I recently considered opening up an IRA account at a robo-advisor, and wanted to share some of the highlights in this Wealthfront review.
Wealthfront is one the largest robo-advisors in existence today with approximately $5 billion in client assets under management. They have combined the best of modern technology with rigorous investment research to provide diversified, low-cost, tax-efficient portfolios comprised of index ETFs.
In plain English, Wealthfront makes it easy for anyone to get access to a diversified, long-term investment portfolio (and financial advice) without the high fees & account minimums of traditional wealth managers.
Wealthfront will manage your first $15,000 for free if you sign up through CashCowCouple (the standard offer is $10,000 free). For balances larger than $15,000, the management fee is a flat 0.25% per year.
Wealthfront Review Background
Wealthfront officially launched in December of 2011. It took just 2.5 years for the company to reach $1 Billion in assets under management.
The leadership at Wealthfront is experienced and well-respected within the financial technology sector. CEO Andy Rachleff is vice chairman of the endowment investment committee at the University of Pennsylvania, and a faculty member at Stanford’s School of Business. He was previously the co-founder of Benchmark Capital.
The investment team includes a few standout advisors as well:
Burton Malkiel, Ph.D.
Chief Investment Officer, Wealthfront;
Chemical Bank Chairman’s Professor Emeritus of Economics, Princeton University;
Here is an excellent introduction to the company and the service provided:
In practice, the Wealthfront process can be boiled down to a few simple steps that take less than ten minutes in total. I’ve gone through the process and would like to provide a little more detail for readers:
1) Respond to 8 questions about your risk tolerance and investment preferences
The point of the questionnaire is to assess your willingness and ability to accept investment risk. There is always a trade-off between investment risk and reward, and your investment portfolio should be based on your appetite for risk.
Stocks are more volatile than bonds, and they have provided a higher average return over the last 100 years. Likewise, bonds are more risky than a savings account, with a higher expected average return.
2) View recommendations
After you complete the questions, you will see your assessed risk tolerance level from a scale of 1-10, with 10 being the highest risk level.
When I went through the process, I scored a 10/10, which is not surprising. I’m young and I have a long investment horizon, making stocks a great investment choice for me.
Wealthfront recommends an investment portfolio that differs based on your desired account. They use select ETFs within taxable accounts to increase after-tax returns. They use a slightly different set of ETFs within retirement accounts to maximize growth.
For Taxable Accounts, Wealthfront recommends the following ETFs:
By combining these various ETF classes, Wealthfront investors are able to own thousands of global securities at a very low cost.
The percentage of each ETF in your portfolio depends on your risk questionnaire. In my example, here is the recommendation for my taxable account:
As you can see, it’s an aggressive mix of 90% stocks, 5% natural resources, and 5% municipal bonds.
If I select a retirement account at Wealthfront, Wealthfront recommends a different portfolio:
The recommendation is 74% stocks, 16% real estate, and 10% taxable bonds.
These differences are due to the different tax treatment of asset classes. Wealthfront attempts to optimize your portfolio to maximize after-tax returns.
3) Open and fund your account.
If you like what they recommend, you simply click “next” and fund your new account with a minimum of $500.
They support most account types including:
Traditional & Roth IRA accounts, including 401(k) and 403(b) rollovers
Personal and Joint taxable accounts
529 College Savings Plan
Wealthfront Offers Tax Efficiency
Wealthfront offers several unique features that focus on improving the after-tax returns of investors.
Differentiated Asset Location – Wealthfront uses a different mixture of asset classes for your taxable and retirement accounts. For example, Municipal bond interest is exempt from federal taxation, making municipal bonds more attractive when held inside a taxable account. On the other hand, corporate bond interest is taxed as ordinary income, making corporate bonds suitable for tax-sheltered accounts.
Automated Rebalancing – After your fill out the initial questionnaire, Wealthfront recommends a portfolio based on your risk tolerance. Hypothetically, let’s assume the recommendation is 50% stocks, 50% bonds. Over time, stocks might outperform bonds resulting in a portfolio comprised of 60% stocks, 40% bonds. That’s not ideal because the portfolio now has more risk than you are comfortable accepting. Rebalancing is the act of returning that balance to 50%-50%. Wealthfront rebalances as efficiently as possible, using the following methods:
Intelligent Dividend Reinvestment – Wealthfront automatically reinvests all dividends into the asset class that is underperforming, reducing the need to sell winning investments.
