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Updated on Monday, August 31, 2020
Wealthfront is a robo-advisor that aims to make investing easier, particularly for beginners. The platform creates portfolios of exchange-traded funds (ETFs) designed to maximize returns within the constraints of your objectives and risk tolerance. It also provides financial-planning suggestions as well as additional benefits, such as tax loss harvesting and automatic rebalancing.
|Accounts offered||Individual, joint, trust, traditional IRA, Roth IRA, SEP IRA, 529, 401(k) rollover|
|Access to human advisors||No|
- What is Wealthfront and how does it work?
- Wealthfront investment approach
- Wealthfront fees
- Wealthfront features and tools
- Wealthfront user experience
- Wealthfront safety and security
- Alternatives to Wealthfront
What is Wealthfront and how does it work?
As a robo-advisor, Wealthfront uses an automated approach to asset allocation by distributing investments among ETFs according to each investor’s specified parameters. This passive approach to investing relies on software and technology to deliver your best possible risk-adjusted returns, while aiming to keep taxes and overall costs low.
Wealthfront requires a minimum investment of just $500, with no added benefits, such as access to certified financial planners (CFPs), extended to larger accounts. It offers numerous account types:
- Individual taxable account
- Joint taxable account
- Traditional individual retirement account (IRA)
- Roth IRA
- SEP IRA
- 401(k) rollover
- 529 Plans
Although it provides extensive financial information on its website, Wealthfront doesn’t provide access to human advisors. It also doesn’t provide support for inherited or beneficiary IRAs.
- Low fees: Wealthfront’s annual advisory fee is just 0.25%, which is on par with competitor Betterment’s 0.25% fee but lower than Fidelity Go’s rate of 0.35% (for accounts above $50,000) or Wealthsimple’s fee of 0.5% (up to $100,000), for example.
- Integrated financial-planning assistance: Although Wealthfront doesn’t provide access to live financial advisors, it provides online financial planning at no cost. Users can link all of their external accounts to get a complete financial picture in a single view, along with analyses of various financial situations.
- Automatic and continuous rebalancing: Unlike some robo-advisors that might rebalance on a set schedule, Wealthfront continuously monitors and periodically rebalances portfolios.
- Tax loss harvesting at no additional charge: Wealthfront harvests tax losses for clients without triggering an additional fee. ETFs that trade at a loss might be swapped into similar funds to capture the tax benefit of the capital loss.
- Higher minimum investment: Although Wealthfront’s $500 investment minimum is still fairly low, some competitors, including Betterment, have a $0 minimum investment.
- No human advisors: Wealthfront doesn’t provide customers the access to human advisors that competitors, such as Betterment or Schwab Intelligent Portfolios Premium, do. Both of these robo-advisors provide access to CFPs, with Betterment providing access over the Phone and Schwab via Phone or videoconference.
- No fractional-share investing: Some Wealthfront competitors, such as SoFi, offer fractional-share investing. This allows investors to purchase stock for a specific dollar amount rather than require a one-share minimum, which can be cost-prohibitive for certain stocks. For example, Amazon traded at over $3,000 per share in August 2020. Wealthfront doesn’t allow fractional-share investing.
Wealthfront investment approach
Wealthfront aims to provide hands-off investors with their best possible risk-reward portfolio available. The firm uses a range of ETFs, statistical portfolio analysis techniques and a low annual management fee to achieve these goals.
|Investment options||ETFs across 11 categories|
|Tax loss harvesting|
|Socially Responsible Investing|
Wealthfront uses a five-step process to create an asset allocations for clients:
- Identify the correct range of asset classes.
- Choose the correct ETFs for each asset class.
- Use Modern Portfolio Theory to maximize risk and reward for each asset allocation.
- Match a client’s risk tolerance to an appropriate portfolio.
- Monitor and rebalance the portfolio.
