FutureAdvisor Review

FutureAdvisor operates a ‘freemium’ business model, where it offers you free portfolio recommendations and account, however if you wish for FutureAdvisor to manage your accounts directly, then you will have to pay for its premium service.

FutureAdvisor does not hold brokerage accounts directly but does so through Fidelity and TD Ameritrade.

Investment Methodology

FutureAdvisor’ investment methodology is based on Modern Portfolio Theory. The premise behind this theory is: you can’t beat the market so you should instead create a long term broadly diversified portfolio that maximizes return for the lowest level of risk.

About FutureAdvisor Inc.

FutureAdvisor is a robo-advisor based out of San Francisco, California.

Founded In: 2010 by

Founders: two former Microsoft employees

Assets Under Management: as of its latest SEC filing has approximately $969m

While it was originally owned by a mix of venture capital firms, it was acquired by BlackRock Inc., the world’s largest asset manager, in 2015.

Based on the time period from July 2013 to Dec 2016 (no backtesting), FutureAdvisor’s clients, split by age group from 30s to 60s, have obtained cumulative returns ranging from 17.3% to 27.0%. FutureAdvisor does also show backtested performance from the 2005 period on their site.

futureadvisor review

Figure 1: Return for FutureAdvisor's 30s age group clients

FutureAdvisor invests in low-cost Exchange Traded Funds (“ETF”), similar to most other robo-advisors. Currently, it invests in stocks, fixed income, and real estate. FutureAdvisor has not publicly disclosed the exact list of ETFs it uses to represent each asset class; however here are some of the ETFs that it has publicly disclosed.

futureadvisor review
futureadvisor review

Getting Started

To begin, you will first have to create an account with a simple password and email address. From there, you will receive a welcome email from FutureAdvisor and followed by a risk tolerance questionnaire. Questions include your age, annual income, marital status, number of children, planned retirement age, and personal risk tolerance level. After filling out the questionnaire, you will be able to link your investment accounts to the FutureAdvisor platform, where it will rank your account holdings based on their 9 ‘best practices’. You will also be given the option to open and directly fund an account instead.

futureadvisor review

Figure 2: Sample best practices comparison

Accounts Available

You can open the following directly-managed accounts at FutureAdvisor: Traditional, Roth, Rollover, and SEP IRAs, Coverdell, 529, UTMA, as well as individual and joint taxable accounts. If you have any 401(k) accounts on the Fidelity platform enabled with BrokerageLink, FutureAdvisor can manage those as well.

Minimum Account Balances

For FutureAdvisor’s direct management premium services, the account minimum is currently $10,000.

Account Fees

For its direct management accounts, FutureAdvisor charges a 0.50% annual management fee, billed on a quarterly basis. FutureAdvisor also advises that some trading commissions may be incurred (although over 90% of its ETFs charge no commissions) as well as embedded ETF expense ratios. All-in-all, FutureAdvisors estimate that total costs, including management fees, average 0.65% annually.

Main Account Features

  • Free Recommendations
  • Automated Portfolio Rebalancing
  • Daily Tax-Harvesting
  • Access to Financial Advisors

Free Recommendations

If you’re a DIY investor who doesn’t want to pay any management fees to FutureAdvisor, you can still take advantage of FutureAdvisor’s portfolio recommendations indefinitely and execute the trades yourself through your own respective brokerages.

Note: If you’re over the age 68, you are unfortunately ineligible to use FutureAdvisor’s premium services.

Automated Portfolio Rebalancing

FutureAdvisor’s algorithm looks for rebalancing opportunities in its directly managed accounts on a daily basis. The algorithm utilizes market-based rebalancing, instead of calendar-based rebalancing, meaning that your portfolio is rebalanced as needed. Inflows and outflows such as dividends, deposits, and withdrawals are used for ‘mini-rebalancing’ purposes while regular rebalancing is done based on portfolio drift; how much your portfolio’s current allocation differs from its target allocation. FutureAdvisor has stated that on average, your portfolio will be rebalanced 4 – 6 times a year. You also have the option to request to ‘lock in’ certain specific investments (your favorite stock, for example) by contacting FutureAdvisor directly.

