Wallet Hacks

2017 Wealthfront Review – Low-cost Roboadvisor with Loss Harvesting, Rebalancing

Launched in 2011, Wealthfront is a robo-advisor with $5+ billion in assets under management in early 2017. 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 an 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.

With a new feature, Wealthfront separates itself from the rest of the pack by offering a personalization aspect you won't find elsewhere. You connect your accounts and Path will give you an approach that is tailored with you information.

As for the rest, 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!).

Learn More about Wealthfront (Get $15,000 Managed Free)

I saw my job as an investor as being two primary tasks:

  1. Determine and establish an asset allocation, and,
  2. 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.

About the “Robots”

Computers are only as good as the people who design and program them, so while I say “robots” a lot in this post (it is a “robo-advisor”), the folks who built the robots and give them the insight to do their automated magic… they're definitely not robots.

In fact, they're PhDs led by Dr. Burton Malkiel. They hire only PhDs to work on the investment team.

Path by Wealthfront (new for 2017)

Wealthfront has begun separating itself from the robo-competition with a new financial planning experience – Path.

It is available to all clients and you'll see it when you log in.

Path is an automated financial planner that takes your individual data, like income, spending, and investing; to project your financial assets and your ability to meet future goals. It takes into account life events, like buying a house and having children, and adjusts your “path” accordingly. And it does this on a regular basis, rather than once a year or once a quarter as you would with a human advisor.

Here is their brief explainer video:

This is a huge value-add and something I haven't seen with their peers.

College Planning with Path (new for 2017)

College Planning with Path, added after Path itself, is a feature that applies Path towards the arduous financial task of planning for college.

The tool is simple – you pick a college and it calculates the real time expenses (tuition, room, board, books, etc.) projected to when your kiddo will start college. You can change the college and it'll update the data. Then they use outside data to figure out how much financial aid you might get, all based on your existing Wealthfront data. Then you just choose how much you'd like to save (like retirement) and you can play with the different numbers to see how they affect your plan.

How do they figure out the financial aid? That's the secret sauce – I asked Kate, my contact with Wealthfront, and she explained:

Path connects to the Integrated Postsecondary Education Data System (IPEDS) database, which is the official source of actual data provided by the colleges themselves.

The majority of college institutions use a form of the federal method which we can get from IPEDS database while many of the Ivy League universities abide by the institutional method. The equation used to calculate financial aid for the institutional method isn’t public, but we spent time talking to the top institutions to figure this out for you.

What that means is you’ll get a financial aid estimate that is customized based on the school you select, the financial aid formula for that school, and the forward-projected income and assets for your household up to the year in which your child will start college.

Wow. That's good.

Portfolio Line of Credit (new for 2017)

Another new feature just release in early 2017 is called Portfolio Line of Credit. If you have an individual or joint account valued at $100,000+, you can request cash up to 30% of the current value of your account and they'll send it over in as quickly as 1 business day.

Your portfolio becomes a line of credit. (hence the name!)

The interest rate depends on the value of your account (rate schedule &
definitions
):

Greater of the aggregate net deposits and market values of your taxable Wealthfront accounts Annual Interest Rate Rounded Down to the Nearest 0.05% in Your Favor
$100,000 – $499,999 Effective federal funds rate +3.60%
$500,000 – $999,999 Effective federal funds rate +2.85%
$1,000,000+ Effective federal funds rate +2.35%

Their interest rate is going to beat a home equity line of credit (since it's technically a margin lending product and not a traditional loan) and since there are no fees, it's even cheaper. And unlike a regular loan product, there are no credit check, no minimum monthly payments and the loan is secured by the assets in your portfolio.

How Wealthfront Invests

Wealthfront holds your assets with Apex Clearing Corporation, which is the same holding company that many discount brokers use. 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 by a solid year. (they are often at the forefront of innovation… you'll often see them roll out features far ahead of others)

Their “Tax-Optimized Direct Indexing” service is a clever name for what is essentially their own index funds – they've created a WF500 (Wealthfront 500) and they buy the S&P 500 stocks directly. This, combined with an ETF of smaller non-S&P 500 companies, gets you index investing without the transaction commissions and work of keeping up with index changes. FWIW, traditional advisors usually won't even think about this until you have $5,000,000.

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 internally but to help reduce taxes, Wealthfront uses this service to offer direct investing in index companies. Taxes can eat into your returns more than fees so this is a feature that works to counter that.

For Direct Indexing, there are three levels and there are balance minimums to get access:

They've basically turned your investment account into a mutual fund, for just 0.25% of AUM.

They offer Advanced Indexing, which is their improvement on existing Smart Beta ETFs. They implemented a multi-factor investment strategy combined with its Direct Indexing feature, which adds more tax efficiency you don't find in existing Smart Beta ETFs. This is offered to those with $500,000 or more but at no incremental cost above the 0.25% fee.

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)

After 7 questions, they provide a simple allocation of funds. Investing doesn't need to be complicated.

Under each category, they list the three leading ETFs. In theory, you could go and buy these allocations directly.

If you click on each of the bars, you'll see a breakdown like this:

A breakdown of U.S. stocks

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 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%.

Learn More about Wealthfront (Get $15,000 Managed Free)

Can you do this yourself?

Sure, anyone can do anything themselves. But the big trade off is going to be on your time, your level of expertise, and how much these moves will cost you. Wealthfront has top-notch software and automation, a stunning PhD investment team led by one of the greats, and is low cost.

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.

You may not be 100% invested because you can't buy partial shares. Most ETFs trade in increments of $30 to $100 so you'll have some smaller portion of that uninvested. (a minor drawback and one that you'd face anyway) As the investments pay dividends, they'll be constantly monitoring your cash reserves and putting you into the market whenever you meet the minimum share prices.

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 $15,000 is managed free but you get what I mean). You get access to more services at higher balances and they are already one of the lowest cost services, but keep that in mind.

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. 🙂

Learn More about Wealthfront (Get $15,000 Managed Free)

If you're using Wealthfront, I'd love to hear about your experience with it!

Wealthfront

9

Overall

9.0/10

Pros

  • Daily tax loss harvesting
  • Automatic rebalancing
  • Automatic dividend reinvestment
  • Low cost
  • Low minimum ($500)

Cons

  • High direct investing minimums
  • No fractional shares
  • No large balance discounts