The Wealthfront robo-advisory platform is based around Modern Portfolio Theory (MPT). MPT, which was developed by Nobel Prize-winning economist Harry Markowitz, attempts to derive statistically the optimal portfolio for a given risk-reward scenario. Wealthfront then invests customer funds into its stable of ETFs, which are grouped into the following broad investment categories:
- U.S. stocks: Shares in U.S.-based companies
- Foreign stocks: Shares in companies headquartered in other countries, such as France, Australia and Japan
- Emerging-market stocks: Shares in developing economies, such as China, India, Brazil, Taiwan and South Africa
- Dividend stocks: U.S.-based stocks that have a record of dividend increases for the past 10 years or more
- U.S. government bonds: Debt issued by the U.S. federal government or agencies
- Corporate bonds: Debt issued by U.S. companies that have investment-grade ratings
- Emerging-market bonds: Debt issued by governments or quasi-government organizations from emerging-market nations
- Treasury-inflation protected securities: U.S. government-issued inflation-indexed bonds
- Municipal bonds: Bonds issued by U.S. local and state governments that are federally tax-exempt
- Real estate: Investments in companies that invest in commercial properties, retail space and apartment complexes
- Natural resources: Investments, such as timber and energy, that are intended to provide diversification and inflation protection
Tax loss harvesting: Wealthfront actively uses tax loss harvesting to maximize tax efficiency in client portfolios. ETFs that trade down from their original cost might be swapped into comparable investments to realize that loss and reduce client tax exposure.
Differentiated asset location: Wealthfront also uses differentiated asset location to minimize the effect of investment taxes. This strategy considers whether an account is taxable or nontaxable, such as an IRA, to determine the appropriate mix of asset classes across accounts.
Stock-level tax loss harvesting: Stock-level tax loss harvesting is available for accounts between $100,000 and $500,000. As the name implies, this feature allows qualifying accounts to benefit from individual stock sales for the purpose of generating tax losses.
Smart Beta: Smart Beta analyzes market capitalization, value, market beta, volatility, dividend yield and momentum to strategically weight assets in a portfolio to increase expected returns. This process can help a portfolio become more tax-efficient as well. Wealthfront charges no additional fee for this service, though only accounts of at least $500,000 qualify.
- Annual management fee: 0.25%
- Investment expense ratios: Varies by fund
- 529 Plan fees: 0.42%-0.46% (fee only applies above $25,000 for Nevada residents)
Wealthfront charges a flat 0.25% annual management fee for all assets. That fee is deducted monthly and is readily apparent. An account with $100,000 in assets, for example, will be charged $250 per year.
Fees for Wealthfront’s ETFs are more difficult to source. Each fund charges annual fees that are taken out of the net asset value of the funds themselves, rather than deducted from individual client accounts. Wealthfront doesn’t charge commissions or transaction fees for buying or selling ETFs or for rebalancing transactions.
The fee structure for Wealthfront’s 529 Plans is slightly different. In addition to the 0.25% Wealthfront management fee, additional expenses for program administration and the underlying ETFs themselves bring the total fee into the 0.42% to 0.46% range. (Note that this fee is charged only on amounts above $25,000 for Nevada residents.)
Wealthfront features and tools
529 college savings plans
Wealthfront offers its robo-advisory platform in the form of a 529 college savings plan as well. Investments are slightly different, composed of municipal securities across nine different asset classes. This minimizes taxes within the portfolio while still providing access to diversified investments.
Cash management account
Wealthfront offers a hybrid account that blends features of traditional checking and savings accounts. The Wealthfront Cash Management Account has no account fees and allows you to pay bills, deposit your paycheck, use a debit card and earn interest on your balance at a 0.35% APY. You don’t have to have an investment account, and the minimum for a cash management account is $1. You also get FDIC insurance of up to $1 million, unlimited free transfers and active fraud monitoring.
Wealthfront automatically rebalances client portfolios based on portfolio deviation from targeted percentages. This is different from the common time-based rebalancing strategy, which adjusts portfolios every month or quarter instead. Wealthfront portfolios therefore are monitored constantly, and the timing of an automatic rebalancing can happen at any time.
