If you've been paying attention to the news within the past few months, you've likely been hearing a lot about the rise of the “robo-advisor“. Robo-advisors is the term given to any number of automated investing services that have popped up in recent years that aim to make investing easier, more affordable and in some instances negate the need for a traditional financial or investment advisor.
While their investment recommendations vary to some degree, many of them use algorithms based on Modern portfolio theory (MPT) to aid in choosing diversified investments and asset allocation based on your risk tolerance. MPT helps to maximize expected return for your portfolio based on your risk profile.
While I still think that some people could benefit from working with a human financial planner one on one, I do think that for most investors using an automated investing service makes a ton of sense.
Today I thought I would do a review of Wealthfront, one of the top and most well respected automated investing services available today.
UPDATE: Sign up for Wealthfront via this exclusive Bible Money Matters link to get an extra $5,000 managed for free:
Wealthfront launched their automated investment service in 2011 and the company is currently based in Redwood City, California. In 2012 Wealthfront launched a daily tax-loss harvesting service. From 2013 to 2014 the company went through some tremendous growth, growing by over 450% in one year. By 2017 Wealthfront has more than $5.5 billion of assets under management.
Wealthfront never holds your portfolio when you invest with them, they just manage it. The portfolio is actually held with Apex Clearing Corporation, similar to if you were to invest with Betterment, Motif Investing or TradeKing, who also use Apex.
How Does Wealthfront Work?
When you sign up for Wealthfront you start by completing a questionnaire that is aimed at determining your risk tolerance. Once your risk tolerance is determined asset allocations are set that will remain the same regardless of how much you have invested.
The portfolios are based on a mix of 6 – 8 asset classes that includes both U.S. and international stocks and bonds. They invest mainly via the following ETFs, although that is subject to change.
- U.S. Stocks (VTI)
- Foreign Stocks (VEA)
- Emerging Markets (VWO)
- Real Estate (VNQ)
- Dividend Stocks (VIG)
- Emerging Market Bonds (EMB)
- Municipal Bonds (MUB)
- TIPS (SCHP)
- Natural Resources (DJP)
When you invest with Wealthfront your diversified asset allocation will depend on the tax status of your account (taxable or tax deferred), and what is the most tax efficient method of investing for you.
In essence, you'll get a highly diversified, low cost portfolio that is suited to your level of risk, time horizon and other factors.
Signing Up For Wealthfront
Signing up for Wealthfront is a quick process. Here's what you'll need to do.
Once you begin the signup process it will first have you go through a risk tolerance assessment.
Once you've answered all the questions, it will give you a quick rundown of what assets and allocation that they would suggest for you, in both a taxable account and retirement account.
If everything looks OK, you're ready to open your account.
Available account options with Wealthfront include:
- Standard taxable account
- Joint investment account
- Trust account
- Traditional IRA
- Roth IRA
- Wealthfront 529 College Savings Plan
Once you choose which account type you want and hit continue, it will take you through the process of entering all of your basic information including:
- Full name
- Birth date
- Phone number
- Social security number
After filling out the basics it will ask you to fund your account. Your options for funding the account include:
- Bank transfer (3-5 business days to get started)
- Wire transfer (1 business day to get started)
- Account transfer (5-10 business days)
Once you submit your application and confirm your email address you just have to wait for your account to be approved. After approval you can login to your account dashboard to confirm transfers, view your account summary, view your plan, transactions, documents and more.
So what are some of the features that you get when you open a Wealthfront account?
Proven passive investing strategy that gives you a diversified portfolio
So what do you invest in when investing with Wealthfront?
We invest with an equity orientation to maximize long-term returns. Each of our selected asset classes is represented by a low cost, passive ETF. We continuously monitor and periodically rebalance your portfolio to maximize your chance of investment success for the long run. We also attempt to minimize your taxes by analyzing the taxes likely to be generated by any given asset class, and then allocating different asset classes in taxable and non-taxable (retirement) portfolios. We use Modern Portfolio Theory (MPT) to identify the ideal portfolio for each client.
Your portfolio will consist mainly of low cost ETF index funds that will be tailored to your risk tolerance, with intelligent dividend reinvestment and regular portfolio rebalancing. It is fully diversified. For a complete look at the Wealthfront strategy you can check it out here.
Tax aware asset allocation and tax loss harvesting
Tax-loss harvesting essentially takes investments that have declined in value and selling them at a loss, generating a tax deduction. The tax deduction helps to reduce your taxes. Wealthfront's service allows daily tax harvesting to be possible, which can help to maximize gains versus a traditional year end tax loss harvesting. This service is available at no extra cost to investors with $100,000 or more in assets. UPDATE: Tax loss harvesting is now available to all investors, no minimum!
Wealthfront also invests in index funds which tend to have little turnover, and as such will likely realize lower capital gains taxes. They also use dividends to rebalance your portfolio throughout the year, lowering capital gains. They optimize asset classes and allocations depending on whether an account is taxable or tax advantaged.
No commission fees
With Wealthfront you're never going to pay fees for purchase of the ETFs in your account.
Other Wealthfront Feature Updates
Wealthfront is constantly innovating, and has had a myriad of other updates in the past year or so, all designed to make investing easier, more efficient, and to bring you better returns. Here are a few of the features and functionality that set them apart.
