Wealthfront has become one of the leaders in the robo-advisor market space since their founding in 2011. Wealthfront is not a true discount brokerage like you’d see in Scottrade or OptionsHouse, but their fees make them very competitive in the online brokerage space. If you are looking for a new broker, this Wealthfront review will shed light on how they can help you achieve your investing goals.
Robo-advisors have become a growing trend within the brokerage industry. Started as a way to help novice investors or those who lack time, robo-advisors provide access to a virtual financial advisor without the bloated fees their physical counterparts can carry. Wealthfront has played a major part in revolutionizing this niche.
Wealthfront History and Background
Wealthfront is newer in comparison to many online brokerages. They started in 2011 and are a little over three years old. The overall goal behind Wealthfront is to offer financial advisory services to those who might not have previously been able to afford them. As most financial advisors target the mass affluent, this leaves a huge untapped market. Wealtfront has been able to capitalize on this and now has over $2 billion in assets under management.
With Wealthfront, you do not actively trade individual stocks, mutual funds, options, etc. Rather, much like Betterment, you invest in a basket of Exchange Traded Funds (ETFs) created for you based on your circumstances. The specific funds chosen are those selected by their investment committee – which boasts numerous PhDs and a former head of the CFA Institute as members. With that background out of the way, it’s time to move on to a more in-depth review of Wealthfront.
How Does Wealthfront Work?
Much like other robo-advisors, the process to open an account with Wealthfront is fairly straightforward. You start by answering a group of about 10-12 questions. These questions should only take a few minutes to complete and are geared toward determining your goals, risk tolerance and the like. This is what Wealthfront will use to construct your portfolio of ETFs.
The main philosophy Wealthfront uses to create your portfolio is based on the Modern Portfolio Theory, or MPT for short. Simply put, the point isn’t to invest in a certain stock or industry but to have an appropriate mix of asset classes based on your specific situation and risk profile – while keeping a long-term view of investing in mind. The team at Wealthfront then manages your portfolio and holds it in street name just like you’d see at any other discount brokerage.
Going back to the ETFs Wealthfront selects from, it’s not a large list but one that represents a solid broad-based approach to investing. The ETFs they select from are as follows:
- VTI – Vanguard Total Stock Market ETF
- VEA – Vanguard Developed Markets ETF
- VWO – Vanguard Emerging Markets ETF
- VIG – Vanguard Dividend Appreciation ETF
- LQD – iShares Investment Grade Corporate Bond Fund ETF
- EMB – iShares Emerging Bond Fund ETF
- SCHP – Schwab Treasury Inflation Protected Securities ETF
- VNQ – Vanguard REIT Index Fund ETF
- XLE – Energy Select Sector SPDR
- MUB – iShares Municipal Bond Fund ETF
When taking a look at Wealthfront vs. Betterment, they offer almost exactly the same holdings. However, Wealthfront adds a bit more by offering both natural resource and real estate funds to choose from. This would give them an edge over Betterment.
You can hold a variety of different accounts with Wealthfront, from the standard brokerage and retirement accounts to things like corporate and Trust accounts. The minimum opening account balance is $500 to open an account with Wealthfront, whereas Betterment has no minimum balance requirement. All that being said, check out the video below for a more in-depth look at Wealthfront.
Fees can be detrimental to an investment portfolio. Wealthfront is well aware of that and boasts one of the best fee structures within the industry. While the fee structure at Betterment is somewhat tiered, that is not the case at Wealthfront – they’re simple and easy to follow.
In fact, the first $10,000 you invest with Wealthfront is free of charge. Meaning, they charge you nothing to manage the portfolio. Once you go beyond the initial $10,000 Wealthfront charges a very competitive .25 percent. This breaks out to a relatively low $212.50 being charged per year if you invest $100,000. You can’t beat that for professional financial management.
Outside of the management fee, there are no other fees with Wealthfront. There are no commissions or hidden fees to pay. You aren’t charged anything when they rebalance. It’s the flat .25 percent and nothing else. It is also important to point out that the funds Wealthfront has chosen are relatively low in expenses. The average expense ratio charged by the funds comes in at a paltry .15 percent.
Wealthfront and Your Taxes
Most know that fees play a big role in investing. What many don’t realize is that taxes can play an equally important role in the success or failure of your portfolio. Like other robo-advisors, Wealthfront keeps that in mind with their investment decisions. This focus is done mainly through a tool called Tax Loss Harvesting or TLH for short. While we as individuals can do TLH on our own, it is much more effective to trust it to an algorithm. Seeing as Wealthfront is able to add an additional max of 2 percent return to your portfolio it is certainly something to keep in mind.
Following are some of the key things Wealthfront focuses on with regards to taxes:
- Selection of index funds. In general, index funds have much less activity and thus less of a capital gain tax hit.
