Wealthfront is one the largest independent robo-advisors with more than $7 billion in client assets under management. They have combined the best of modern technology with rigorous investment research to provide diversified, low-cost, tax-efficient portfolios comprised of index ETFs.
In plain English, Wealthfront makes it easy for anyone to get access to a diversified, long-term investment portfolio (and financial advice) without the high fees & account minimums of traditional wealth managers.
Wealthfront offers Cash Cow readers their first $15,000 managed free. For balances larger than $15,000, the management fee is a flat 0.25% per year.
Since launching in December of 2011, Wealthfront has grown into one of the most sophisticated robo-advisors in the world.
Much of this success can be attributed to Wealthfront’s team of experts. CEO Andy Rachleff is vice chairman of the endowment investment committee at the University of Pennsylvania and a faculty member at Stanford’s School of Business. He was previously the co-founder of Benchmark Capital.
The investment team is led by Burton Malkiel, Ph.D., who is the Professor Emeritus of Economics at Princeton University and author of the best-selling A Random Walk Down Wall Street. Other members of the investment committee hold a doctorate degree or the Chartered Financial Analyst (CFA) designation.
Here is an excellent introduction to the company and the service provided:
Wealthfront’s Investment Process
Getting started with Wealthfront takes less than ten minutes. The section below will describe the onboarding process for new Wealthfront clients.
1) Select your investment preferences
When you first create a Wealthfront account, you will be asked to select your investment goal. You can choose between retirement savings, general savings, college education, or something else entirely. Your answer will help Wealthfront suggest the correct type of investment account.
Wealthfront then asks you to complete eight multiple-choice questions about your investment preferences and risk tolerance. The questionnaire is designed to assess your willingness and ability to accept investment risk, and Wealthfront uses this information to recommend an appropriate asset allocation.
Traditionally, risk tolerant investors will own more stocks than bonds, because stocks have historically offered the greatest growth potential.
2) View recommendations
After you complete the questionnaire, Wealthfront will explain your assessed risk tolerance on a scale of 1-10, with 10 being the highest risk level.
When I went through the process, I scored a 10/10, which is not surprising. I have a long investment horizon, making stocks a great investment choice for me.
Using your risk tolerance, Wealthfront recommends a diversified investment portfolio. The recommendation varies by account type. If you are opening a taxable account, Wealthfront recommends select ETFs to increase the after-tax return. If you are opening a retirement account, Wealthfront recommends a slightly different set of ETFs to maximize potential growth.
For Taxable Accounts, Wealthfront recommends a combination of the following ETFs:
By combining these various ETF asset classes, Wealthfront investors are able to own thousands of financial securities at a very low cost.
The percentage of each ETF in your portfolio depends on your risk questionnaire. In my example, here is the recommendation for my taxable account:
As you can see, it’s an aggressive mix of 90% stocks, 5% natural resources, and 5% municipal bonds.
If I select a retirement account, Wealthfront recommends a different portfolio:
The recommendation is 74% stocks, 16% real estate, and 10% taxable bonds.
Wealthfront makes these recommendations to maximize your after-tax investment returns.
3) Open and fund your account.
If you don’t like the Wealthfront recommendations, you can change your asset allocation by adjusting your risk tolerance. Once you decide on your preferred portfolio, simply click “next” and fund your new account with a minimum of $500.
Most account types are supported, including:
Traditional & Roth IRA accounts, including 401(k) and 403(b) rollovers
Personal and joint brokerage accounts
529 college savings plan
Differentiated Asset Location – Wealthfront uses a different mixture of asset classes for your taxable and retirement accounts. For example, because municipal bond interest is exempt from federal taxation, Wealthfront recommends they be held in a taxable account. On the other hand, corporate bond interest is taxed as ordinary income, which is why Wealthfront recommends they be placed in a tax-sheltered account.