Cash Flow Reinvestment – If you’re adding to your Wealthfront balance over time, they can use those funds to automatically purchase the asset class which is underperforming. Again, this maintains your ideal asset allocation without requiring the sale of one asset class (which results in less taxation).
Wealthfront’s Selling Plan – Designed to help sell your company stock tax-efficiently and commission free, at a level of service previously only available to executives. Many professionals receive company stock as part of a compensation package, but it’s risky to have a sizable portion of your wealth tied to a single company’s stock. The Wealthfront selling plan allows you to sell your company shares gradually, minimizing taxation in the process. Doing this on your own is expensive and time-consuming, and Wealthfront is the only company to offer this service.
Daily Tax-Loss Harvesting – This feature is free for all accounts with no required minimum balance. Tax-Loss Harvesting works by taking advantage of investments that have declined in value (a common occurrence in a diversified investment portfolio). By selling declined investments at a loss, you earn the right to deduct that loss from your taxable income – thus lowering your annual tax burden.
What’s more, you can replace any investment sold in this manner with a highly correlated alternative investment. The result is that the risk and return profile of your portfolio is unchanged, even as you gain tax savings. These tax savings can then be reinvested to further grow the value of your portfolio.
At Wealthfront, when one of your ETFs drops in value it is automatically sold and quickly replaced by a highly correlated alternative.
Tax-Optimized Direct Indexing – Free for clients with $100,000 or more invested, Wealthfront will create your own index portfolio, harvesting losses among the individual stocks in the S&P 500 or S&P 1500. This feature is unique to Wealthfront and cannot be found anywhere else.
Instead of using a single ETF investment to implement the U.S. stock allocation of a portfolio (typically Vanguard’s Total Stock Index (VTI)), Tax-Optimized Direct Indexing replaces VTI by directly buying up to 1001 individual securities from the S&P 500 or S&P 1500 indices.
Thus, if a single stock in the S&P 500 is down in value, it can be sold to harvest tax-losses (even if the S&P 500 is up overall). In purely index ETF portfolios, no tax-loss harvesting benefit would be available unless the entire S&P 500 index or the entire U.S. stock market is down.
Wealthfront offers 3 levels of direct indexing to clients:
Wealthfront 100: Available now for taxable accounts of $100,000, the Wealthfront 100 will utilize up to 100 of the largest capitalization stocks from the S&P 500 combined with specific ETFs to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront 500: Available now for taxable accounts of $500,000, the Wealthfront 500 utilizes up to 500 stocks from the S&P 500 combined with the Vanguard Extended Market ETF (VXF) to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront 1000: Available now for taxable accounts of $1,000,000, the Wealthfront 1000 utilizes up to 1000 stocks from the S&P 1500 combined with the Vanguard Small-Cap ETF (VB) to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront has written a few research oriented white papers on the topic of tax loss harvesting. They conclude that a portfolio including Wealthfront’s Daily Tax-Loss Harvesting service and Tax-Optimized Direct Indexing service could add up to 2.03% annually in additional investment returns (compared to VTI only).
Here is a nice video explaining all of the tax-loss harvesting features offered by Wealthfront:
Path by Wealthfront (+ Wealthfront Portfolio Review)
Path is Wealthfront’s new financial planning experience – free for all customers.
Path allows you to link all of your external financial accounts through your Wealthfront Dashboard. The service can then evaluate your accounts to measure four important metrics:
If your external accounts are flawed, Wealthfront offers a unique solution and an opportunity to easily transfer your funds into a new Wealthfront account. Instead of selling everything at once, Wealthfront uses their Tailored Transfer process to migrate your investments tax-efficiently over time.
Path also allows you track your financial progress in real time. Path uses your real transaction history to calculate a rolling 12-month average of how much you’ve been saving and spending, then provides advice on how to achieve your financial goals using this data.
If that’s something you’re interested in, take a look at this video:
Wealthfront Review – Security and Protection
Wealthfront maximizes the protection of your assets by doing the following:
Third party custodian: Your assets are held in an account at a third-party custodian named Apex Clearing. Wealthfront only has the right to issue trading instructions against your account. The firm cannot access your money, other than to receive the agreed upon advisory fee. You are the only one who can deposit into, or withdraw from your account.