Daily Tax-Harvesting

Tax harvesting is a tax deferral strategy whereby realized losses on investments are used to offset realized gains or ordinary income. Depreciated assets are sold to obtain the realized loss while at the same time a correlated asset is purchased to maintain the overall portfolio risk and allocation levels. There are no minimum balances required to use this service; you can use it as long as you are a premium client. However, FutureAdvisor has stated that generally speaking, its daily tax-loss harvesting is useful for accounts with balances of $20,000 and above.

Access to Financial Advisors

If you think the robo-advisory industry can be a little too impersonal for your liking, then FutureAdvisor has added back in a human element; something that makes it stand out from the robo-advisory crowd. You will have access to FutureAdvisor’s financial advisory team via chat, email, or phone, Monday to Friday, from 1130 AM to 8 PM Eastern. We should specify that this does not equate to a dedicated financial advisor for each account although FutureAdvisor’s human advisory team does monitor all managed trades in addition to the company’s algorithm.

Who is FutureAdvisor Suitable For?

If you’re the sort of long-term investor who wants a ‘set it and forget it’ kind of portfolio, then FutureAdvisor may be for you. If you want to create a broadly diversified portfolio based on Modern Portfolio Theory but don’t feel like paying FutureAdvisor’s management fees, then you can make use of their free investment advice and recommendations. Also, since many robo-advisors are yet to offer 401(k) accounts, if you have 401(k) accounts on the Fidelity platform, you can also benefit from FutureAdvisor’s services.

P.S. If you’re looking to beat the market by investing in specific securities or through market timing; then FutureAdvisor, or any robo-advisor, is definitely NOT for you.

TradeKing Advisors Review

About

TradeKing Advisors Inc,. (“TradeKing Advisors”) is the SEC-registered investment advisory arm of TradeKing, a discount online brokerage firm. TradeKing itself, headquartered in Fort Lauderdale, Florida, was launched in 2005 while TradeKing Advisors was formed in 2014. TradeKing Advisors still only maintains a small market share in the industry, with its latest SEC filing indicating just $15.6m in assets under management.

TradeKing Advisors is partnered with Ibbotson Associates a subsidiary of Morningstar, Inc., for the purposes of providing the risk tolerance questionnaire, creating and providing model portfolios, the initial selection of the funds in each model, as well as reviewing and updating the allocations and underlying funds of each portfolio. TradeKing Advisors also does not hold its clients brokerage accounts directly, but does so through the Apex Clearing Corporation.

Investment Methodology

TradeKing Advisors’ investment methodology is based on Modern Portfolio Theory, which aims to create a broadly diversified portfolio that maximizes the return-to-risk ratio. Based on backtesting from the 2011 to Q12016 period, TradeKing Advisors has released the following data regarding the performance for its Core portfolios.

tradeking advisors

Just like most robo-advisors, TradeKing Advisors invests in low-cost Exchange Traded Funds (“ETF”) however, it also invests in Exchange Traded Notes (“ETN”) to represent the different asset classes. Currently, TradeKing Advisors invests in stocks, fixed income, and real estate. The ETFs that TradeAdvisors uses to represent each asset class are as follows:

Asset Class ETF
US Stocks Vanguard Total Stock Market ETF (VTI) Vanguard Value ETF (VTV) Vanguard Mid-Cap ETF (VO) Vanguard Mid-Cap Value ETF (VOE) Vanguard Small-Cap ETF (VB) Vanguard Small-Cap Value ETF (VBR)
International Stocks Vanguard FTSE Developed Markets ETF (VEA) iShares MSCI EAFE Small-Cap ETF (SCZ) Vanguard FTSE Emerging Markets ETF (VWO)
US Bonds Schwab U.S. TIPS ETF (SCHP) SPDR Barclays High Yield Bond ETF (JNK) Vanguard Total Bond Market ETF (BND) Vanguard Short Term Bond ETF (BSV)
International Bonds iShares Emerging Markets Bond ETF (EMB)
Real Estate SPDR DJ Global Real Estate ETF (RWO)

Getting Started

To begin, users will have to fill out a questionnaire which asks for details on age, goals (wealth building, retirement, or saving for a major purchase), investment time horizon, risk tolerance, liquid assets, and initial investment amount. From there, TradeKing Advisors will give you a recommended portfolio allocation; an example is given below:

tradeking advisors

Figure 1: My recommended portfolio allocation

From there, users can proceed to fill in their details and fund their account.

