Wealthfront will manage up to $15,000 of your money free of charge. They focus on constructing diversified ETF portfolios with low fees, both of which are key components of a successful investment strategy.
This year I am considering opening up another new IRA account at one of the “robo-advisors” that continue to grow and expand.
Wealthfront is one the largest robo-advisors in existence today with more than $3 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 sophisticated, diversified, long-term investment portfolio without the high fees & account minimums of traditional wealth managers.
Wealthfront charges no trading commissions, and is completely free for accounts under $15,000. For accounts 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 management team is experienced and well-versed. CEO Adam Nash came from leadership roles in Greylock Partners, LinkedIn and eBay. Executive Chairman Andy Rachleff is vice chairman of the endowment investment committee for University of Pennsylvania, a member of the faculty at Stanford Graduate School of Business, and co-founder of Benchmark Capital.
The investment team is even more impressive. They have at least 7 Ph.D. holders and a slew of credentials. To name a few standouts:
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 thirty minutes in total. I’ve gone through the process and would like to provide a little more detail for readers:
1) Respond to 10 questions about your risk tolerance and investment preferences.
The point of the questionnaire is to assess your willingness to take investment risk. Stocks are more volatile and risky than bonds, but they have produced higher average annual returns over the last 100 years. Likewise, bonds are more risky than CDs or a savings account, but they have higher expected returns.
There is always a trade-off between risk and reward. Your investment portfolio should be based on your appetite for risk and your age. That’s what Wealthfront is attempting to determine.
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 at all. I’m young and I have a long investment horizon, making stocks a great investment choice for me.
Wealthfront will then recommend an investment portfolio that is dependent on the type of account. They use some ETFs only for taxable accounts to increase tax efficiency. They use other ETFs for retirement accounts that grow tax-deferred to maximize growth.
For Taxable Accounts, they use the following ETFs:
The percentage of each ETF depends on your risk questionnaire. For my example, here is what they recommended for the taxable account portfolio:
As you can see, it’s an aggressive mix of 90% stocks, 5% natural resources, and 5% municipal bonds.
If I select the retirement account at Wealthfront, they recommend a different portfolio:
You can see now it’s 74% stocks, 16% real estate, and 10% bonds. These differences are because of the different tax treatment of asset classes. They try to optimize your returns on an after-tax basis.
By combining these various ETF classes, Wealthfront investors are able to own thousands of underlying securities spread across the global economy for a very low cost.
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:
Personal & Joint Taxable Accounts
Traditional & Roth IRA Accounts, including 401(k) and 403(b) rollovers
SEP-IRA Accounts for small businesses
Corporate Accounts for LLCs & Non-Profits
An Emphasis on 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 taxes. This makes municipal bonds very attractive in taxable accounts. On the other hand, corporate bond interest is taxed as ordinary income, and such bonds are placed in retirement accounts.
A Selection of Index ETFs – ETFs are a better investment vehicle than mutual funds. They are more tax efficient and often have lower expense ratios. Index ETFs have very little turnover, resulting in fewer taxable events and better returns.
Automated Rebalancing – Rebalancing is the act of maintaining asset allocation. After your fill out their questionnaire, they recommend a portfolio based on your risk tolerance. Let’s say it’s 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.
Intelligent Dividend Reinvestment – To rebalance, Wealthfront automatically reinvests all dividends into the asset class that is underperforming. It’s an efficient way to constantly maintain asset allocation.
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 taxation).
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 broadly diversified investment portfolios). By selling declined investments at a loss, you earn the right to write-off that loss from your taxable income – thus lowering your 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.
Essentially, this feature is harvesting losses from the ETFs that you own. When the drop in price, they are automatically sold and 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 that provides enhanced tax-loss harvesting by harvesting losses among the individual stocks in the S&P 500 or S&P 1500.
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.
That is, if a stock in the S&P 500 is down in any particular period, it becomes a candidate for being 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 in this case 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.
Here is a nice video explaining all of the tax-loss harvesting features available for free:
Outside accounts are not supported – At this time, Wealthfront’s algorithms are unable to consider other accounts that you own when designing your portfolio. This isn’t unique to Wealthfront, but it can be lead to poor asset allocation if you have a lump sum of money in a 401k, or company stock, etc. You can partially remedy this problem by grabbing a free account at Personal Capital.
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. Market risk is present 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 within 3 years, Wealthfront won’t be the best fit (consider a savings account).
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 additional 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% for a total cost of $212 per year. That’s a very good price for research based wealth management services.
Wealthfront clients incur no commissions or any other type of 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 another 0.10-0.15% 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.
Who Should Consider Wealthfront?
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 people wanting to test the service.
Individuals who have an extensive network: All investors who signup through our blog can begin with $15,000 managed free, but each additional referral results in an additional $5,000 of free asset management. 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 it’s no surprise to me 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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