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With a low management fee of 0.25%, research-based portfolio optimization, and a tax-optimization strategy, Wealthfront is an excellent robo-advisor choice.
What is Wealthfront great for?
- Investors who do not want to spend time picking stocks and deciding when to buy or sell
- Good for beginners
- Long term investing and exposure to the stock market
- Free financial planning tools (for retirement, purchasing a house, big purchases)
- College savings plan
- Retirement planning
- Excellent cash savings account with no minimum and unlimited transfers
Pros & Cons Pros Tax loss harvesting that optimizes tax efficiency (with improved tax loss harvesting for high balance accounts) for no additional fee Low cost fees No trading commissions Customized portfolio that reflects the level of risk you are comfortable with Automatic portfolio rebalancing High yield cash account with good APY, no fees, unlimited transfers, and a minimum balance of only $1 Retirement accounts (traditional IRA< Roth IRA, Sep IRA and 401(k) rollovers) 529 College savings account Line of credit available for taxable accounts with $25,000 or more Excellent free financial planning tools Ability to link multiple financial accounts, including TurboTax and Coinbase, for a more complete financial picture Cons No option to choose your own funds or stocks No human advising component - all investment services are provided through an intelligent software Small accounts, such as $500, are not as well balanced as larger portfolios, as Wealthfront does not purchase fractional shares vs
A quick look at Wealthfront
With a low management fee of 0.25%, research-based portfolio optimization, and a tax-optimization strategy, Wealthfront is an excellent robo-advisor choice.
|Minimum balance || |
|Management fee || |
|Account fees ||None |
No account opening, withdrawal, account closing, trading, or account transfer fees.
|Expense ratios ||Wealthfront’s ETFs have an average expense ratio of 0.09% compared to 0.75% of actively managed mutual funds|
|Portfolio construction ||Wealthfront considers 11 asset classes for your portfolio. |
|Portfolio choices ||Investors choose the level of risk they are willing to tolerate and Wealthfront choose the optimal portfolio. |
Risk scores range from 0.5 to 10.0 and increase in 0.5 increments.
|Investment vehicles ||Exchange Traded Funds (ETFs) are used to represent each asset class.|
|Available accounts ||Cash/Savings accounts (individual, joint, and trust accounts) |
|Tax efficiency ||Daily tax-loss harvesting, with advanced tax-loss harvesting for high account balances. |
|Automatic rebalancing ||Yes. |
Portfolios are rebalanced when the underlying asset classes have veered away from their target allocation.
Events that trigger automatic rebalancing include deposits, withdrawals, and dividend reinvestment.
|Human financial advisors ||None. |
All investment advice is provided through an intelligence software. No financial advisors supervise the portfolio.
|Resources & tools ||Free financial planning tool that you can use without depositing any money with Wealthfront. |
|Savings account ||High yield savings account with up to $1 million FDIC insured. |
|Customer support ||Technical support available via phone or email|
|Ease of use ||Easy to use and pleasant interface on desktop and on mobile.|
|Line of credit ||Portfolio line of credit available for taxable accounts with at least $25,000. |
|Mobile app ||Available for iOS and Android|
With automated investing that is grounded in academic research and led by one of the most well-known proponents of democratizing investing, Wealthfront is a low-cost option that is good for those who want a hands off approach to investing.
What is Wealthfront?
Wealthfront is one of the major online, automated investment advisors, also known as robo-advisors. Rather than picking which stocks to buy and when to buy or sell them, you tell Wealthfront your level of risk, and they create an optimal portfolio for you.
Founded in 2008, with its robo-advising launched in 2011, Wealthfront was one of the first robo-advisors. The company is based in Palo Alto, California and was founded by Andy Rachleff and Dan Carroll. Andy graduated from the University of Pennsylvania and Stanford University, and was a co-founder of Benchmark Capital, a VC firm. Dan was a former trader.