Accounts Available

TradeKing Advisors offers a wide variety of accounts: Individual, Joint, Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, SIMPLE IRA, Beneficiary IRA, Beneficiary Roth IRA, Custodial and Coverdell. It also offers the following entity accounts: Trusts, Corporate, LLC, Partnership and Sole Proprietorship.

Minimum Account Balances

While there are no account minimum balances, TradeKing Advisors require a $500 minimum balance in order to begin building a Core portfolio for you. Momentum portfolios have an even higher minimum balance of $5,000.

Account Fees

For its Core portfolios, TradeKing Advisors charges an advisory fee of 0.25% annually, charged monthly, for balances of $5,000 and up. For balances of $4,999 and below, the fee is $1/month (which translates to an annual rate of 0.24% and up). Momentum portfolios incur a higher advisory fee of 0.50% annually.

Clients will also incur embedded ETF costs, however TradeKing Advisors has not publicly provided the average expense ratios of its ETFs.

Main Account Features

• Automated Portfolio Rebalancing

• Core and Momentum Portfolios

• Risk Assist

Automated Portfolio Rebalancing

As with most robo-advisors, portfolios are rebalanced during inflows and outflows such as from receipt of dividends, deposits, and withdrawals. TradeKing Advisors generally states that its portfolios are rebalanced ‘as needed’. Customers may also find some cash in their portfolios as TradeKing considers it as a small part of the allocation, depending on risk tolerance, and also uses it to automatically cover the relevant account fees.

We should also note that unlike most robo-advisors, where users are able to alter the portfolio allocation and risk tolerance level through the online interface, TradeKing Advisors require that clients contact its client services desk in order to perform such a task.

Core and Momentum Portfolios

In addition to its main Core portfolios, TradeKing Advisors also offers a Momentum portfolio, which is a more actively-managed portfolio. Both the Core and Momentum portfolios offer 5 different risk tolerance levels, being:

• Conservative

• Moderate

• Moderate Growth

• Growth

• Aggressive Growth

Momentum portfolios aim to capture the market’s momentum, and thus, this type of portfolio is reviewed on a monthly basis in response to the movement of the markets. This means that the portfolio is rebalanced not only according to target allocation but also according to market fluctuations.

Note: As of this writing, it appears that TradeKing Advisors has removed all mention of Momentum portfolios on their site; we advise that prospective customers consult directly with a customer service representative to check whether Momentum portfolios are still offered.

Risk Assist

This is an additional feature available to TradeKing Advisors’ Core portfolios which have a minimum balance of $5,000 and for an additional management fee of 0.50% annually (bringing the total fee to 0.75% annually). When this feature is activated, a client’s portfolio will automatically shift from more volatile asset classes such as equities toward safer asset classes such as bonds and US Treasuries during periods of market distress. When the market recovers, the allocation will gradually shift back towards equities. While this is a useful feature for shorter-term investors, investors with a long-term horizon may not consider this feature to be of much value, particularly given that management fees will be effectively tripled.

Who is TradeKing Advisors Suitable For?

As with most robo-advisors, TradeKing Advisors is suitable for passive long-term investors. Investors looking to beat the market via market timing or stock picking should not use its services or the services of robo-advisors in general.

As TradeKing Advisors does not offer any tax-harvesting features; something which most other robo-advisors offer, individuals with taxable accounts may want to look elsewhere. That said, TradeKing Advisors does offer a wide range of business accounts that most robo-advisors do not, making it one of the few options available for businesses.


Wealthfront Review

About

Wealthfront Inc. (“Wealthfront”) is an SEC-registered automated investment service firm, known colloquially as a ‘robo-advisor’. Based out of Redwood City, California, Wealthfront was founded in 2008 and as at end-2016, has approximately $4.7 billion in assets under management.