- Dividend reinvestment. Any old dividend reinvestment isn’t going to help from a tax perspective, but when done wisely it can be beneficial to your portfolio. By reinvesting in underperforming asset classes Wealthfront allows you to stick closer to your chosen asset allocation.
- Daily TLH. As of April 1, 2015 Wealthfront is making Daily TLH (Tax-Loss Harvesting) available to all clients – regardless of account balance. Through Daily TLH, you sell an underperforming fund and purchase a closely correlated fund. This allows you to take losses to lower your taxable income.
- Tax-Optimized US Index Portfolio. This is a feature that is now available to clients with account balances of at least $100,000. This feature puts TLH on overdrive. Instead of reinvesting in something like VTI, Wealthfront directly purchases 100 stocks from the S&P 500 to reap further benefits from TLH. They also offer something similar at the $500,000 and $1,000,000 price points – known as the Wealthfront 500 and 1000 respectively.
When taking a look at Betterment vs. Wealthfront, both offer the TLH feature to their clients. However, where Wealthfront stands apart is their offering of TLH to any account size. Betterment currently offers this feature to those with at least $50,000 in their accounts. Wealthfront also offers the Direct TLH feature, which makes them the clear winner.
For a deeper explanation of how TLH works, you can watch this brief video from Wealthfront:
Advantages of Wealthfront
There is much to like about Wealthfront, and many of their positive features have been pointed out already. Other things to like about Wealthfront are:
- Fees. Wealthfront is hard to beat when it comes to fees. Paying only $200 per year to manage $100,000 in investments beats the alternative by far. When you look at Wealthfront vs. Betterment in terms of fees, both are low in price, though Wealthfront has the slight edge due to the flat structure especially when you have over $100,000 to invest.
- Tax Loss Harvesting. This has been covered at length, but Wealthfront uses TLH to effectively and efficiently grow your portfolio.
- Personalized service. Much like Betterment, Wealthfront is set up to help you reach your specific goals. For those lacking access to a true physical financial advisor this is a huge benefit.
- Dividend Reinvestment. Unlike Motif Investing, Wealthfront offers dividend reinvestment and does so wisely. This allows for greater potential in growing your portfolio, especially when rebalancing is taken into consideration.
- Simple. Many often hold back from investing in the stock market out of fear or feeling like they don’t know enough about it. Wealthfront makes it incredibly simple and straightforward so you can do other things.
- Led by a team of experts. This is part of what really helps Wealthfront stand apart. They have a big league advisory committee led by Burton Malkiel. You can’t get that anywhere else.
Drawbacks to Wealthfront
There are many things to like about Wealthfront, especially for those new to investing or wanting access to professional financial management. But, no brokerage is perfect. Following are some of the things to keep in mind when considering Wealthfront:
- Lack of customization. Regardless of your situation or stage in life you are going to be offered the same selection of ETFs. You also have no input as to which ones will be selected. This provides simplicity, though for the DIY crowd it may not be a good fit. It is very important to point out that this lack of customization is not unique to Wealthfront, but applies to the robo-advisor market as a whole.
- Wealthfront is not for the DIY investor. The beauty of handing management over to someone else is also a downside to those wanting control. Again, this isn’t unique to Wealthfront and comes with any robo-advisor.
- They don’t know what else you’re invested in. If you have outside 401(k) accounts, or other brokerage accounts Wealthfront does not know what those are invested in. This can result in being over-invested in certain classes, industries or sectors if you’re not careful. A relatively simple way to counteract this is to sign up for a free Personal Capital account so you can monitor all of your investments in one place.
- No pure cash option. Again, like many other robo-advisors you don’t have access to a money market fund. You buy whole shares with Wealtfront and they leave enough cash to cover management fees and nothing else. For those needing quick access to cash or wanting to pull back temporarily this is not an option.
Wealthfront Review – Final Analysis
For the right individual Wealthfront would be a great option. Whether you are new to investing, lack the time to adequately invest or want access to a virtual financial advisor, Wealthfront can help meet those needs.
What is missed out on thanks to lack of control or customization, Wealthfront more than makes up for when fees and the TLH aspect is considered. The combination of those latter two are things that have only been accessible to those with significant sums of money in the past. When you add in their overall investment philosophy and selection of low-cost index funds, Wealtfront is a good broker to consider.
As has been spoken about earlier, Wealthfront allows you to invest your first $10,000 without paying any fees. Wealthfront is offering readers of BestDiscountBrokerages.com the ability to receive an additional $5,000 in free management – meaning you get your first $15,000 managed for free! Additionally, if you recommend any friends and they open an account you, as well as they, receive $5,000 in free management for each person referred.
Wealthfront is one of the top robo-advisors in the industry, and a great option for new and seasoned investors alike.