Wealthfront is the largest automated investing service, with over a $1 billion in managed funds. Although this is still a drop in the bucket—around a 0.1%, in market share of household investable assets—Wealthfront does lead the new breed of robo-advisers that have popped up in the last three years.
What is Wealthfront?
Wealthfront is a company that uses software to automate your choice of investments based on your tolerance to risk tolerance and modern portfolio theory. Modern portfolio theory states that trying to time the market and pick stocks is a fool’s errand. The smart move is to invest in a well-diversified portfolio based on a selection of asset classes chosen for their complimentary risk and return potentials.
Although ultra-wealthy people are unlikely to fire their wealth management advisers any time soon, software-based investing is a low-cost and efficient option for most people.
How does it work?
Once you register on Wealthfront’s website you are asked some simple questions to determine what type of investor your are. Then Wealthfront creates a portfolio of stocks, bonds and other asset tailored to your tolerance to risk.
There are six main assets Wealthfront uses to build your portfolio:
- Natural resources
- National stocks
- Foreign developed markets
- Emerging markets
- Real estate REITs
To keep costs and fees down, Wealthfront uses exchange-traded funds to benefit from the performance of a diversified portfolio without incurring the cost of having a human personal advisor or broker.
Wealthfont also offers customers with over $100,000 in assets complimentary tax-loss harvesting. This tax mitigation technique allows you to use any tax benefits you receive from investment losses to offset the taxes you owe on the investments that are profitable. This can add up to 1% more to your annual return.
Wealthfront’s is the automated investment service that is closest to reaching the volume of assets invested required to turn robo-advisers from a cute novelty into a viable long-term service with a chance of competing with human advisors.
Its investment team includes economists Burton Malkiel and Charles D. Ellis. Burton is a proponent of the efficient market hypothesis and author of the classic investment book A Random Walk Down Wall Street. Charles D. Ellis is the author of Winning the Loser’s Game. They are both rock stars in finance and economics and are ideally qualified to consult in the tailoring of ETF-based portfolios.
The design of Wealthfront’s platform is elegant and easy to use. I particularly like how you can keep your taxable and non-taxable accounts in separate portfolios.
The first $10,000 is managed for free and those who exceed that amount only have to pay a 0.25% fee.
If your assets come to less than $100,000, Wealthfront provides a competitive option to both financial advisers and other robo-advisers. But once you have more than $100,000 in assets, the fees are no longer as low as other robo-advisers, such as Betterment and SigFig.
Wealthfront also has a minimum of $5,000, which may be a deal-breaker for those who are just starting to save. This is important because competitors like SigFig and Betterment don’t require a minimum investment.
Is Wealthfront for you?
Wealthfront provides a low-cost way of creating a scientifically diversified portfolio that would either cost you a small fortune in financial advisor fees or take hours and hours of your time to set up.
The design, ease of use and special features, such as tax harvesting, make Wealthfront a solid choice.