- Path Financial Planning Experience: The new financial planning experience, unique to Wealthfront that I go into below.
- Tailored Transfers: Instead of selling everything at once, use our tailored transfer process to migrate your investments tax-efficiently over time.
- Direct Indexing: an enhanced form of tax-loss harvesting for accounts over $100k to boost your tax savings. Wealthfront is the only automated investment service to offer Direct Indexing.
- Selling Plan: Another service unique to Wealthfront. Wealthfront’s Selling Plan helps all employees who hold public company stock to sell their shares tax-efficiently and commission free, at a level of service previously only available to executives.
- Portfolio Line of Credit: Launching on 4/28/17, this line of credit is available for any Wealthfront client with an Individual or Joint Wealthfront account valued at $100,000 or more. There’s no set up – if you’re an eligible Wealthfront client then you already have access. Your line of credit is secured by your diversified investment portfolio, so current rates are as low as 3.25-4.5% depending on account size – lower than most HELOC loans. Borrow the amount you need up to 30% of account value, when you need, for whatever you want. Repay on your own schedule.
Path Automated Financial Planning Experience
As of February 2017 Wealthfront launched a new automated financial planning experience for their clients, to help them better plan for their financial future.
Path connects to your existing financial accounts in a few minutes, and then by tracking your actual spending and saving patterns to help you figure out how your financial future may look.
It helps you to figure out how much you need to save now to reach your future goals, and helps you to determine if you'll be able to live the same lifestyle you live now, in retirement.
Path helps take the guesswork out of figuring out if your hoped for future is even attainable based on your current spending and saving patterns. It helps you take a look at “what-if” scenarios, and help you figure out what the impact of a raise at work, or saving more every month might be.
Path is your personal financial planner, but without the need for a bi-annual meeting at an expensive office with a planner that hardly pays attention to your needs. Here's a look at it from Wealthfront:
College Planning In Path
In addition Path also now has a College planning tool that looks at every important aspect of college planning and deliver a complete, personalized assessment. It will allow you to choose a college that your child may attend, enter some personal data about yourself, after which it will calculate the financial aid you can expect to receive at that school. Then you can setup how much to save, and see the effect of adding more to your savings. At the end you can link it to your Wealthfront 529 College Savings Plan!
The Wealthfront 529 College Savings Plan
This is another investment account unique to Wealthfront. They offer one of the lowest cost 529 plans from an advisor, that offers more diversification for higher returns. (Many plans offer a very limited range of investment options).
A recent Sallie Mae study shows that more and more parents are saving for college, but are nowhere near prepared to meet their goals because they are saving solely through savings accounts earning less than 1% interest. The Wealthfront 529 College Savings Plan was created to help change this, to help parents grow their child's college savings, while minimizing the amount of risk based on your level of risk tolerance.
Wealthfront’s 529 uses 20 different glide paths, tailored to match both the beneficiary’s age, as well as the account owner’s financial situation and risk tolerance. Our glide paths transition asset allocations much more continuously, which again means you may be less likely to be hurt by market movements.
This is definitely something to check out if you're interested in saving for your child's education.
Fees, Charges & Minimums For Wealthfront
What are the fees that you'll have to pay for the Wealthfront investment service? The good news is they offer some extremely competitive rates, and if you have below $10,000 in assets you'll be able to invest for free!
Wealthfront does not charge an advisory fee on the first $10,000 of assets under management. On amounts over $10,000, we charge a monthly advisory fee based on an annual fee rate of 0.25%. The only other fee you incur is the very low fee embedded in the cost of the ETFs you will own that averages 0.15%.
You pay the following fees to Wealthfront:
- $500-$10,000: FREE – No fees.
- 0.25% annual fee of assets over $10,000.
- NOTE: Sign up via the exclusive Bible Money Matters link, and get an extra $5,000 (total of $15,000) managed for free!
So if you have $30,000 in your account and you signed up via our link, you'll have no charge for the first $15,000, and a 0.25% fee on the second $15,000.
When you sign up you'll also have the chance to refer other users to the service to earn $5,000 more per user in free asset management, beyond the first $15,000. If you know enough people who want to sign up, you could definitely increase the amount managed for free very quickly!
An account with Wealthfront does come with a minimum balance.
Our account minimum is $500, which entitles you to a periodically rebalanced, diversified portfolio of low cost index funds enhanced with our daily tax-loss harvesting service (for taxable accounts).The account minimum required to qualify for our Tax-Optimized Direct Indexing service is $100,000.
So to open an account, you'll need a minimum of $500. Why not start with $500, and then fully fund your Roth IRA for the year ($5500 for 2017)?
There is also a minimum withdrawal of $250, and you can't withdraw below the account minimum of $500.
If you withdraw all of your funds it will transfer your money and close your account for you, with no exit fees.
Wealthfront – Great Low Cost Investment Advisory Service
When I first heard about Wealthfront a few months ago, I wasn't sure if it would be a service that I could recommend. After doing my due diligence, however, I believe they're a great service that would be perfect for a lot of people.
Wealthfront is the only robo advisor who offers both investment management and financial planning through their software, Path. Anyone can open a Wealthfront investment account and receive a personalized, globally-diversified investment portfolio and access a variety of tax-efficient services.
I'd highly recommend giving them a chance if you're looking for an easy place to start investing – that will work for you over the long haul.