Table of Contents
- An Introduction to Wealthfront
- How Wealthfront Works
- Wealthfront’s Investment Process
- Wealthfront Features
- Wealthfront Security and Protection
- Wealthfront Fees
- Possible Drawbacks
- Wealthfront Review Summary
The key to a prosperous financial life is mastering the two-step process of saving money, then investing those savings responsibly to build wealth. Although saving money is often a straightforward task, the process of investing can be overwhelming to individuals just getting started.
Wealthfront was created to solve this problem, offering an all-in-one, fully automated financial solution that includes free financial planning, investment management, and short-term cash management, without the high fees and account minimums of traditional wealth managers. Wealthfront best serves those who would rather manage their finances through an app on their phone than call a certified financial planner on the phone or meet with them in person.
Wealthfront has combined the best of modern technology with rigorous investment research to provide diversified, low-cost, tax-efficient investment portfolios and a variety of valuable features for one transparent fee.
Wealthfront offers the Cash Cow Community their
An Introduction to Wealthfront
Since launching in December of 2011, Wealthfront has grown into one of the largest, most sophisticated robo-advisors in existence. Slightly smaller than competitor Betterment, Wealthfront is the second largest independent robo-advisor in the world with nearly $12 Billion in client assets under management.
Much of this success can be attributed to Wealthfront’s team of experts. CEO Andy Rachleff is 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 Ph.D. in finance and/or the Chartered Financial Analyst (CFA) designation.
How Wealthfront Works
Getting started with Wealthfront takes less than ten minutes. The entire onboarding process can be completed free of charge with no strings attached. Account funding is the last step in the process, should you choose to proceed.
1) Create a free account
When creating a free Wealthfront account, the first thing you will be asked is whether you would like to build a financial plan or begin investing (I’ll describe both options, in detail, later in this review). You will be able to take advantage of both options simultaneously after creating your Wealthfront account, so don’t worry about choosing the wrong option.
2) Select your goals
Whether you first select “start investing” or “build a financial plan” doesn’t much matter, as both options are made available at any time. With that said, portfolio management is the only paid service offered by Wealthfront, with financial advice being a free option for all customers.
Whichever option you select will lead to a series of questions. The investment-related questions are designed to help Wealthfront recommend a personalized investment portfolio. The financial planning questions are designed to help you plan for the future.
Ultimately, both questionnaires find their way home in your Wealthfront Dashboard, where you will simultaneously manage all investment accounts alongside your personal financial goals.
3) Finalize your account
Using the answers that you’ve provided, Wealthfront will recommend a personalized investment portfolio and the appropriate type of investment account that you should open. You may ignore the recommendation and select your own account(s) and preferred asset allocation at any time. After you have selected your preferred investment portfolio, you then link an external bank account to transfer funds to/from Wealthfront.
On the financial planning side, Wealthfront will ask you to securely link external accounts so that their automated advice engine, Path, will understand your complete financial situation and make appropriate recommendations. This is entirely optional, and there is no obligation to link external accounts or use any of the free financial planning tools provided by Wealthfront.
4) Live your life
Let’s not forget, Wealthfront’s core value proposition is providing efficient, automated portfolio management. That is what you are paying 0.25% annually to receive, and that is what Wealthfront does best.
Once you hire Wealthfront to create and manage your personalized investment portfolio, they take care of everything. That includes selecting appropriate investments, rebalancing your asset allocation, advanced tax-loss harvesting, and all of the other features described later in my review. Take advantage of their expertise by spending your precious time and energy doing something other than managing your portfolio.
The remainder of this review provides a detailed explanation of Wealthfront’s investment recommendations and expansive list of features. Given my Ph.D. in financial planning, I’m interested in the nitty-gritty details, but I also recognize that some readers might find this information boring or overly complicated.
If you would like to exit now and test the service yourself, our referral link guarantees that your first $5,000 invested at Wealthfront will be managed free of charge. Wealthfront charges 0.25% annually on balances in excess of $5,000 (which is $25, annually, per $10,000 invested).
Wealthfront’s Investment Process
Should you hire Wealthfront to manage your investments, you will first complete a risk tolerance questionnaire and then have the opportunity to review Wealthfront’s investment recommendations before funding your account. Here is how that takes place:
1) Answer a few questions
The first step is to select your primary investment goal. You can choose between retirement savings, general savings, college education, or something else entirely. Your answer will allow Wealthfront to suggest the optimal type of investment account.
Wealthfront then asks you to complete seven multiple-choice questions about your investment preferences. The questionnaire is designed to assess your willingness and ability to tolerate investment risk, and Wealthfront uses this information to recommend an appropriate blend of investments (called asset allocation).
2) View investment 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 and
Traditionally, risk-tolerant investors will own more stocks than bonds, because stocks have historically offered the greatest growth potential of any common asset class. However, Wealthfront allows you to select your preferred asset allocation regardless of their
Using your assessed risk tolerance, Wealthfront recommends a diversified investment portfolio that varies by account type. If you are opening a taxable account, Wealthfront recommends select ETFs to increase your expected after-tax return. If you are opening a retirement account, Wealthfront recommends a slightly different set of ETFs to maximize potential growth.