Wealthfront does not hold its clients brokerage accounts directly, but does so through the Apex Clearing Corporation.

Investment Methodology

Wealthfront’s investment methodology is based on Modern Portfolio Theory, which emphasizes the benefits of portfolio diversification based on asset class allocation rather than individual security selection. Its Chief Investment Officer is Dr. Burton Malkiel, author of popular investment book A Random Walk Down Wall Street reflects the Efficient Market Hypothesis; which is consistent with Modern Portfolio Theory.

To that end, Wealthfront invests its clients’ funds in low-cost index-based Exchange Traded Funds (“ETFs”) that represent each asset class. Currently, Wealthfront invests in the following 11 asset classes:

wealthfront review

Refer below for Wealtfront’s current list of primary and secondary ETFs.

Primary ETFs

wealthfront review

Secondary ETFs

wealthfront review

For more information on Wealthfront’s investment methodology, you can refer to their relevant white paper here.

Getting Started

Since Wealthfront is a purely automated service, it customizes its advice to its clients via a risk tolerance questionnaire that has to be completed prior to opening an account. The questionnaire covers investment objectives, pre-tax income, net worth, age, and behavior during a market downturn. The questionnaire is very basic and covers only 8 questions. Based on your answers, Wealthfront will generate a risk tolerance score and recommended portfolio allocation; below is one example.

wealthfront review

Accounts Available

Currently, Wealthfront offers the following accounts to its clients: Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, trusts, non-profit, individual, joint, and 529 College Savings Plan.

Minimum Account Balances

Wealthfront’s current account minimum balance is $500 with a minimum withdrawal amount of $250.

Account Fees

Wealthfront charges zero fees for the first $10,000 invested by a client and a 0.25% annual advisory fee (charged monthly) on amounts over $10,000. Clients also incur embedded ETF fees which vary from fund to fund, although Wealthfront estimates an average annual ETF fee of 0.12%.

Note: Wealthfront also has a referral program, known as the Wealthfront Invite Program which waives advisory fees of an additional $5,000 in assets per referral for both the referrer and the referral.

Main Account Features

• Automated Portfolio Rebalancing

• Daily Tax-Loss Harvesting

• Tax-Optimized Direct Indexing,

• Single Stock Diversification Service

• Portfolio Review

Automated Portfolio Rebalancing

Wealthfront’s software automatically rebalances its clients’ portfolios based on how much the movement of an asset class causes a drift in a portfolio’s target allocation. Once a certain threshold is breached, the client’s portfolio is automatically rebalanced. Rebalancing is not based on time.

Daily Tax-Loss Harvesting

This is a feature that Wealthfront offers to all its clients with taxable accounts; it is not available to IRA accounts as gains and losses on those accounts are tax-deferred. The idea behind tax-loss harvesting is that by selling investments that have declined in value at a loss, clients can write-off that loss from their taxable income. Further, clients can replace those sold investments with a highly correlated alternative investment, resulting in a portfolio with an unchanged risk and return profile but with additional tax savings.

While this service is offered by traditional financial advisors, typically at the end of the year; Wealthfront’s software is able to check for such opportunities on a daily basis. Based on historical data between 2000 and 2011, Wealthfront has estimated that this service is able to increase after-tax returns by over 1.55% annually.

Tax-Optimized Direct Indexing

This feature is the more advanced and comprehensive version of the daily tax-loss harvesting feature and is available for clients with account balances over $100,000. Instead of investing a client’s money in the stock market ETFs listed above, Wealthfront will use direct indexing instead meaning that it will directly purchase up to 1,001 securities on the investor’s behalf (consisting of 1,000 stocks from the S&P500 andS&P1500 indices plus one ETF of smaller companies). Wealthfront currently offers 3 levels of direct indexing, with each threshold based on account balances. They are:

Wealthfront100 (WF100) – For accounts between $100,000 and $500,000. The Vanguard Total Stock Market ETF is replaced by up to 100 of the largest capitalization stocks from the S&P500 index plus the combination of the Vanguard Extended Market ETF (VXF) and the Vanguard S&P 500® ETFs (VOO) to represent the remaining smaller-capitalization companies.

