Wealthfront is an online, automated investment platform, commonly referred to as a “robo-advisor”. Wealthfront, and other similar investment platforms are referred to as robo-advisors because your investment portfolio is both designed and managed by proven computer algorithms.
The platform constructs your portfolio with a small number of exchange traded funds (ETFs) that are representative of the broader stock and bond markets, as well as natural resources.
Once your portfolio has been created, it is fully managed by Wealthfront, including reinvestment of new funds consistent with the designated portfolio allocation, as well as periodic rebalancing to maintain those allocations on an ongoing basis.
But Wealthfront goes beyond typical robo-advisors in one very important category: tax-loss harvesting or TLH. TLH has become more popular in the robo-advisor space, but Wealthfront goes farther than anyone else, in offering it to all account sizes. But more than that, they also provide a holistic tax-efficient investment methodology that has the potential to increase your return on investment.
Based in Redwood City, California, Wealthfront manages about $4 billion for 90,000 individual investors.
How Does Wealthfront Work?
When you apply for a Wealthfront account, you will be asked a series of questions that are designed to determine your risk tolerance. Basically, that means your attitude toward the prospect that you might lose money with your investments.
People range anywhere from conservative to aggressive in their personal risk tolerance. For that reason, Wealthfront will make that determination upfront, and use it as the basis for constructing your portfolio.
Once that is done, you simply need to provide funds for the account. You can start with a minimum deposit of $500, and then add money periodically, or through regular contributions such as payroll deductions.
You can start out with a basic account, which is invested in a short list of ETF’s, but as your account balance grows, Wealthfront provides various additional portfolio options, that have the potential to provide even greater returns.
Wealthfront Features and Pricing
Wealthfront’s basic features include:
Type of accounts available. Wealthfront is available for regular individual and joint taxable investment accounts, traditional, Roth, rollover and SEP IRAs; trusts, and 529 plans.
Minimum deposit to open an account. Wealthfront requires just $500 in order to open an account.
Automatic Rebalancing. Wealthfront automatically rebalances your portfolio to keep the asset positions consistent with your designated asset allocation. This means that you can “set it and forget it” where your investments are concerned!
Customer Service. You can contact a representative by phone, Monday through Friday, from 10:00 AM to 8:00 PM, Eastern time. They are also available 24 hours a day, seven days a week by email.
Account Protection. Your Wealthfront account is protected from broker failure (but not market related losses) by SIPC insurance. That covers your account for up to $500,000, including up to $250,000 in cash. There is also additional coverage through Weathfront’s third-party clearing agency, Apex Clearing.
Wealthfront Mobile App Wealthfront is available on Apple iOS and Android and offers all of the features of the web site.
Annual fees/cost. Wealthfront charges a flat annual advisory fee of 0.25% of the value of your account. What’s more, the first $10,000 in your account is managed for free. There are no trading commissions, and Wealthfront uses low-cost ETFs in building your portfolio, which keeps investment expenses to an absolute minimum.
Wealthfront Investment Portfolio
Like all robo-advisors, Wealthfront constructs all portfolios using a small number of ETFs. These funds capture a very broad percentage of the financial markets since virtually every fund represents a portfolio of hundreds of securities.
Wealthfront uses just nine ETF’s to construct basic portfolios. This includes four stock funds, three bond funds, plus real estate and natural resource funds. The last two differentiate Wealthfront from most other robo-advisors, who typically offer investment exposure only to stocks and bonds.
The basic portfolio ETFs include the following funds, as of September 20, 2016:
- US Stocks – Vanguard US Total Stock Market (VTI)
- Foreign Stocks – Vanguard FTSE Developed Markets (VEA)
- Emerging Market Stocks – Vanguard FTSE Emerging Markets (VWO)
- Dividend Stocks – Vanguard Dividend Appreciation (VIG)
- US Government Bonds – Vanguard Barclays Aggregate Bond (BND)
- US TIPS – Charles Schwab Barclays Capital US TIPS (SCHP)
- Municipal Bonds – iShares S&P National Municipal (MUB)
- Real Estate – Vanguard REIT (VNQ)
- Natural Resources – Energy Select Sector SPDR (XLE)
Wealthfront offers other investment portfolios that provide a much broader range of investment components. We’ll take a closer look at those portfolios under Tax-Optimized Direct Indexing Portfolios .
