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A Comprehensive Wealthfront Review

Posted by Jamie on September 13, 2017

If you have a bit of spare cash and you want it to work harder than it would in a deposit or savings account, what are your options? One way is to invest using one of an increasing number of robo-advisors, automated portfolios run by algorithms. One such offering is from Wealthfront.

Wealthfront is a robo-advisor that specializes in tax efficiency. Many of this new wave of automated investors have specific strengths and weaknesses, Wealthfront’s is making the most of tax allowances.

About Wealthfront

Wealthfront launched in 2011 and is based in California. While not the first robo-advisor, it was the first to reach $1 billion invested and currently manages over $7 billion of assets. Wealthfront manages your portfolio and Apex Clearing Corporation holds it. Apex is a big mover and works with a number of fund managers and robo-advisors as far as I can tell.

The products on offer include retirement savings in traditional IRA, Roth IRA, SEP IRA and 401(k) rollover, college savings accounts, trusts and investments both individual and joint. There are also a range of credit options and company stock sale and investment plans too.

Wealthfront’s robo-advisor uses the Modern Portfolio Theory algorithm to manage your money and invest in Exchange-Traded Fund (ETF) index funds. This is the primary way many such managers work which is a hands-off, slow burning investment method that allows you to invest intelligently with the minimum of fuss and financial knowhow.

MPT is used to create a portfolio based on your assets and tolerance for risk. It will not list individual stocks but create a diverse portfolio for the longer term and automate it using the algorithm.

How does Wealthfront work?

To begin using Wealthfront, you need to sign up for an account and fill in a questionnaire that will help determine your financial goals and tolerance to risk. It is important to answer the questions accurately as the performance of your portfolio will be based on the answers you give.

Wealthfront then creates a portfolio based on around 8 classes of assets across a mix of domestic and international stocks and bonds. They will all be Exchange-Traded Fund (ETF) index funds as this is where Wealthfront deals. The classes include U.S. stocks, foreign stocks, emerging markets, real estate, dividend stocks, emerging market bonds, municipal bonds, TIPS and natural resource classes.

The spread of these classes will be determined by that questionnaire which is why answering accurately is so important. Your tax status will also influence the type of investments selected, as tax efficiency is at the forefront of how Wealthfront manages assets.

  1. Go to Wealthfront and select Invest Now in the top right.
  2. Complete the questionnaire.
  3. Assess the overview it provides of where your portfolio sits. If you agree, select ‘Looks Great! Open My Account.’
  4. Complete your details and select Continue to progress.
  5. Select the type of account you want Wealthfront to manage.
  6. Complete your personal details.
  7. Fund your account. You can use a wire transfer, bank transfer or account transfer. This will take between 1 and 10 working days to complete.

Once you have funded your account, nothing happens until the money arrives at Wealthfront. During this time your account may be assessed by Wealthfront and you will be approved. Once approved, you can log into Wealthfront and manage your account and read any documentation provided.

The account creation process is very straightforward. The questionnaire does make you think about your long term goals but contains no difficult to technical financial questions. They are designed to assess how you view risk, how able you are to cope with any losses and what you want the plan to achieve over the longer term.

Approval can take a few minutes or a few days. As nothing can happen until your account is funded so you don’t lose time or opportunities while this happens. I have not heard of anyone’s account not being approved but assume it must happen. Most normal investors should have no problem.

Key features of Wealthfront

The main benefit of robo-advisors is that they are cheap to run and take most of the heavy lifting out of investing. They are ideal for smaller investors for whom using a broker would be too expensive or not worth the effort.

They fill in that lucrative middle ground between savings and deposits and managing stocks through brokerages for those of us without the patience to learn about investing.

No fees for accounts under $10,000

One key benefit of Wealthfront is that management is free for investments under $10k. Use the refer a friend program and that increases to $15k. Once you exceed that amount, the management fee is 0.25% (September 2017) for balances over that initial $10 or $15k.

Low initial investment

Another useful feature is a low $500 barrier to entry.  That is the minimum balance allowable to use the service, with no maximum that I can find. That opens investing up to all of us and means anyone, from almost any background can effectively plan for the future.

Competitors like Betterment or WiseBanyan may have zero minimum balance requirements, but $500 is much lower than the $5,000 require by Charles Schwab or Fidelity, or the $50k required by Vanguard.

Tax efficiency

Wealthfront is all about tax efficiency. It offers daily tax-loss harvesting, a Tax-Minimized Brokerage Account Transfer service and tax-optimized direct indexing.

The Tax-Minimized Brokerage Account Transfer service uses existing investments held by Wealthfront and holds transferred securities wherever possible to maximize the efficiency of capital gains. Tax-optimized direct indexing purchases stocks directly on your behalf to instigate tax-loss harvesting options available through stock movement.

Path

Path is a new service launched this year. It is a new automated financial planning program that connects to other financial accounts and tracks outgoings, incomings, investments and savings and offers ideas and guidance on how to maximize what you have. It is another automated robo-advisor but seems to be a credible one.

Path also allows you to set goals and build towards them and tells you what kind of retirement you can look forward to with your current financial planning strategy. It works as a financial adviser like the main Wealthfront account acts as your virtual broker and is well worth checking out if you are looking to the future.

Automated portfolio rebalancing

The robo-advisor will automatically balance your portfolio so it has an even amount of the asset classes at any one time. The emphasis is on managing your risk tolerance while remaining as diverse as possible. This is all done as part of the algorithm on a daily basis.

Traditionally, you would meet your broker annually and look at your current standing and rebalance over the next twelve months. Using a robo-advisor to perform this daily may be overkill for smaller investors but considering it is part of the package and costs nothing extra, could be beneficial.

529 plan management

One standout feature of Wealthfront that not many other robo-advisors currently offer is college savings. This is a big financial commitment for many families and you are often limited in your options if you don’t want traditional bank-based savings plans.

The college savings plans available here walk you through the process including setting goals, managing diversifications and spread. Fees are currently between 0.43 and 0.46% for anything over that initial free $10k. Just remember that if your state offers tax deduction or credit for using their plans, you will lose that if you use Wealthfront.

Who could benefit from using Wealthfront?

Wealthfront is designed for smaller investors who prefer the hands-off approach. Families or individuals who want to invest and grow their money but who don’t have financial knowledge or the patience to manage finance to an infinite degree. If you don’t think you will need advice or human interaction, robo-advisors are ideal.

Wealthfront specializes in long term investments from small balances. This makes it ideal for most families across the country. It also specializes in being tax efficient so you can minimize your tax bill while staying on the right side of the law and avoiding any shady avoidance schemes.

Larger investors may not be ideal candidates for Wealthfront. Neither would anyone with trading knowledge or who want to play the market. These are hands-off investments that automate all moves. You won’t get much action here if you like getting your hands dirty.

Finally, Wealthfront is one of the best-reviewed robo-advisors on the market. While that alone doesn’t mean much, it does give you an indication of how others have experienced the service.

If you are beginning financial planning or want to begin saving for the future, Wealthfront seems a credible way to do it. You can balance your portfolio as you need, design plans that will get you the future you want and even help you save for your children’s college education. Considering the first $10-15k is free and you can get started for only $500, I consider it well worth trying.

Quick note: Neither I, nor TechJunkie are financial advisors. This is a review of the service and not a recommendation. Always seek professional advice before making any significant financial commitment.

Have you tried Wealthfront? Got any experiences that you want to talk about? Any advice for TechJunkie readers on using robo-advisors? Tell us about it below if you do!

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