Wealthfront500 (WF500) – For accounts between $500,000 and $1 million. The Vanguard Total Stock Market ETF is replaced by up to 500 stocks from the S&P500 index plus the Vanguard Extended Market ETF for non-S&P500 smaller capitalization companies.

Wealthfront1000 (WF1000) – For accounts above $1 million. The Vanguard Total Stock Market ETF is replaced by up to 1,000 of the largest capitalization stocks from the S&P1500 Index plus the Vanguard Small-Cap ETF for the smaller capitalization companies.

Since this feature allows for the broad market US stocks ETF to be replaced by many individual securities, the opportunities for tax loss harvesting is much greater (Index Funds and ETFs are legally prohibited by The Investment Company Act of 1940 from passing on tax losses to investors). In addition, this feature also eliminates the management cost associated with the Vanguard Total Stock Market ETF. Overall, Wealthfront estimates that tax-optimized direct indexing can add as much as 2.03% to annual investment performance (figure is for the WF1000; estimates are 1.77% and 1.88% for the WF100 and WF500, respectively).

For detailed information on their methodology, refer to Wealthfront’s white paper here.

Single Stock Diversification Service

This is a service that Wealthfront offers to employees of select publicly-listed companies whose net worth may be significantly tied up to stock options. This service creates a personalized selling plan for each employee based on stock holdings, short-term financial needs, and longer term outlook. The stock is then transferred to Wealthfront according to said plan; Wealthfront will set aside cash proceeds from each sale to cover taxes payable. Currently, this service is only applicable to employees of the following companies:

wealthfront review

Portfolio Review

This is a free portfolio analysis tool that Wealthfront makes available to all people with accounts at most brokerage firms. Portfolio review analyzes investors’ portfolios at other brokerages based on 4 factors: fees, taxes, cash drag, and diversification; it then makes recommendations based upon said analysis. Of course, the idea behind this tool is to encourage people into making the switch to Wealthfront.

You can find a detailed analysis of their portfolio review methodology in their white paper here.

Who is Wealthfront Suitable For?

Wealthfront is recommended for long term passive investors who are looking to create a diversified investment portfolio. As active portfolio management via individual security selection is in opposition to Wealthfront’s investment methodology, Wealthfront is not suitable for investors looking to beat the market by investing in specific securities or through market timing. Individuals with over $100,000 to invest will also benefit from its Tax-Optimized Direct Indexing service, a feature not offered by many other robo-advisors.


Betterment Review

About

Betterment Inc. (“Betterment”) is an SEC-registered automated investment service firm, or ‘robo-advisor’ based out of New York. It was founded in 2008 and as at end-October 2016, has approximately $6.1 billion in assets under management, making it the largest in the business.

Betterment does not hold its clients brokerage accounts directly, but does so through the Apex Clearing Corporation.

Investment Methodology

As with most robo-advisors, Betterment’s investment methodology is based on Modern Portfolio Theory , which states that a broadly diversified investment portfolio allows for maximum return for a given risk level. Betterment estimates that its methodology will be able to excess returns of 4.30% over that of an average investor over a 20 year period.

As such, Betterment does not invest in individual securities but in low-cost index-based Exchange Traded Funds (“ETFs”) that represent each asset class. Currently, Betterment only invests in stocks and bonds using the following ETFs; note that the ETF selection differs depending on whether the account is taxable or is an IRA.

Taxable Accounts

Betterment Review

IRAs

Betterment Review

Getting Started

To begin, users will have to fill out their age, annual pre-tax income, and status (retired or employed). From there, Betterment offers 3 recommended portfolio allocations:

Safety Net – 60:40 stocks to bonds allocation. A conservative portfolio that Betterment recommends as a superior alternative to a cash savings account. It is designed to beat inflation while including a 30% buffer that allows for as much as a 23% decrease in value over 5-years while still preserving the minimum balance.

Retirement – Recommended allocation changes according to age; starts at a high 90% recommended stock allocation that begins decreasing after age 48 until it reaches a 56% recommended stock allocation at retirement then a continued reduction thereafter.