Wealthfront recommends ETFs instead of mutual funds because ETFs have lower expenses and receive preferential tax treatment, making them a better overall investment vehicle. The asset allocation between these various ETFs ensures that your investment portfolio is not weighted too heavily in any specific asset class, company, country, or sector, which ultimately reduces overall investment risk.
For Taxable Accounts, Wealthfront recommends a combination of the following ETFs:
- U.S. Total Stock Market Index ETF (VTI)
- Developed International Markets Index ETF (VEA)
- Emerging International Markets Index ETF (VWO)
- U.S. Dividend Appreciation Stock Index ETF (VIG)
- U.S. National Municipal Bond Index ETF (VTEB)
- U.S. Total Bond Market Index ETF (BND)
- U.S. Corporate Bond Index ETF (LQD)
- U.S. TIPS Bond Index ETF (SCHP)
Taxable Accounts with over $100,000 are also eligible to opt-in to Wealthfront’s Risk Parity Mutual Fund (WFRPX).
For Retirement Accounts, Wealthfront recommends a combination of the following ETFs:
- U.S. Total Stock Market Index ETF (VTI)
- Developed International Markets Index ETF (VEA)
- Emerging International Markets Index ETF (VWO)
- U.S. Dividend Appreciation Stock Index ETF (VIG)
- U.S. Total Bond Market Index ETF (BND)
- U.S. Corporate Bond Index ETF (LQD)
- Emerging Market Bond Index (EMB)
- Real Estate Index (VNQ)
By combining these various ETFs, Wealthfront clients are able to own thousands of stocks and bonds issued by corporations and governments across the globe at a very low cost.
For example, here is my recommended portfolio when opening an Individual Retirement Account:
Note, the percentage of each ETF recommended in your portfolio will vary according to your risk tolerance and Wealthfront’s current investment projections, which are updated regularly by the investment committee.
3) Open and fund your account.
If you don’t like Wealthfront’s recommendations, you can modify the asset allocation by manually adjusting your risk tolerance. Once you decide on your preferred portfolio, simply click “next” to save your portfolio and create your Wealthfront account.
Once you create an email/password combo, you then proceed to fund your new account with a minimum of $500. If you aren’t ready to fund your account, you can save Wealthfront’s recommendations to your account and return at a later date.
A variety of account types are supported, including:
- Rollover Existing Employer-Sponsored Retirement Plans (401k, 403b, 457, etc.)
- Individual Retirement Account (Traditional or Roth)
- Self-Employed Retirement Accounts (SEP-IRA)
- Taxable Brokerage Accounts (Individual or Joint)
- Wealthfront’s 529 College Savings Plan
- Corporate and Trust accounts
You can transfer (rollover) existing employer-sponsored accounts into Wealthfront through your online Dashboard, but Wealthfront cannot manage those accounts directly if they are still held at a current/previous employer.
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 that muni-bonds 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.
Free Financial Planning – Wealthfront launched free software based financial planning in December 2018. Now, when you download the Wealthfront mobile app, you can choose to get started by building a financial plan — with options for retirement planning, home planning, education planning, and travel planning — before opening an investment account. Wealthfront’s financial planning is powered by its automated advice engine, Path, that instantly gives answers to over 10,000 financial questions.
PassivePlus Investing and Tax-Loss Harvesting
Wealthfront now offers four unique features designed to increase your return on investment and reduce your tax liability.
1) Daily Tax-Loss Harvesting – Free for all taxable Wealthfront accounts, tax-loss 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.
Instead of using a single ETF investment to implement the U.S. stock allocation of a portfolio (typically Vanguard’s Total Stock Index (VTI)), Stock-level Tax-Loss Harvesting 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 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 Stock-level Tax-Loss Harvesting service could add up to 2.03% annually in additional investment returns (compared to VTI only). Wealthfront is also the only automated financial advisor to publish the results of its Daily Tax-Loss Harvesting service.
3) Smart Beta – Halfway through 2017, the Wealthfront investment committee introduced Smart Beta for taxable accounts of $500,000 or more.
Smart Beta 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 Stock-level Tax Loss Harvesting features previously described, Wealthfront estimates the overall after-tax benefit to be as much as 3% each year, as discussed in their latest research.
4) Risk Parity – At the beginning of 2018, Wealthfront introduced the newest PassivePlus strategy, Risk Parity, which aims to increase your risk-adjusted returns in a wide range of market environments through an enhanced asset allocation strategy. This new strategy is available as part of a diversified portfolio for Wealthfront clients with taxable investment accounts of $100,000 or more.
The key benefit of Risk Parity is the way it balances the risk of an investment portfolio, which will increase your portfolio’s average annual expense ratio. Wealthfront structured this Risk Parity implementation as a mutual fund in order to preserve the value they offer through their Tax-Loss-Harvesting and Portfolio Line of Credit. Just as the ETFs they use have an associated expense ratio, the Wealthfront Risk Parity Fund has an expense ratio of 0.25%. Fortunately, your weighted average annual expense ratio will only increase by 0.03%.