Automated Rebalancing – Wealthfront maintains your desired asset allocation over time. Hypothetically, let’s assume that your portfolio begins with an asset allocation of 50% stocks, 50% bonds. Over time, stocks might outperform bonds resulting in a portfolio comprised of 60% stocks, 40% bonds. That’s not ideal because the portfolio now has more risk than you are comfortable accepting. Rebalancing is the act of returning your asset allocation to 50/50. Wealthfront rebalances the portfolio using efficient methods:
Intelligent Dividend Reinvestment – Wealthfront automatically reinvests all dividends into the asset class that is underperforming, reducing the need to sell investments.
Cash Flow Reinvestment – If you’re adding to your Wealthfront balance over time, they use those funds to automatically purchase the asset class which is underperforming. Again, this maintains your ideal asset allocation without requiring the sale of one asset class (which results in less taxation).
Tax-efficient Withdrawals – When you sell any financial asset in a taxable account, you will realize a gain or loss. The tax consequences of your sale depend on the holding period. If you sell an investment after holding it for 365 days or less, you have a short-term capital gain (or loss). If you sell the investment after holding it for 366 days or longer, that is considered a long-term gain (or loss). Short-term capital gains are treated as ordinary income, while long-term capital gains are taxed a preferential tax rate.
When you request a withdrawal from your taxable account, some of your investment must be liquidated (sold) so that you can receive cash. Wealthfront offers a withdrawal system that is designed to minimize taxation. First, they sell any positions that will result in no taxable gain. Second, they sell any positions that result in long-term capital gains. As a last resort, they sell the positions that result in short-term capital gains.
Wealthfront’s Selling Plan – Many professionals receive company stock as part of a compensation package, but it’s risky to have a sizable portion of your wealth tied to a single company’s stock. The Wealthfront selling plan allows you to sell your company shares gradually (and commission-free), minimizing taxation in the process. Doing this on your own is expensive and time-consuming, and Wealthfront is the only company to offer this service.
Passive Plus Investing and Tax-Loss Harvesting
Wealthfront now offers three unique investment features designed to increase your return and reduce your tax liability.
1) Daily Tax-Loss Harvesting – Free for all taxable Wealthfront accounts, tax-toss harvesting is the process of selling investments that have declined in value and replacing those investments with highly correlated alternatives.
By selling an investment at a loss, you earn the right to deduct that loss from your taxable income – thus lowering your annual tax burden. By replacing the original investment with a highly correlated alternative, the risk and return profile of your portfolio is unchanged, even as you gain tax savings. These tax savings can then be reinvested to further grow the value of your portfolio.
At Wealthfront, when one of your ETFs drops in value it is automatically sold and quickly replaced by a highly correlated alternative.
2) Tax-Optimized Direct Indexing – Available to clients with $100,000 or more invested in a taxable account, Wealthfront will create your own index portfolio, harvesting losses among the individual stocks in the S&P 500 or S&P 1500. This feature is unique to Wealthfront and cannot be found anywhere else.
Instead of using a single ETF investment to implement the U.S. stock allocation of a portfolio (typically Vanguard’s Total Stock Index (VTI)), Tax-Optimized Direct Indexing replaces VTI with individual securities.
Thus, if a single stock in the portfolio is down in value, it can be sold to harvest losses (even if the overall market is up). In Wealthfront’s standard index ETF portfolios, no tax-loss harvesting benefit would be available unless the U.S. stock market ETF (VTI) declined in value.
Wealthfront offers three levels of direct indexing to clients:
Wealthfront 100: Available now for taxable accounts of $100,000, the Wealthfront 100 will utilize up to 100 of the largest capitalization stocks from the S&P 500 combined with specific ETFs to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront 500: Available now for taxable accounts of $500,000, the Wealthfront 500 utilizes up to 500 stocks from the S&P 500 combined with the Vanguard Extended Market ETF (VXF) to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront 1000: Available now for taxable accounts of $1,000,000, the Wealthfront 1000 utilizes up to 1000 stocks from the S&P 1500 combined with the Vanguard Small-Cap ETF (VB) to provide US stock market coverage equivalent to Vanguard’s Total Stock Market ETF (VTI).