Wealthfront Tax-Loss Harvesting (TLH)
Wealthfront is serious about TLH. So serious in fact that they even prepared a full-blown White Paper on the topic. (But I warn you, it’s not light reading!). TLH is a continuous process of selling off losing investment positions, offset gains. Later, similar investments are purchased to replace those that have been sold, thus maintaining your designated asset allocation.
It sounds like a complicated process, but since Wealthfront handles it on a fully automated basis, it just happens automatically. The basic idea is that by selling off losing positions, you enable the gains to simply roll forward, similar to tax-deferred gains that you might have in a tax-deferred retirement account.
This enables growth to continue in your portfolio based on an ever larger amount of money, and with only minimal tax consequences along the way.
Naturally, TLH is available only on taxable accounts (it’s not necessary for tax-sheltered retirement accounts like IRAs).
But Wealthfront doesn’t stop at TLH when it comes to income tax considerations. They also have their Tax-Optimized Direct Indexing accounts (see below), that also use individual stocks to provide greater tax loss offsets. And for all accounts, they make use of index funds, which are tax efficient since they have very little stock turnover that might generate short-term capital gains tax liabilities.
Intelligent Dividend Reinvesting. This is another type of tax favored investing. Wealthfront uses dividends to help rebalance your portfolio. That minimizes the need to sell one type of asset in order to reallocate funds to another asset class. Fewer asset sales, means fewer capital gains generating events.
Wealthfront Tax-Optimized Direct Indexing Portfolios
Beyond their regular investment accounts, Wealthfront also offers three other managed portfolios that are designed to further reduce your income tax liability from your investing activities. And once again, these portfolios are available only for taxable accounts. As mentioned above, these portfolios use individual stocks in order to create more tax saving investment activity.
The three Tax-Optimized Direct Indexing Portfolios include:
- Wealthfront 100. This portfolio is available for accounts that have a minimum balance of at least $100,000. The portfolio includes the stocks of up to 100 of the largest US companies. It then adds positions in the Vanguard Extended Market ETF (VXF) and the Vanguard S&P 500 ETFs (VOO) to provide a representation of smaller companies.
- Wealthfront 500. This portfolio is available for accounts that have a minimum balance of at least $500,000. The portfolio includes the stocks of as many as 500 individual large companies, as well as positions in the Vanguard Extended Market ETF (VXF) representing non-S&P 500 companies, which means smaller companies.
- Wealthfront 1000. This portfolio is available for accounts that have a minimum of $1 million. This portfolio uses up to 1,000 stocks in large companies, and the Vanguard Small-Cap ETF (VB) to represent small-capitalization stocks.
These portfolios give Wealthfront investors a built-in advantage over the single portfolio option available with most other robo-advisors. It means that you will have additional investment options available as your portfolio grows.
Wealthfront Path – Help Setting Your Investment Goals
Wealthfront Path is a tool that enables you to determine what you’ll need to do and how long it will take for you to reach specific investment goals. You can run different scenarios to see how each will work and to help you to determine the best way forward.
Path also incorporates Wealthfront’s Portfolio Review, which is designed to analyze outside investment accounts and provide a set of data-driven recommendations to improve your rate of return in those accounts.
The tool analyzes account fees, including total annual expenses, which include advisory fees, transaction fees, and product fees. It also measures the tax efficiency of taxable accounts to minimize your tax liability in the account, as well as the diversification of each account.
The most interesting analysis is what is referred to as “cash drag”. That’s the amount of excess cash held in an investment account beyond what is needed to cover short-term liquidity needs in the account. It can help you to determine if a particular investment account is actually fully invested, or if it’s holding unnecessary amounts of idle cash.
This gives you the ability to take a big picture view of your entire investment situation, even beyond your Wealthfront account, and enable you to coordinate all investments to work for the best possible return.
Will Wealthfront Work for You?
Wealthfront is without a doubt one of the very best robo-advisors available. If you are looking for professional investment management, the kind that can provide you with a completely hands-off investment experience – at a very low cost – Wealthfront is the platform.
What’s more, with its comprehensive tax-efficient investing strategy, including tax loss harvesting, Wealthfront offers perhaps the most sophisticated investment portfolio management available to the average investor.
The fact that Wealthfront manages the first $10,000 in your account completely free makes it a natural choice for new and small investors, especially since they require an initial minimum deposit of just $500.
Still another area where Wealthfront stands out is that its basic portfolio offers exposure to natural resources, particularly energy. Since most robo-advisors invest only in the broader stock market, this sector offers a specialized asset class, that could be particularly valuable in certain types of markets.
If you are looking for comprehensive, sophisticated investment management at a low-cost sign-up for Wealthfront now.