage account, you should take advantage of tax loss harvesting. For accounts over $100,000 this is available at the stock level rather than an ETF level. Stock level tax harvesting is also known as direct investing.
Stock-Level Tax-Loss Harvesting:
Available for no extra cost to taxable accounts over $100,000, Stock-level Tax-Loss Harvesting is an enhanced form of Tax-Loss Harvesting that looks for movements in individual stocks within the US stock index to harvest more tax losses and lower your tax bill even more.
Risk Parity, also known as mean variance optimization helps investors more effectively weigh volatility against expected returns. This feature costs an additional .03% annually and is only available for portfolios over $100,000.
Wealthfront isn’t completely straightforward about what’s in their “Secret sauce,” but their newest algorithm is clearly based off of the well-renowned five-factor investing model. Smart Beta accounts for Value, Momentum, Dividend Yield, Low Volatility, Volatility relative to the market.
Historically, a Five-Factor model would not only beat the market, but it would also reduce portfolio volatility. It’s not clear that it’s true today. Smart Beta is available for portfolios over $500,000
You need to invest at least $500 to start an account with Wealthfront. Then there is a flat-rate management fee of 0.25%. This fee is an annual cost and applies to the assets you have under management.
You have the potential to earn $5,000 of fee-free investment every time you refer someone. (You and the person you refer receive the fee-free benefit.)
There are no other pricing plans with special features but investors with at least $100,000 and $500,000 receive additional management services. There are no trading commissions.
You’ll never pay fees to purchase ETFs. The only other cost to keep in mind is the operational fees that individual ETFs charge. These fees are generally less than 0.15% but maybe over 0.40% in some cases.
Should You Invest with Wealthfront?
I’m quick to recommend Wealthfront to novice investors, and anyone who wants to outsource investing to an algorithm.
The only automated investing platform that is less expensive is M1 Finance, and M1 Finance doesn’t have the robust investing theory that Wealthfront has.
The clearest advantage of Wealthfront is its ability to do systemic tax-loss harvesting. Of course, that only matters in unsheltered tax accounts.
The biggest drawback to Wealthfront is an overemphasis on conservative asset classes. The asset allocation it suggested for me was very conservative despite my long time horizon to retirement.
Overall, Wealthfront is an excellent option, and it’s still one of my top recommendations for automated investing platforms.
Pros and Cons of Wealthfront
Terrific financial planning that helps you see the big picture
Goal-setting assistance goes in-depth for large goals, such as home purchases and college savings
Portfolio line of credit available
If you have multiple goals, Path shows you the trade-offs you’ll face
No online chat for customers or prospective customers
Wealthfront carries no excess SIPC insurance
Portfolios under $100,000 are not customizable beyond risk settings
Larger accounts may contain more expensive mutual funds
1. What is a Robo-advisor?
A robo-advisor performs the same services as a traditional financial adviser, just using complex algorithms and technology instead of human brainpower. It uses online platforms to track investment trends, follow an algorithm designed specifically for a client’s portfolio preferences and then recommends opportunities to save or invest.
2. What is an ETF?
ETF stands for exchange-traded fund. ETFs can include assets like stocks, bonds and commodities, and they’re traded on stock exchanges.
A passive-investingfirm like Wealthfront invests in ETFs because they typically track indexes, like the S&P 500. This means your money is broadly exposed to the market and your investment carries less risk.
3. How much should I deposit into Wealthfront?
You must deposit at least $500, but beyond that the amount is up to you. Wealthfront says it’s best to keep a rainy-day fund that pays for six months of living expenses in case of emergencies. Once you have that in place, you can invest the rest of your savings in a diversified investment portfolio.
4. Are there withdrawal limits?
You can withdraw a minimum of $250 as often as you’d like as long as your account balance stays above $500.
5. Can I transfer an existing investment to Wealthfront?
Yes. If you’re already a Wealthfront customer, you can simply follow the steps after clicking “Transfer/rollover” on your account dashboard. If you aren’t already a customer, you can select the transfer option during signup to get help moving your assets to Wealthfront.
Overall, Wealthfront appears to be an excellent investment service. We think it’s one of the best Robo advisors, actually. It shines with taxable accounts.
Now that Wealthfront offers tax-loss harvesting for all accounts, its service can minimize your annual tax expenses.
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