Wealthfront has written a few research oriented white papers on the topic of tax-loss harvesting. They conclude that a portfolio including Wealthfront’s Daily Tax-Loss Harvesting service and Tax-Optimized Direct Indexing service could add up to 2.03% annually in additional investment returns (compared to VTI only)
3) Advanced Indexing – Halfway through 2017, the Wealthfront investment committee introduced Advanced Indexing, which replaces Direct Indexing in the Wealthfront 500 (requires $500,000) and Wealthfront 1,000 (requires $1,000,000).
Advanced Indexing blends five single-factor strategies (value, momentum, high dividend yield, low market beta, and low volatility) with the cap-weighted market index (VTI) to generate a new modified index. This new index then serves as the benchmark for the tax-loss harvesting algorithm in your portfolio.
Historically, this strategy has provided additional portfolio gains and more opportunities for tax-loss harvesting. When combined with the Daily Tax-Loss Harvesting and Direct Indexing features previously described, Wealthfront estimates the overall after-tax benefit to be as much as 3% each year, as discussed in their latest research.
Availability: Wealthfront clients with an account valued at $100,000 or more have immediate access to the line of credit.
Interest Rate: Your line of credit is secured by your diversified investment portfolio, and current rates are between 3.5-4.5% depending on your account size.
Complete Flexibility: Borrow the amount you need, when you need, for any reason. Then repay on your own schedule.
No Application or Fees: If your account is eligible, you have a line of credit. Simple as that. No paperwork, credit checks, or application process. Just request the cash (up to 30% of the current value of your Wealthfront account) and Wealthfront sends you the money as quickly as one business day.
This line of credit is an excellent way to obtain cash, should you ever need immediate liquidity.
Path (+ Wealthfront Portfolio Review)
Path is Wealthfront’s financial planning experience – free for all customers.
Path allows you to link all of your external financial accounts through your Wealthfront Dashboard. The service can then evaluate your accounts to measure four important metrics:
If your external accounts are flawed, Wealthfront offers a unique solution and an opportunity to easily transfer your funds into a new Wealthfront account. Instead of selling everything at once, Wealthfront uses their Tailored Transfer process to migrate your investments tax-efficiently over time.
Path also allows you track your financial progress in real time. Path uses your real transaction history to calculate a rolling 12-month average of how much you’ve been saving and spending, then provides advice on how to achieve your financial goals using this data.
If that’s something you’re interested in, take a look at this video:
College Planning with Path
Wealthfront recently updated Path to include customized college planning advice. With this addition, Path walks you through every important aspect of college planning and delivers a complete, personalized assessment in three steps:
You Select A College – Wealthfront connects to every U.S. college to calculate the estimated cost of tuition, room and board, books, etc. You can change your desired school at any time and the data will update automatically.
Path Calculates Financial Aid – Using outside data for each college and their specific approach to calculating financial aid, along with the personal details that you’ve shared through Path, Wealthfront provides a customized estimate of financial aid per school.
You Choose How Much to Save – Path will show you how far your estimated savings will go towards covering college expenses. Just like with retirement, you can adjust the inputs to see the impact of increased savings. Want to make it personal? You can upload a custom image for each account on your dashboard.
Wealthfront is the only robo-advisor offering a cost-effective 529 plan and a personalized college planning service all in one.
Wealthfront Security and Protection
Wealthfront maximizes the protection of your assets by doing the following:
SIPC Insurance: Wealthfront is protected by SIPC insurance. This insurance covers up to $500,000 in securities for each type of account you hold with Wealthfront. An IRA is considered a different type of account than a taxable account for this purpose, but different types of IRA accounts are considered one account for this purpose. SIPC insurance also covers up to $250,000 in cash.