Risk Parity is designed to increase your long-term net-of-fees, after-tax, risk-adjusted returns, and you can select this investment strategy in your account settings.
Wealthfront Cash Account
Wealthfront launched Wealthfront Cash Account in February 2019 as the next important step towards automating all of its client’s finances. Cash Account is a secure place to stow away cash you plan to invest, spend within a few years, or use in an emergency.
The account offers an interest rate of 2.57% and is FDIC insured for up to $1 million. That’s nearly 20 times the national average interest rate and four times the insurance you’d receive at a traditional bank. Wealthfront clients can open a cash account with as little as $1. The account isn’t subject to any market risk and offers unlimited and free transfers all for no fees.
Portfolio Line of Credit
Wealthfront’s Portfolio Line of Credit offers you access to immediate cash without disrupting your investment strategy. 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 borrowing rates depend on the size of your portfolio.
- 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. Many of Wealthfront’s clients use PLOC to pay tax bills, down payment on a home, etc.
Wealthfront Free Financial Planning
Wealthfront’s financial planning experience – free for all customers – offers answers to over 10,000 financial questions personalized for you at any time. This is possible without the use of CFPs thanks to their automated financial advice engine, Path, which was built by an in-house team of PhDs. In contrast to having to meet with a CFP who requires an interview to collect your financial information, Wealthfront’s financial planning is based on much more accurate and up to date information that is accessed with your permission from all your financial accounts. That includes data from your bank, brokerage, 401(K), credit cards, mortgages — even accounts like Coinbase. You name it they can connect to it. Path allows you to link all of your external financial accounts through your Wealthfront Dashboard.
You can 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. Wealthfront then combines that information with data acquired from third-party sources like Redfin and Zillow for home pricing estimates and the Department of Education for college tuition costs to calculate foundational elements.
If that’s something you’re interested in, take a look at this video:
In 2018, Wealthfront expanded Path to help clients plan for a future home purchase. Here are some the features included in this update:
- Personalized Home Affordability Estimate: Path uses third-party data on home prices and mortgage rates combined with your financial information to provide an accurate estimate of what you can expect to afford when it’s time to purchase a home. Path’s home affordability estimate even accounts for expenses beyond the mortgage, such as closing costs, property taxes, maintenance, and insurance.
- Saving and Goal Tradeoffs: Path makes recommendations on which accounts are best to save for a home, how much to save each month, and provides a realistic time frame for the purchase. You can also interactively explore the impact of saving more or saving for a longer period of time, and how this will affect your existing financial goals.
- Virtual House Hunting: Path links to Redfin, allowing you to virtual house hunt in locations across the country. You can see what’s possible with affordability estimates, and even track specific neighborhoods for real-time market fluctuations.
- Home Planning in Retirement: Home equity can be a powerful asset to utilize in retirement. Path projects the value of your purchased home in the future and allows you to try on different scenarios to see how your financial status will change if you sold or downsized in retirement.
With this addition, Path is one of the most comprehensive financial planning tools available today (and entirely free for Wealthfront clients).
In addition to home planning, Path now includes 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.
- Path Shows You How Much You Can Pay For – 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.
Wealthfront is the only robo-advisor offering a cost-effective 529 plan and a personalized college planning service all in one.
Time Off for Travel
Wealthfront also offers Time Off for Travel, a unique financial planning service that lets clients explore the possibility of taking an extended leave. Wealthfront’s advice engine, Path, uses a combination of a client’s real-time financial data and outside data to answers questions like:
- How much time can I afford to take off? Once a client links all their financial accounts, Wealthfront estimates how many months or even years they can afford to travel. Wealthfront even takes combined household finances into account.
- How much will I spend while traveling? Wealthfront estimates how much a client is likely to spend while traveling based on their current personal spending habits and how they plan on traveling from budget to luxurious.
- Will taking time off impact my other goals? With Wealthfront’s unique affordability slider, a client can see if taking extended time off will delay their ability to buy their dream home or retire early. Advice is always delivered in the context of a client’s other plans so a single goal doesn’t disrupt one’s entire Path, or financial plan.
- What can I do to afford to take time off? Wealthfront provides advice on how a client might adjust their spending, saving or other goals to afford an extended leave from work.
Wealthfront Security and Protection
Wealthfront protects your investments through the following measures:
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 RBC. 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 RBC. That means at no time can the cash or securities held in your account be loaned out or borrowed by Wealthfront.
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. Cash Cow Couple readers receive their first $5,000 managed free.
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 0.10% 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 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 and M1 Finance allow investors to utilize fractional shares, but Wealthfront does not. For example, if an ETF costs $125 per share today, but 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 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 or trade individual stocks, 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 for 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 $5,000 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 and Wealthfront Free 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 $5,000 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 PassivePlus suite of tools, which become increasingly valuable as your account balance grows.
The combination of features offered by Wealthfront is unmatched by other robo-advisors, as detailed in my Wealthfront vs M1 Finance vs Betterment comparison.