Wealthfront Review
Wealthfront is an automated investing service that emphasizes asset allocation with low fees. Here’s our Wealthfront review.
What is Wealthfront?
Wealthfront is an automated investing (aka “robo advisor”) service that puts a particular emphasis on taxable accounts. It also supports IRAs.
No matter what type of account you have with Wealthfront, your portfolio is managed using Modern Portfolio Theory (MPT) for automated asset allocation.
Wealthfront doesn’t actually hold your portfolio themselves. Instead, your portfolio is held with Apex Clearing Corporation. In that sense, Wealthfront is not that much different from having an account with a discount broker like TradeKing, which also uses Apex.
Ultimately, Wealthfront is a lot like giving your money to a financial advisor. The only difference between a financial advisor and Wealthfront is that Wealthfront manages your money based on algorithms and software programming instead of more “human” qualities. Whether that’s a good or bad thing is up to you.
Wealthfront is one of the larger robo advisors on the market today, with $2.6 billion under active management. The service was launched in December 2011.
How Does Wealthfront Work?
Wealthfront manages your money using robo advisors, although the company itself is led by a team of “world class financial experts” including someone you might know: legendary economist Burton Malkiel.
Malkiel is the same guy who wrote A Random Walk Down Wall Street. He’s the Chief Investment Officer at Wealthfront.
When you first sign up for a Wealthfront, you’ll complete a questionnaire to learn more about your investing strategies and personal preferences. The only real goal of this questionnaire is to determine your risk tolerance.
After Wealthfront has decided on your risk tolerance, it will create a portfolio based on that information.
A sample portfolio might look like this:
-US Stocks: 35%
-Foreign Stocks: 21%
-Emerging Markets: 16%
-Municipal Bonds: 15%
-Dividend Growth Stocks: 8%
-Natural Resources: 5%
That sample portfolio is based on a risk tolerance of 7.5/10. Wealthfront also takes your account type (taxable vs tax deferred) into account so you maximize your gains in either situation.
After you’ve established that asset allocation ratio, that ratio will never change. The ratio remains constant regardless of the amount of money you have invested. Wealthfront will go to work 24/7 managing your investment.
Wealthfront Features
Account Types: Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts, Non-Profit, Individual, and Joint
Customized Asset Allocation: Asset allocation is customized for you based upon your risk profile as well as your account type (taxable or tax deferred)
Tax Loss Harvesting: Wealthfront has automated tax loss harvesting features that minimize your taxable investments by offsetting gains with losses
Tax Optimized Direct Indexing: Receive advice on larger taxable accounts to make sure you’re being as tax efficient as possible
Automatic Portfolio Rebalancing: Wealthfront buys and sells ETFs within your portfolio automatically to ensure your ratio remains constant
Automated Deposits: Deposit money into your account on a scheduled basis, like a weekly, monthly, or quarterly deposit, or on the 1st and 15th of every month
Pricing
Minimum Deposit: $500 (you cannot withdraw below the account minimum)
Minimum Withdrawals: $250
Annual Fee: Depending on how you sign up for Wealthfront, the first $10,000 in your account might be managed for free, with amounts over $10,000 having a 0.25% annual fee. In more realistic terms, that means a $100,000 account with a 0.25% annual fee will cost you $225 for a full year of management. Annual fees are prorated and withdrawn from your account on a monthly basis.
Wealthfront Direct Indexing
Wealthfront’s Direct Indexing feature is available on taxable accounts. This feature is designed to make your investment account more efficient by limiting the amount of fees you pay.
Effectively, Wealthfront has created their own ETF. That ETF doesn’t come with the same management fees as a traditional ETF, which means you save money.
There are three different levels of Direct Indexing available through Wealthfront, including:
-Wealthfront 100: Available on taxable accounts with a minimum of $100,000. Wealthfront uses individual stocks in up to 100 of the largest US companies, while the Vanguard Extended Market ETF and the Vanguard S&P 500 ETFs represent the remaining smaller companies.
-Wealthfront 500: Available on accounts with a minimum of $500,000. It uses up to 500 individual large company stocks as well as the Vanguard Extended Market ETF to represent 500 smaller S&P companies.
-Wealthfront 1000: Available on accounts with a minimum of $1 million. Offers all the same options as the previous two accounts, with an extension to up to 1,000 large company stocks as well as the Vanguard Small-Cap ETF for small market capitalization.
How Does Wealthfront Help You Save Money on Taxes?
Wealthfront repeatedly emphasizes that it helps you save money on taxes. Here are a few of the tax-related services offered by the automated investment service:
-Wealthfront Direct Indexing: Uses a blend of individual stocks as well as ETFs to mirror the US stock market (as we explained above).
-Index Funds: Index funds have lower turnover than traditionally-managed mutual funds, which means you end up paying lower capital gains taxes.
-Intelligent Dividend Reinvesting: Wealthfront balances your portfolio throughout the year using dividends. The goal of this is to minimize sales and lead to lower realized capital gains.
-Tax Location: All clients receive different asset classes and asset allocations for taxable and retirement accounts in order to optimize their after-tax performance and reduce their number of taxes.
-Daily Tax-Loss Harvesting: Only available in taxable accounts, this feature helps you cover the gains in some ETFs using the losses of other ETFs.
All of this sounds good – but what does it actually mean?
Wealthfront claims that using the above features, you can add “more than 1.6%” onto your portfolio’s annual after-tax investment return.
Wealthfront Mobile App
Unfortunately, Wealthfront only has a mobile app for the iPhone. You can learn more about that app here.
There is no app available for Android or other operating systems at this time.
Conclusion: Who Should Use Wealthfront?
Wealthfront makes the same promises as other robo advisors: it promises to intelligently manage your money in order to maximize your gains, minimize losses, and minimize taxes.
The main advantage of working with Wealthfront is their taxable accounts. If you’re concerned about your tax burden, then you may be able to save thousands in taxes every year thanks to the intelligent profit/loss management systems built into Wealthfront. This service becomes particularly powerful if you have over $100,000 to invest in a taxable account, and it gets even better once you have $1 million to invest.
Overall, Wealthfront is an intelligent investment service whose main limitation is its inability to offer non-Wealthfront assets (like alternative ETFs). However, you can publically track the performance of these ETFs (under the symbols VXF and VOO) to decide whether or not Wealthfront is the right investment vehicle for you.
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