General Investing – For general growth and preservation of capital. Recommended stock allocation begins at 90% until age 45 and thereafter decreases until a 55% recommended stock allocation at age 65; it remains at that allocation thereafter.

You can also go deeper into each goal to see their recommended allocation on a per-ETF basis. An example is presented below.

Betterment Review

Accounts Available

Currently, Betterment offers the following accounts to its clients: Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, trusts, non-profit, individual, joint, and 401(k).

Minimum Account Balances

Betterment’s currently has no minimum amounts for account balances or withdrawals.

Account Fees

Betterment has 3 fee tiers based on the average account balance. Fees are charged at the end of each quarter. They are:

$1 - $9,999: 0.35% annual fee with a $100 monthly recurring deposit required. Without the recurring deposit, fees are $3/month instead.

$10,000 - $99,999: 0.25% annual fee.

$100,000 and up: 0.15% annual fee.

On top of the above fees, clients will also have to pay embedded ETF fees as well, which Betterment states averages 0.13%.

Note: Betterment has a referral program which gives you 30 days free with each referral with said referral receiving 6 months free. Upon your third referral, you get a bonus 1 year free.

Main Account Features

• Automated Portfolio Rebalancing

• Tax Impact Preview

• Daily Tax-Loss Harvesting

• Tax-Coordinated Portfolio

• RetireGuide

• SmartDeposit

Automated Portfolio Rebalancing

Betterment’s software automatically rebalances its clients’ portfolios based on portfolio drift, meaning the degree that the movement of an asset class causes a drift in a portfolio’s target allocation. A client’s portfolio is automatically rebalanced whenever there is an inflow or outflow; Betterment also allows its clients to keep tabs on the level of portfolio drift and gives clients the option of making deposits to further reduce the level of drift. And because Betterment can buy fractional shares in an ETF, the cash flows can be allocated precisely.

Even without cash flows, Betterment can reduce portfolio drift by selling overweight assets in a client’s portfolio and buying the underweight assets. This method is triggered at a portfolio drift level of 3%. Clients can also elect to turn off automated rebalancing if they so choose and can also alter their desired target allocation at any time.

Tax Impact Preview

The selling of securities by a client, such as when altering the target allocations of a portfolio can often result in unexpected taxes payable. This tool, available on all accounts, gives an estimate (based on highest applicable tax rates, so it is an upper-bound estimate) of the potential tax impact a transaction will have. An example of how the tool works is shown below.

Daily Tax-Loss Harvesting

Tax loss harvesting is a tax deferral strategy whereby capital losses from selling a depreciated asset is used to offset capital gains while also purchasing a similar correlated asset to one that has been sold. This maintains the portfolio at the targeted allocation level while generating tax savings. This feature is fully automated by Betterment and is available to all taxable accounts.

Betterment uses what it calls its proprietary Parallel Position Management system to facilitate tax loss harvesting and it estimates that based on back-testing from the 2000 to 2013 period that its system would have provided an additional 0.77% to an investor’s after-tax returns.

For a more detailed explanation, you can refer to Betterment’s tax-loss harvesting white paper here.

Tax-Coordinated Portfolio

Betterment’s Tax-Coordinated Portfolio is another tax efficiency optimization feature that makes use of asset location. This strategy takes advantage of different tax treatments between taxable and IRA accounts. As a basic example, consider an investor with a 70:30 stock to bonds allocation with a taxable, traditional IRA, and a Roth IRA account. In a non-tax coordinated portfolio, each of those three accounts would follow the same 70:30 allocation, bringing the overall portfolio allocation at 70:30.

However, by using asset location, Betterment alters the allocation mix between the accounts such that each of the three accounts would not have a 70:30 allocation individually however the overall portfolio allocation would still maintain a 70:30 allocation. In this manner, Betterment estimates that a typical investor would have an estimated annualized benefit of 0.48% across the entire portfolio over a 30-year horizon, equating to a 15% more after-tax return available in retirement.

For detailed information on their methodology, refer to Betterment’s white paper here.

