Launched in 2011, Wealthfront was one of the first so-called robo-advisors. It’s a platform that offers automated investment management services, and as of a few months ago, it offers automated financial planning options and lines of credit for clients with brokerage accounts.
Since it’s one of the largest robo-advisors based on assets under management, it’s probably one of the options you should consider if you’re looking for automated investing or automated guidance.
In this space, the big players are Betterment, SoFi Wealth, and Wealthfront. See how Wealthfront compares and whether it makes sense for you to invest. You might also look at how they compare to the best online stock brokers.
- A robo-advisor that helps you invest for the long term
- Starting at a 0.25% management fee based on AUM
- Other tools to help you manage your portfolio
How Does Wealthfront Work?
Wealthfront’s primary product is automated portfolio management. It uses an investment philosophy called Modern Portfolio Investing to help clients invest their assets. Modern Portfolio investors believe that it’s really hard to beat the market. As a result, these investors try to manage portfolio volatility and keep costs low.
Wealthfront is an investing platform for prudent investors who want to see their money grow, but don’t want to spend much time thinking about their investments. First, Wealthfront always starts with your goals and your risk tolerance. Wealthfront asks 4 objective questions, and six subjective questions. Then after assessing your risk, Wealthfront allocates your investments between stocks, bonds and other asset classes.
If you have more than $100K at Wealthfront, they will allow you to use a feature called PassivePlus investing. PassivePlus is a first of it’s kind “Smart Beta” robo-advisor. Smart Beta investing tries to used decreased downward portfolio volatility (Beta) to increase portfolio returns (Alpha).
It’s clear that Wealthfront’s captures systemic tax advantages. Wealthfront also makes the case that their five-factor investing model combined with indexing boosts returns. That’s a claim you would have to investigate on your own. I don’t buy into the factor investing model as a long term sustainable advantage (although I admit it worked in the past).
These are the elements of WealthFront’s PassivePlus program:
- Tax Loss Harvesting: Wealthfront’s algorithms check for daily capital loss opportunities. Over the course of a year, an investor can claim a tax credit for $3000 in capital losses, plus you can offset any gains with losses. Wealthfront virtually guarantees that you’ll never pay the government more than you have to. If you’ve got a big after-tax brokerage account, you should take advantage of tax loss harvesting. For accounts over $100,000 this is available at the stock level rather than an ETF level. Stock level tax harvesting is also known as direct investing.
- Risk Parity: Risk Parity, also known as mean variance optimization helps investors more effectively weigh volatility against expected returns. This feature costs an additional .03% annually and is only available for portfolios over $100,000.
- Five Factor Investing: Wealthfront isn’t completely straightforward about what’s in their “Secret sauce,” but their newest algorithm is clearly based off of the well-renowned five factor investing model. The Five Factors investing model accounts for Value, Momentum, Dividend Yield, Low Volatility, Volatility relative to the market. Historically, a Five Factor model would not only beat the market, it would reduce portfolio volatility. It’s not clear that it’s true today. This is also called Smart Beta and is available for portfolios over $500,000.
Wealthfront Plans and Pricing
Wealthfront charges 0.25% per year for all of its portfolios. If you have a portfolio under $100,000 you’ll also pay 0.07-0.16% per year for fund fees. With direct investments, you won’t have to pay the fund fee.
If you want to start an automated savings plan, you can link your Wealthfront account directly to a checking or savings account.
Wealthfront supports the following types of investment accounts:
- Traditional IRAs
- Roth IRAs
- SEP IRAs
- IRA transfers
- Rollover 401(k)
- 529 plans for college
- Individual and joint taxable brokerage accounts
Wealthfront’s Other Features
WealthFront’s two newest features are free financial planning software and a portfolio line of credit.
This is what you should know about these features.
Wealthfront’s Free Financial Planning Software
Wealthfront offers free financial planning software to anyone who wants to use it. You don’t have to be a Wealthfront customer to use it.
The software connects directly to user’s financial accounts, so users can easily track their goals. If you’ve never set financial goals before, Wealthfront has a Financial Health Guide which provides a framework for helping you think about your financial and life goals.
Using the free software, you can make informed tradeoffs. The app helps you answer questions like: Should I take time off work now and work a few years longer before full retirement?
The software still can’t tell you exactly which questions to ask, so it doesn’t have quite the same value as a CFP or financial coach, but it will help you move in the right direction. This is one of the better free planning tools that I’ve seen, but if you want to work with a human, not a bot you’ll need to find an alternative. Consider connecting with a financial coach at the Financial Gym or with a planner form the XY Planning Network.
Portfolio Line Of Credit
If you’ve got at least $100,000 in a taxable brokerage account, you’re eligible for a portfolio line of credit worth 30% of your account value. The loan is secured by your account, so the rates on the loan are often below most home equity lines of credit. You can pay back the loan on your own schedule, but interest accrues until the loan is paid in full.
This sounds like a great loan, but I’m skeptical about borrowing against assets in general. If you’ve got investments in a taxable brokerage account, and you need money to start a business or buy a car, you should probably liquidate the account to pay for your needs.
If you’re considering this option, you should see how it compares to a similar service called M1 Borrow.
Should You Invest At Wealthfront?
I’m quick to recommend Wealthfront to novice investors, and anyone who wants to outsource investing to an algorithm. The only automated investing platform that is less expensive is M1 Finance, and M1 Finance doesn’t have the robust investing theory that WealthFront has.
The clearest advantage of Wealthfront is its ability to do systemic tax loss harvesting. Of course, that only matters in unsheltered tax accounts.
The biggest drawback to Wealthfront is an overemphasis on conservative asset classes. The asset allocation it suggested for me was very conservative despite my long time horizon to retirement.
Overall, Wealthfront is an excellent option, and it’s still one of my top recommendations for automated investing platforms.
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