SIPC Insurance: Your brokerage account is protected by SIPC insurance. This insurance covers up to $500,000 in securities for each type of account you hold with Wealthfront. An IRA is considered a different type of account than a taxable account for this purpose, but different types of IRA accounts are considered one account for this purpose. SIPC insurance also covers up to $250,000 in cash.
Additional coverage: Apex Clearing has secured excess SIPC insurance that provides an additional $150 million of coverage across all its clients. This insurance should be more than enough given that over the past 42 years, 98.7% of client assets were recovered in failed brokerages even before SIPC insurance was employed.
Everything is held in street name: Wealthfront only invests in SIPC covered securities registered in street name at the Depository Trust Company (DTC). That means the securities purchased on your behalf by Wealthfront are held separately from other Wealthfront assets and other assets of our brokerage partner (Apex Clearing) and are fully insured as described above.
No proprietary trading: The brokerage partner, Apex Clearing, performs no proprietary trading, the cause of failure at MF Global.
No rehypothecation: Wealthfront clients only have cash accounts (vs. “margin accounts”) at Apex Clearing. That means at no time can the cash or securities held in your account be loaned out or borrowed by Wealthfront or Apex.
Wealthfront typically charges an advisory fee of only 0.25% per year on assets above $10,000. The first $10,000 has zero management fees. However, they are currently offering readers of our blog an additional $5,000 managed free for a total of $15,000.
If you were to sign up here for the $5,000 bonus, you would pay the following fees on a $100,000 portfolio:
The first $15,000 is managed free.
The next $85,000 would be managed for 0.25% in fees ($212 per year).
Wealthfront clients incur no other fees outside of the 0.25% advisory fee. There are no trading commissions, custodial fees, or exit fees if you close your account.
Keep in mind that although Wealthfront charges no additional fees, you will have to pay fees for the underlying ETFs that you own through Wealthfront. You would pay these even if you managed your own portfolio. These are typically around 0.10% annually on top of the 0.25% management fee.
Once you have an account opened and funded, you can get an additional $5,000 managed free for each friend that you invite who ends up funding their account. The person invited gets an additional $5,000 managed for free as well. That’s $5,000 for the both people involved. There’s no limit to the amount you can get managed for free and these funds are managed free for as long as the account remains open.
Wealthfront Review – Possible Drawbacks
No customization – Wealthfront recommends a diversified set of 10-20 ETFs to everyone, but no other ETFs are allowed. If you don’t want real estate in your retirement account, too bad. If you want to own a small-cap ETF, too bad. They do make very good, research based recommendations, but it’s algorithm based and you can’t tinker with the allocation.
No Cash Equivalent Investments – Your money is invested in stock and bond ETFs. Financial markets are risky, and you can lose your money even in their most conservative portfolio. If you are a very risk averse investor, or if you need your funds to be available for withdrawal, Wealthfront won’t be the best fit (consider a savings account).
Wealthfront Review Summary
Wealthfront offers quality investment management at a very reasonable fee. For those investors who don’t want to mess with managing a portfolio, it’s a great option.
I think Wealthfront offers even more to a select group of people:
Individuals just getting started: Wealthfront recently lowered their minimum account funding to just $500. This allows almost anyone to open a new account and start building wealth. When combined with their offer to manage $15,000 free of charge, Wealthfront is a great option for new investors or individuals wanting to test the service.
Young Professionals in their 30s and 40s: Wealthfront is focused on offering services and features that directly address the needs of young people. The Wealthfront 529 College Savings Plan, Stock Selling Plan, and Path (Financial Planning) are examples of unique services designed to help young families manage their finances.
Individuals who have an extensive network: All investors who sign up through our blog begin with $15,000 managed free, but each additional referral results in an additional $5,000 managed free. Someone who can refer 25 people would have a sizable portfolio managed for free.
Individuals with $100,000 or more to invest in a taxable account: Retirement accounts don’t count because there is no tax-loss harvesting available. For taxable account balances that large, the Tax-Optimized Direct Indexing feature is very impressive. Those individuals in higher tax brackets will see Wealthfront harvest an exceptional amount of losses than can offset income each year, resulting in greater after-tax returns and larger account balances over time.
I’m a big fan of the service, and I hope that Wealthfront continues to thrive and expand.
Thanks for reading my Wealthfront review. If you’d like to get your first $15,000 managed free, you can sign up here.
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