Backed by eminent Princeton professor
Wealthfront’s Chief Investment Officer is Burton Malkiel, famed economics professor at Princeton and author of the very popular investment book A Random Walk Down Wall Street, which helped launch the low-cost investing phenomenon. Professor Malkiel is a big proponent of helping the little guys win in the stock market. He graduated from Harvard and Princeton.
How has Wealthfront grown over time?
Since its founding Wealthfront has grown to over $23 billion assets under management and 138 employees.
Where Wealthfront stands out
Wealthfront’s investment team is headed by famous Princeton professor, Burton Malkiel, who has been a long standing champion of making low-cost, indexed-based investing available to the average investor, regardless of economic status.
You cannot find a better philosophical fit between Wealthfront and Professor Malkiel. He is the author of A Random Walk Down Wall Street, a famous investment book, and was on Vanguard’s Board of Directors. Vanguard is most famous for its index funds.
He was Chairman of the Economics department at Princeton, Dean of the Yale School of Management, and has written hundreds of articles in publications such as The Wall Street Journal and The Financial Times. He has authored more than 17 books.
What’s most unique about Wealthfront is its tax-loss harvesting strategy.
If your investments are declining in value, Wealthfront will sell those to capture a loss. It will take this loss and offset it against your gains for a tax benefit. To rebalance the portfolio, Wealthfront will then purchase a very similar investment in your portfolio.
This tax strategy is available to for all investment accounts for no fee. Those with high account balances can take advantage of a more nuanced tax-loss harvesting strategy.
Smart Beta is an interesting offering that more finely tunes the proportion of investments in your index fund based on more recent economic theory. It is available with an additional fee for accounts with at least $500,000.
Use of low-cost ETFs to provide exposure to a variety of asset classes
Wealthfront is able to offer low fees because it uses low-cost Exchange Traded Funds (ETFs) to construct your portfolio.
Unlike actively managed mutual funds, ETFs passively track indexes and therefore are low-cost.
Low management fees
Management fee for investment accounts is 0.25%. By comparison, fees for mutual funds are generally around 0.5% to 0.8% based on data from the Investment Company Institute.
Cash/savings account fee is 0%.
Easy to use
Wealthfront is very easy to use, particularly for a hands off investor or an inexperienced investor.
You pick your risk tolerance, which ranges from 0.5 (least risky) to 10.0 (most risky), and Wealthfront will construct the right portfolio for you.
You can change your risk tolerance once a month, for example if your financial situation changes.
Backed by many decades of academic research
Wealthfront is based on the Modern Portfolio Theory, a popular investment strategy that has been around in the 1950s and won its creator a Nobel Prize in Economics.
Free financial planning tool
Wealthfront provides you with a rich, free financial planning tool called Path that you can use without depositing any money into Wealthfront.
The tool lets you link your external accounts so you can see your whole financial picture. You can link loans, savings accounts, retirement accounts, and even cryptocurrency accounts.
The tool lets you test various scenarios, such as when you want to retire, how to plan for a vacation, when can you buy a house, and more.
Link external accounts
The ability to link many external accounts to Wealthfront is powerful and very helpful for financial planning.
Linking is quick and simple.
Save for college
You can save for college with Wealthfront’s 529 plan.
If you are looking for a high yield savings account, you can create one with Wealthfront. It’s FDIC insured up to $1 million, which is significantly more than the typical FDIC insured amount of $250,000 offered at most banks.
There are no fees, no minimum amounts, and you can have unlimited transfers.
This is a great place to stash cash.
Line of credit
You can access a line of credit for up to 30% of the value of your taxable investment account if it has $25,000 or more. Interest rates are less than those for a credit card line of credit.
Save for retirement
Wealthfront offers retirement accounts, including traditional IRAs, Roth IRAs, Roth conversions, SEP IRAs, and 401(k) rollovers.