PassivePlus is Wealthfront’s collection of rules-based investment strategies aimed at maximizing return and minimizing risk. For individual, Trust and joint accounts, PassivePlus incorporates such techniques as risk parity and Smart Beta to provide additional value to clients.
Certain elements of the strategy apply only to large-value accounts. Risk parity, Wealthfront’s enhanced asset allocation strategy, kicks in at the $100,000 level, while Smart Beta, a method that Wealthfront uses to deliver higher returns with lower risk, is available for portfolios of at least $500,000.
Socially responsible investing
Socially responsible investing is available in accounts that qualify for stock-level tax loss harvesting, meaning accounts from $100,000 to $500,000. Under this program, investors can single out specific stocks that they don’t want to own, which will be culled from their portfolios.
Wealthfront user experience
Wealthfront provides a user-friendly experience, on its mobile website and app. The robo-advisor’s financial-planning tools are helpful and easy to use, including sliders to assist with “what if” financial projections. For example, if you want to buy a home, you can enter various home prices and see what you can afford and when, based on sliders that allow you to input projected savings over varying periods.
In terms of support, Wealthfront has online FAQs. To get a Phone number to contact the firm directly, however, you’ll have to log in to your account. You also can submit questions via an online form, and Wealthfront will send a response to your Email.
Wealthfront safety and security
- FDIC insurance
- SIPC insurance
- Two-factor authentication
Your cash in Wealthfront’s cash management account is insured by the FDIC for up to $250,000 per banking institution. Because Wealthfront uses numerous banks, your account has total coverage of up to $1 million on cash deposits.
FDIC insurance covers cash in a bank account; SIPC insurance covers investment accounts. The Securities Investor Protection Corporation (SIPC) provides insurance for up to $500,000 of investment account assets, including $250,000 on claims for cash. Bear in mind SIPC insurance does not protect against market declines, but rather insolvency of a brokerage firm.
On the security side, Wealthfront protects customer accounts through two-factor authentication. This requires you to enter your Email, password and a security code that you’ll receive on your mobile Phone when you log in to your account. However, you must opt in to this protection; it isn’t enabled by default.
Alternatives to Wealthfront
Wealthfront was one of the first robo-advisors, and it remains one of the top choices in the industry. Fees and minimums are relatively low, and in addition to a standard robo-advisor asset allocation template, Wealthfront provides advanced tax loss harvesting, socially responsible investing and Smart Beta strategies for larger accounts. However, Wealthfront doesn’t provide access to financial professionals.
If you’re not sure if Wealthfront is right for you or simply want to explore the other options out there, below are two of its top competitors to consider.
|Investment minimum||Annual fee||Accounts offered|
|Ally Invest Managed Portfolios||$100||0.00% or 0.30%||Taxable, retirement, custodial|
|Fidelity Go||$0||$0 to $9,999: $0|
$10,000 to $49,999: $3/month
Wealthfront vs. Ally Invest Managed Portfolios
Ally Invest Managed Portfolios has an unusual, two-pronged pricing strategy. The standard investment advisory fee is 0.30%, which is higher than Wealthfront’s 0.25%. Ally also has a completely free option, but there’s a big catch — you must keep 30% of your portfolio invested in cash, which is placed in Ally’s high-yield savings account.
Either way, Ally requires just a $100 minimum, well below Wealthfront’s $500 investment minimum requirement.
Wealthfront vs. Fidelity Go
Fidelity Go has higher fees than Wealthfront on most accounts, 0.35% compared with 0.25%, but the funds in Fidelity’s robo-advisor lineup have no management fees. The Fidelity Flex funds in the Fidelity Go platform are a combination of active and passive management styles.
Fidelity Go requires no minimum to open an account, and it doesn’t charge fees for accounts under $10,000, but there is a $10 minimum to begin investing.
All information included in this profile is accurate as of August 27, 2020. For more information, please consult Wealthfront’s website.