RetireGuide

RetireGuide is a series of questionnaires that Betterment posts in order to provide its clients an idea of how on-track or off-track they are with their retirement goals. The main goal it tracks is the planned retirement age of the client and their desired annual spending in retirement. It then presents a probability of the client’s portfolio in reaching said goal. An example is provided below and you can access their full RetireGuide methodology here.

Betterment Review

SmartDeposit

This is an auto-deposit feature that automatically transfers money from client’s bank account to their Betterment portfolio. The feature allows customers to set a maximum amount they want in their checking account as well as the maximum amount per deposit. The difference between the current bank account balance and the maximum checking account balance will then automatically be transferred to Betterment up to the maximum amount per deposit limit.

Who is Betterment Suitable For?

As an automated investment advisor based on Modern Portfolio Theory, Betterment is suitable for investors with a longer term outlook who are not looking for active portfolio management. Investors who believe in beating the market through market timing or active security selection should not invest with Betterment. Investors with account balances of over $100,000 will also incur very low levels of management fees and will also likely be able to take better advantage of its Tax-Coordinated Portfolio if said balances are spread across multiple taxable and IRA accounts.


WiseBanyan Review

About

WiseBanyan Inc. (“WiseBanyan”), founded in 2013, is an SEC-registered automated investment service firm, or ‘robo-advisor’ based out of Las Vegas, Nevada. It is one of the smallest robo-advisors in the industry, with assets under management totaling only approximately $49m, according to its latest filing with the SEC.

WiseBanyan’s unique selling point is that it is the “world’s first free financial advisor”, and thus does not charge any management fees. However, it does charge a fee for its premium services, such as tax-loss harvesting (refer to our “Account Fees” section below). The philosophy behind this business model is incentives alignment; without management fees WiseBanyan is not incentivized to encourage its clients to continuously increase their account balances. However, this has raised questions about whether or not WiseBanyan’s business model is sustainable in the long term.

WiseBanyan does not hold its clients brokerage accounts directly, but does so through the Apex Clearing Corporation.

Investment Methodology

Just like all the robo-advisors, WiseBanyan’s investment methodology is based on Modern Portfolio Theory, which targets a broadly diversified investment portfolio which allows for maximum return for a given risk level over individual security selection. WiseBanyan estimates that based on backtesting from the 2003 to 2013 period that a WiseBanyan portfolio with moderate risk tolerance would have returned about 7.6%.

As such, WiseBanyan invests in low-cost index-based Exchange Traded Funds (“ETFs”) that represent three main asset classes: stocks, bonds, and real estate. The list below shows the primary ETFs that WiseBanyan uses for each asset class at the top followed by the secondary and tertiary ETFs that it uses when the WiseHarvesting feature is activated.

Asset Class ETF Expense Ratio
US EquitiesVanguard Total Stock Market ETF (VTI) Schwab U.S. Broad Market ETF (SCHB) State Street SPDR S&P 500 ETF (SPY)0.05% 0.03% 0.11%
International Developed EquitiesVanguard FTSE Developed Markets ETF (VEA) Schwab International Equity ETF (SCHF) iShares MSCI EAFE ETF (EFA)0.09% 0.08% 0.32%
International Emerging EquitiesVanguard FTSE Emerging Markets ETF (VWO) iShares Core MSCI Emerging Markets ETF (IEMG) iShares MSCI Emerging Markets ETF (EEM)0.15% 0.16% 0.70%
US Corporate BondsiShares Investment Grade Corporate Bond ETF (LQD) Vanguard Intermediate-Term Corporate Bond Index ETF (VCIT)0.15% 0.10%
Short Term High Yield BondsState Street Global Advisors Barclays Short Term High Yield Bond Index ETF (SJNK) PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS) iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)0.40% 0.55% 0.50%
REITsVanguard REIT ETF (VNQ) iShares U.S. Real Estate ETF (IYR) iShares Cohen & Steers REIT ETF (ICF)0.10% 0.45% 0.35%
Short Term Corporate BondsVanguard Short-Term Corporate Bond ETF (VGSH)0.12%
US TreasuriesVanguard Intermediate Term Government Bond Index ETF (VGIT)0.12%
US Inflation Protected TreasuriesiShares Barclays TIPS Bond Fund ETF (TIP)0.20%