Where could Wealthfront could improve
Lower balances don’t benefit as much from Wealthfront’s allocation strategy
If your account balance is on the lower sider (closer to $500), you may not benefit as much from Wealthfront’s strategy. This is because the account does not have enough money buy each each of the underlying investments in the portfolio.
No financial advisors
Wealthfront’s strategy is purely software-based and there are no financial advisors overseeing it.
Wealthfront returns and performance
Wealthfront constructs a portfolio for you based on the level of risk tolerance you select. You can choose a risk score between 0.5 (low) and 10.0 (high).
Check out the returns you could have earned based on your risk score below. These returns are average annual returns, after Wealthfront’s fees and before any taxes you would pay.
Taxable accounts are regular investment accounts.
Tax-advantage accounts are retirement accounts such as Roth IRAs, traditional IRAs, and SEP IRAs.
What’s the theory behind Wealthfront?
Buy and hold
Wealthfront’s underlying investment philosophy is a buy and hold strategy. Buy and hold is a passive investment strategy where you buy a portfolio of stocks and then hold them over a long period of time. The opposite of a buy and hold strategy is one where you trying to time the market by frequently buying and selling stocks.
The buy and hold strategy has been praised by famous investors such as Jack Bogle, founder of Vanguard, one of the largest investment companies in the world, and Warren Buffett.
Optimize based on risk tolerance
Wealthfront’s goal is to maximize long-term returns, that are net of Wealthfront’s fees and taxes, for you, based on your risk tolerance.
Modern Portfolio Theory (MPT)
Modern Portfolio Theory is an economic theory on how risk averse investors can create a portfolio that optimizes their returns for a given level of risk they are willing to undertake.
Modern Portfolio Theory is a very popular and successful investing strategy and has been around since the 1950s. It even earned its creator, Harry Markowitz, a Nobel Prize in Economics.
How does Wealthfront use Modern Portfolio Theory? It asks you to provide your risk tolerance, and based on this constructs a portfolio that will maximize your returns.
How does Wealthfront construct your portfolio?
In order to construct your portfolio, Wealthfront needs to select a diverse set of asset classes.
The asset classes are:
- US stocks
- Foreign developed market stocks
- Emerging market stocks
- Dividend growth stocks
- US government bonds
- Corporate bonds
- Emerging market bonds
- Municipal bonds
- Treasury inflation-protected securities (TIPS)
- Real estate
- Natural resources
Why asset classes? Because academic papers have found that this is a great way to maximize returns.
How does Wealthfront keep its fees low?
Rather than selecting single stocks or mutual funds to represent each of these asset classes, Wealthfront uses Exchange Traded Funds (ETFs) which are low-cost and index-based.
ETFs, unlike mutual funds, are not actively managed, which means that it costs less for you.
Mutual funds hire portfolio managers and analysts who figure out what the mutual funds should invest in. They need to get paid and that cost is passed to you through fees.
ETFs track an index, like the S&P 500, which decides which investments it should hold
What is the risk score?
The risk score is your risk tolerance. Are you willing to tolerate a lot of turbulence in your portfolio? Or are you the type who will wake up in the middle of the night if your portfolio could go down by 20% because you are all in on a single stock?
How much volatility you can tolerate is your risk tolerance.
Wealthfront lets you select a risk score between 0.5 (very low) and 10.0 (very high), in increments of 0.5.
A risk score of 0.5 corresponds to a target annual volatility of 5.5% and a risk score of 10.0 targets 15.0%.
Based on what risk score you choose, Wealthfront constructs you an optimal portfolio.
How often can you adjust your risk score? Every 30 days. Adjusting it too often is not recommended. The major reasons for adjusting your risk score include major life changes and major changes in net worth or income.
What is Wealthfront’s tax strategy?
Wealthfront’s most unique aspect is its tax optimization strategy, called tax-loss harvesting.
What is this? Let’s illustrate the idea with a broad example.
