Launched in 2011, Wealthfront is a robo-advisor with $2+ billion in assets under management by 2014. A robo-advisor is a type of investment advisory service that uses robots, instead of people, to help you invest — hence the portmanteau robo-advisor.
It’s a little more complicated than that but for all practical purposes, it’s the robots. 🙂
Wealthfront bills themselves as the “most tax-efficient, low-cost, hassle-free way to invest.” Their offering is compelling. For just 0.25% on top of underlying fund fees, which are low cost ETFs from places like Vanguard, they do all of the heavy lifting and remember to do it with the memory of a computer. Because, well, they’re run by computers.
I think robo-advisors are great because they offer professional advisory services, at least a vanilla version (or cosmopolitan, to keep the ice cream analogy as accurate as possible), to the masses because they rely on algorithms rather than a personalized, advisor-heavy approach. Many investment advisers won’t meet with someone without at least six figures to invest since they get paid as a percentage of assets under management. Robo-advisors can do this because robots don’t need anything but hugs.
What’s key then is who determines the algorithms behind the curtain? For that we turn to the investment team and their investment team is impressive, featuring names like their Chief Investment Officer Dr. Burton Malkiel (A Random Walk Down Wall Street) and Charles Ellis (Winning the Loser’s Game), founder of Greenwich Associates.
What Wealthfront Offers
Simplicity and optimization.
All robo-advisors promise investment returns without as much maintenance. With an account minimum of just $500 (with the first $15,000 managed free if you sign up through a link on this site), Wealthfront offers an investment advisory service to the masses. It took me many many years to amass $15,000 in investable assets and it sat in an index fund at Vanguard while it grew. I didn’t pay much in fees but I also didn’t get tax loss harvest either (heck, I didn’t even learn about it until many years later!).
I saw my job as an investor as being two primary tasks:
- Determine and establish an asset allocation, and,
- Rebalance their portfolio periodically.
Wealthfront does the first task by having you answer a questionnaire about your risk tolerance to establish your asset allocation. Then its robots do their magic to accumulate the right assets to get the allocation that best first your risk tolerance.
As an ongoing service, they handle rebalancing, tax loss harvesting, dividend reinvestment, and all the other smaller tasks that can add to your returns but that we often forget to do. That’s where the optimization comes in.
Here’s a brief video of how it works:
How Wealthfront Invests
Wealthfront holds your assets with Apex Clearing Corporation, which is the same holding company that many discount brokers use, including TradeKing. Wealthfront invests your money through exchange traded funds, or ETFs, and offers a variety of account types, including IRAs and trusts. The type of account determines the assets you get access to.
All accounts will get access to US Stocks, Foreign Stocks, Emerging Stocks, Dividend Stocks, US Government Bonds, and Treasury Inflation-Protected Securities (TIPS). Retirement accounts also get access to Corporate Bonds, Emerging Bonds, and Real Estate. Taxable accounts get access to Natural Resources and Municipal Bonds.
Their “daily” Tax-Loss Harvesting feature is a game changer. Tax loss harvesting is the strategy of selling losers, to capture the capital losses, reinvesting in a similar but not substantially similar investment for 30+ days, then reinvesting it in the original loser at a lower tax basis. When they first offered this, they were one of the first to do so.
Their “Tax-Optimized Direct Indexing” service is also very clever and worth keeping an eye on. The Investment Company Act of 1940 prohibits index funds and ETFs from passing realized losses to investors. The losses can be used to offset gains but cannot be passed on and Wealthfront gets around this by offering direct investing in index companies. They’ve created a WF500 (Wealthfront 500) and they buy the S&P 500 stocks directly, essentially turning you into an index fund. This, combined with an ETF of smaller non-S&P 500 companies, gets you index investing without the commission (and work of keeping up with index changes).
For Direct Indexing, there are three levels and there are balance minimums to get access:
- Wealthfront 100 – $100,000 account minimum, invests in the top 100 of the largest US companies and uses the Vanguard Extended Market ETF (VXF) and Vanguard S&P 500 ETF (VOO) to get exposure to the rest.
- Wealthfront 500 – $500,000 account minimum, invests in the top 500 companies and then the VXF to get exposure to the rest.
- Wealthfront 1000 – $1,000,000 account minimum, invests in the top 1,000 in the large cap sector and uses Vanguard Small-Cap ETF (VB) to get the small cap representation
They’ve basically turned your investment account into a mutual fund, for just 0.25% of AUM.
Risk Tolerance & Asset Allocation Tool
It’s pretty simple. It takes a few seconds to answer the 7-question Risk Tolerance questionnaire and it revealed this investment plan: (you can do this yourself without putting any personal information, they don’t ask for or require an email to play with this tool)
Under each category, they list the three leading ETFs. In theory, you could go and buy these allocations directly. If you click on more information, to View Your Plan, this dashboard appears:
Here it is for a Retirement Investment Mix:
You can play around with the Risk Tolerance slider, to see how the allocations change (max is 10), plus see the difference between a Taxable Investment Mix and a Retirement Investment Mix. I really like that the Projected Performance is a spread, versus a single line as it’s often depicted, because it more accurately reflects the data.
As you can see, the investment for the taxable consists of mostly Vanguard funds (VTI ETF, VEA ETF, VWO ETF, and VIG ETF) plus a State Street XLE ETF for “natural resources” and iShares MUB ETF for municipal bonds. If you hover over the choice, they explain why they chose the fund they chose.
For example, for the State Street XLE, they explain their choice over the two alternatives:
The three leading choices in this category are:
- XLE (State Street Energy Select Sector ETF)
- DJP (iPath Dow Jones-UBS Commodity Index Total Return ETN)
- VDE (Vanguard Energy ETF)
XLE vs. DJP
While both XLE and DJP provide investment exposure to natural resources, XLE has a substantially lower expense ratio. XLE also has much higher trading volume than DJP, making it easier to transition in and out of (as part of a tax-loss harvesting transaction, for example). Lastly, because of the way DJP uses futures contracts, it is vulnerable to an effect known as contango, which can be destructive for long-term investors.
XLE vs. VDE
Both XLE and VDE provide investment exposure to natural resources, with a primary focus on energy. The expense ratios for XLE and VDE are also roughly the same. However, XLE has a significant advantage in trading volume, making it the better default choice for Wealthfront portfolios.
How much does it cost?
Wealthfront doesn’t charge a commission or account maintenance fees, they instead rely on an account management fee. The account management fee is 0.25% of assets but you get the first $10,000 managed free. Wallet Hacks users get the first $15,000 managed free, an extra $5000 compared to their public offer.
This is on top of the fees charged by the underlying ETFs, which average 0.12%.
Why is this better than doing it yourself?
It’s not… if you already do this yourself and don’t mind spending the time. The big trade off is going to be on your time and how much these moves will cost you.
If you’re entirely invested in Vanguard funds (or similar), you can re-balance for free since all fund and ETF trades are free. You still have to remember to rebalance and tax loss harvest.
As I tried to think of drawbacks to their service, the only one I could think of a few. The first is that you can’t own fractional shares so there will be a small amount of uninvested cash in your account. They also keep the projected annual fees as cash in your account.
They also don’t give a discount on the fees for large balances. Whether you invest $10,000 or $1,000,000, the 0.25% fee is the same (technically, the first $10,000 is managed free but you get what I mean).
The last one was whether you agreed with their asset allocation. 7 questions to reach one number that set my allocation seemed… short? Then again, their allocation is based on modern portfolio theory, they have a top notch board, and investing shouldn’t be complicated… so what am I complaining about. 🙂
If you’re using Wealthfront, I’d love to hear about your experience with it!