With over $12 billion under management, Wealthfront is one of the largest automated investment service firms or robo advisors. Its impressive team of PhDs, led by a legendary Dr. Burton Malkiel, has developed academically proven investing strategies that were created to help investors reach their financial goals.
Their focus is on passive investing, using ETFs and they see this approach as a superior to stock picking. Financial planning is also important for Wealthfront, because it wants to create diversified portfolios that balance the client’s risk tolerance and financial goals.
Before investing your money, the robo-advisor asks you a set of questions to find out what are your goals and to determine your risk tolerance. Based on your answers it gives you a risk score from 1 to 10 and it recommends the best investment plan for you.
Pros of Wealthfront
Wealthfront boasts a low-cost and features to help you reach your financial goals, whether you’re saving for college, investing for retirement, or planning a getaway.
Low cost investing
Wealthfront doesn’t charge you trading commissions and fees for investing your money. They say that they compound over time and decrease your returns. For their services, they only charge a 0.25 percent advisory fee. Since Wealthfront uses ETFs for their strategies, it is necessary to check the expense ratio of an ETF. An average expense ratio for Wealthfront-selected ETFs is 0.09 percent.
Wealthfront launched free financial planning in December 2018. Now, when you download the Wealthfront mobile app, you can choose to get started by building a financial plan — without any cost or obligation — before opening an investment account.
Short-Term Cash Management
In February 2019, Wealthfront launched their Cash Account which allows clients to place their cash in a secure place for savings, emergencies, or for investing. The account currently has a 2.51% APY with an easily-accessible $1 minimum. The account charges no fees, has unlimited and free transfers, and is covered by FDIC insurance up to $1 million.
Wealthfront also offers a Portfolio Line of Credit (PLOC) which gives you easy access to your long-term investments. If you have an account of at least $100,000 invested in a taxable account, you automatically have a PLOC. You can access this cash quick, easy, and at a low rate for trips, bills, or unexpected expenses. Clients can get up to 30% of their account value (in some cases, in less than 24 hours) with no credit check or paperwork.
Achieve your personal goals
When you know what you want, it makes a financial advisor’s job much easier. A person who wants to maximize gains should not have the same investment strategy as a person who wants to minimize losses. People react differently to losses and those who can’t handle a loss should not have exposure to volatile assets.
Wealthfront offers free financial planning powered by their automated advice engine, Path. Path helps you figure out your saving and spending habits and it asks you a set of questions to create the best investment plan for you. It also automatically rebalances your portfolio and invests dividends. As time goes by, you can track your progress and see how is your financial plan leading you towards achieving your goals.
The robo-advisor can help you plan for a retirement, a new home, college savings, traveling or it can just invest your savings. It lets you open an individual account, a joint account, a trust, a 529 College savings or a traditional IRA, Roth IRA, SEP IRA, 401(k) Rollover.
Time-tested and academically proven investment strategies
Like most of the automated investment advisors, Wealthfront uses Modern Portfolio Theory to create optimal portfolios. Its strategies depend on your goals, but they are based on academic research. To create your portfolio, the robo advisor will first identify a set of asset classes that should work the best for you.
It will consider a historical behavior and risk-reward relationship for every asset class. They can be bonds, the U.S. stocks, the emerging markets stocks, the foreign stocks and similar. When the appropriate asset classes are identified, the system selects the most suitable ETFs for them.
After that, it applies the Modern Portfolio Theory to create asset allocations and then it determines your risk tolerance to select the asset allocation suitable for you. After everything is set, the system will monitor and periodically rebalance your portfolio.
Tax-Loss Harvesting was one of the first Wealthfront’s services. When an ETF declines in value, the system is going to sell the ETF if it meets certain thresholds. The sold ETF is replaced by another highly correlated ETF and you can use the realized loss to lower your overall tax bill, while maintaining your exposure. Wealthfront’s tax efficient passive investment strategy is called PassivePlus® and includes:
- Tax-Loss Harvesting: Daily ETF level tax-loss harvesting takes advantage of movements in the markets to capture investment losses, which can reduce your tax bill. This service is available for no extra cost.
- Stock-level Tax-Loss Harvesting: This enhanced form of tax-loss harvesting looks for movements in individual stocks within the U.S. stock index to harvest more tax losses and lower your tax bills more. This comes at no extra cost to taxable accounts over $100,000.
- Risk Parity: This methodology allocates capital across multiple asset classes and is also known as mean-variance optimization. It is much like Modern Portfolio Theory but has generated better returns. It is available for an additional 0.03% to taxable accounts over $100,000.
- Smart Beta: This investment feature is designed to increase your expected returns. This is accomplished by weighing the securities that make up your portfolio in a more intelligent manner. This is available for no extra cost for taxable accounts over $500.000.
Ease of use
Not only is Wealthfront easy to use because it guides your financial decisions, the platform itself is user-friendly and intuitive. Wealthfront can be accessed from desktop, mobile, and the web. Colorful and easy-to-consume graphs, charts, and tables are scattered around the platform, showing off your financial progress.
As you can see, Wealthfront’s mobile application allows you to switch between your financial goals so you can seamlessly check the progress on your retirement portfolio and real estate goals. Users are able to link all external financial accounts to the app – so gone are the days switching between your bank and other investing applications. You can also add and transfer money directly on the mobile app.
However, you can’t change your risk tolerance score when you’re on the go. You’ll have to log-in on your computer to change it. The application is available on the Apple Store and Google Play.
Clients who recommend Wealthfront to other people get lower advisory fees. For each new recommended client, you and your referral will have no fees on $5,000 of your money.
Cons of Wealthfront
While Wealthfront is a pretty great robo advisor, it does fall flat in one area: allowing the sale of partial investments.
Doesn’t allow you to be invested 100 percent
Wealthfront doesn’t use fractional shares, so when you are left with an amount of money that is not enough to buy a full share, that money is not going to be invested. It will stay on the account as cash. The projected amount of fees that you are going to owe to Wealthfront over a year is also going to stay as cash on the account.
If you are not confident enough or if you don’t have enough knowledge to invest your money on your own, it is smart to have a professional do the work. But, you must make sure that the investment strategy is going to help you achieve your financial goals. Wealthfront does just that. It has automated both financial planning and investing in order to create suitable investment strategies for its clients. It uses a passive investing approach, which requires patience when the market is going against you. Wealthfront’s team of experts believe that if you invest in a diversified portfolio of low-cost ETFs, you have a better chance for a success than if you opt for an active investing approach and stock picking.