If an investment in your portfolio has lost value, Wealthfront will sell that investment to capture your loss, and then invest in a very similar investment.
Wealthfront offers two versions of tax-loss harvesting for taxable accounts (these are non-retirement accounts). There is no fee to this service, but the version you get varies based on your account balance.
Daily tax-loss harvesting
Daily tax-loss harvesting is offered to accounts with balances below $100,000.
Stock-level tax-loss harvesting
Stock-level tax-loss harvesting is available for accounts with at least $100,000.
Stock-level tax-loss harvesting differs from daily tax-loss harvesting because it is on the stock level and not on the ETF or index fund level. It is the same idea, but instead of selling an ETF, the underlying stocks are sold.
What is Smart Beta?
Smart Beta is a very interesting offering by Wealthfront, and has been used by institutional firms like Dimensional Fund Advisors, which has more than $600 billion in assets under management.
Smart Beta provides a more nuanced weighting of the investments that are in your portfolio.
Let’s take an index fund (remember that the ETFs in your portfolio track these funds) like the S&P 500. The index holds shares of all of the companies in the S&P 500.
But how much of each? That depends on the size of the company, or the market capitalization (market cap). Bigger companies will take up more of the index than smaller companies.
Smart Beta takes this a step further and consider five other factors:
- Dividend yield
- Market beta
Smart Beta also includes stock-level tax-loss harvesting.
Smart Beta is available for accounts with at least $500,000 for no additional fee.
How do I open a Wealthfront account?
Opening a Wealthfront is simple and can take less than 15 minutes.
Wealthfront will ask you a few questions, like the type of account you are looking to open, some personal identifying information, and then account you would like to link to fund your Wealthfront account.
Linking an account to fund your Wealthfront account is quick and easy, and you can do it within Wealthfront’s system.
Once you have transferred your money over, you can start allocating. You will also be taken to the Wealthfront dashboard which includes its free financial planning tools.
What are Wealthfront’s management fees?
Wealthfront charges 0.25% to manage your investment and retirement accounts, and no fee for your cash/savings account.
Is Wealthfront safe?
Your money is held in a brokerage account in your name at Wealthfront’s brokerage arm, Wealthfront Brokerage LLC. It is:
• Registered with the US Securities and Exchange Commission (SEC)
• Regulated by the largest independent regulatory body for securities firms in the US, the Financial Industry Regulatory Authority (FINRA), and is
• Licensed in 53 US states and territories
The IRA custodian is a third-party, IRA Services Trust Company (IRASTC), which has over $11 billion of assets under custody.
RBC Correspondent Services (RBC CS) provides clearing functions such as trade settlements. RBC CS is part of the Royal Bank of Canada (RBC), a publicly traded company worth more than $150 billion.
Is my money insured?
What’s great about Wealthfront is that your investment balance is insured by the Securities Investor Protection Corporation, up to a maximum of $500,000.
Your cash account balance is insured by the U.S. Federal Deposit Insurance Corporation (FDIC) for up to $1 million. This is significantly higher than a savings or money market account at a bank or credit union, who insure your money up to $250,000.
Should you use Wealthfront?
Wealthfront is an excellent robo-advisor choice for those who want a hands off online investing option. Its portfolio optimization strategy is grounded in decades of academic research and its tax-loss harvesting strategy can minimize your taxes. All of this for a 0.25% management fee.
With a variety of investment accounts including retirement accounts, traditional investment accounts, and a 529 college savings account, Wealthfront has a good breadth of options.
Its high yield cash account, with no fee and unlimited transfers, is attractive as is its portfolio line of credit.
Wealthfront’s free financial planning tool that lets you see all of your financial accounts in one place and provides insights for major purchases is easy to use.
Wealthfront targets the hands off investor where you can let Wealthfront do the heavy lifting. For those who are interested in individual stock picking, you can supplement with a brokerage account.
All in all, Wealthfront is an excellent robo-advisor choice.