Getting Started

To begin, users will have to enter their email address on WiseBanyan’s page to receive an invite link. From there, you are taken to a short risk tolerance questionnaire which asks for your age, annual income, and net worth. From there you can select one of four ‘Milestones’ (refer to “Main Account Features” section below) followed by a several more risk tolerance questions.

wisebanyan review

Figure 1: My recommended allocation based on their 'Build Wealth' milestone

After the completion of the questionnaire, WiseBanyan will give you a recommended portfolio allocation and then take you to the deposit page. There it will request the amount of your initial deposit plus the amount of monthly auto-deposits you wish to select followed by the standard personal information.

Accounts Available

Currently, WiseBanyan offers only 4 types of accounts: Traditional IRA, Roth IRA, SEP IRA, and individual.

Minimum Account Balances

WiseBanyan’s currently has no minimum amounts for account balances or withdrawals; minimum deposit amount is $1.

Account Fees

WiseBanyan does not charge any management fees; the only fees that WiseBanyan charges are for its WiseHarvesting service which costs 0.25% annually capped at $20/month. This means that account balances over $96,000 can use this service for under the 0.25% rate.

As with all robo-advisors, clients will also incur the embedded ETF fees, which WiseBanyan estimates averages 0.12% annually. There are also various fees imposed by WiseBanyan’s broker-dealer for paper statements, wire transfers, and account closings; summarized below.

wisebanyan review
wisebanyan review
wisebanyan review

Note: WiseBanyan has a referral program which gives you $20 to yours and your referral’s account.

Main Account Features

• Automated Portfolio Rebalancing

• Milestones

• WiseHarvesting

• Auto-Deposit

Automated Portfolio Rebalancing

Client accounts are automatically rebalanced whenever there is an inflow or outflow of funds such as during deposits, withdrawals and receipt of dividends. By rebalancing during inflows and outflows, WiseBanyan is able to minimize the tax consequences to its clients. The portfolio is also automatically rebalanced (regardless of inflows or outflows) whenever any portion strays by more than 5% from the target allocation; the target allocation can be changed by the client at any time.

Milestones

This is WiseBanyan’s goal setting feature and clients can select a milestone during the account opening process. Currently, WiseBanyan offers 4 different milestones; while clients can create as many custom milestones as they wish, they are limited to one each for the other 3 types.

Rainy Day – This is the recommended beginner milestone. The idea behind this milestone is the creation of an emergency fund to cover unexpected expenses.

Retirement – Self-explanatory; this milestone is designed to assist in your retirement planning.

Build Wealth – The investment milestone for those without a specific goal in mind but just want to grow their portfolio in general.

Custom – Clients can set this milestone based on a target savings amount over a selected time horizon.

WiseHarvesting

This is WiseBanyan’s premium tax-loss harvesting service. Tax-loss harvesting is a tax deferral strategy whereby investment losses are used to offset income and investment gains. In addition, a similar correlated investment to the one sold at a loss is repurchased; maintaining the overall risk profile and target allocation of the portfolio. Through its software, WiseBanyan looks for such tax-loss harvesting on a daily basis. Depending on marginal tax rates and time horizons, WiseBanyan estimates that its WiseHarvesting feature can generate additional returns as summarized in the below table.

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We should also note that other robo-advisors, which charge a general account management fee, typically offer daily tax-loss harvesting at no additional charge.

For a detailed explanation, you may refer to WiseBanyan’s tax-loss harvesting white paper here.

Auto-Deposit

As the name implies, this is a simple auto-deposit feature that clients can choose to activate on a monthly or weekly basis. While the monthly deposit is the standard and is available during the account opening process, the weekly deposit allows for more dollar-cost averaging.

Who is WiseBanyan Suitable For?

As with most robo-advisors, WiseBanyan is suitable for passive long-term investors. Investors looking to beat the market via market timing or stock picking should not use its services. However since WiseBanyan currently does not charge any fees other than for its WiseHarvesting services, investors with non-taxable accounts will be able to take advantage of its services at practically no cost.