Third party custodian: Your assets are held in an account at a third-party custodian named Apex Clearing. Wealthfront only has the right to issue trading instructions against your account. The firm cannot access your money, other than to receive the agreed upon advisory fee. You are the only one who can deposit into, or withdraw from your account.
No rehypothecation: Wealthfront clients only have cash accounts (not margin accounts) at Apex Clearing. That means at no time can the cash or securities held in your account be loaned out or borrowed by Wealthfront or Apex.
No proprietary trading: The brokerage partner, Apex Clearing, performs no proprietary trading.
Everything in street name: Wealthfront only invests in SIPC covered securities registered in street name at the Depository Trust Company (DTC). That means the securities purchased on your behalf by Wealthfront are held separately from other Wealthfront assets and remain fully insured.
For all of the services described in this review, Wealthfront charges an advisory fee of 0.25% per year. Your first $10,000 invested has zero management fees. However, they are currently offering readers of our blog an additional $5,000 managed free for a total of $15,000.
If you were to sign up here to receive $15,000 bonus, here is the total annual cost by account balance:
Total Account Balance
Balance Subject to 0.25% Annual Fee
Total Annual Fee
Wealthfront clients incur no other fees outside of the 0.25% advisory fee. There are no trading commissions, custodial fees, or exit fees if you close your account.
Keep in mind that although Wealthfront charges no additional fees, you will have to pay fees for the underlying ETFs that you own through Wealthfront. You would pay these even if you managed your own portfolio. These are typically around 0.12% annually on top of the 0.25% management fee.
Once you have an account opened and funded, you can get an additional $5,000 managed free for each friend that you invite who opens and funds their account. The person invited gets an additional $5,000 managed for free as well. That’s $5,000 for the both people involved. There’s no limit to the amount you can get managed for free and these funds are managed free for as long as the account remains open.
No fractional share investing – Betterment, M1 Finance, and Motif Investing all allow investors to utilize fractional shares, but Wealthfront does not. For example, Vanguard Total Stock Market Index (VTI) costs a bit more than $125 per share today. If you only have $100 available in your investment account, these other firms will allow you to purchase a partial share. At Wealthfront, no investment would occur until your account balance exceeds $125.
No cash equivalent investments – At Wealthfront, your money is invested in a blend of stock and bond ETFs. Financial markets are risky, and you can lose your money even in their most conservative portfolio. If you are a very risk averse investor, or if you need immediate access to your funds, consider a savings account.
No customization – Wealthfront recommends a diversified set of ETFs to everyone, but no customization is allowed. For example, if you would rather choose a different type of real estate investment, that’s not allowed. The Wealthfront team makes very good, research-based recommendations, but you can’t replace or delete any of their chosen ETFs.
Wealthfront Review Summary
Wealthfront offers quality asset management and financial planning services at a very reasonable fee. But I think Wealthfront offers even more to a select group of people:
Individuals just getting started: Wealthfront recently lowered their minimum account balance to just $500. When combined with the $15,000 free management offer, Wealthfront is a great option for new investors or individuals wanting to test the service.
Young professionals and families: Wealthfront is focused on offering services and features that directly address the needs of young professionals. The Wealthfront 529 College Savings Plan, Stock Selling Plan, and Path (Financial Planning) are examples of unique services designed to help young families manage their finances.
Individuals who have an extensive network: All investors who sign up through our website begin with $15,000 managed free, but each additional referral results in an additional $5,000 managed free. Someone with an extensive network could have a sizable portfolio managed for free.
Individuals with $100,000 or more to invest in a taxable account: Retirement accounts don’t count because no tax-loss harvesting is available. Taxable account balances in excess of $100,000 receive Wealthfront’s Passive Plus suite of tools, which become increasingly valuable as your account balance grows.
In my opinion, Wealthfront is the best robo-advisor in existence. In 2017 alone, Wealthfront has added several innovative features, including Path financial and college planning, a portfolio line of credit, and the Passive Plus suite of tax reduction tools.