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.
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:
Refer below for Wealtfront’s current list of primary and secondary ETFs.
For more information on Wealthfront’s investment methodology, you can refer to their relevant white paper here.
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.
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.
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:
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.