The Modest Wallet is a free digital publication delivering its readers simple personal finance solutions. We regularly partner with brands that have products and services that will help our readers. Some of the links in this post are from our partners. How we make money.
Wealthfront is one of the biggest robo-advisor players in the United States with over $20B in assets under management (AUM) and a platform that serves more than 400,000 customers.
Wealthfront has been rated as a top robo-advisor by many personal finance sites. This credibility boost has allowed it to significantly increase its client base, and allowed it to emerge as a strong player in the investment management landscape.
Wealthfront’s Self-Driving Money™ philosophy claims to offer a way to optimize the way people use and invest their money, offering a wide range of money management products, including cash accounts, investment accounts, and retirement accounts.
Quick Summary: Wealthfront is one of the biggest robo-advisor players in the United States with over $20B in assets under management (AUM). Wealthfront offers a wide range of products, including cash, investment, and retirement accounts.
What is Wealthfront?
Founded in 2008, Wealthfront is a California-based investment management firm that provides robo-advisory services. These services (different from traditional in-person investment advice) work by using algorithms and artificial intelligence to determine the optimal portfolio allocation for each investor based on their financial goals.
In 2013, Wealthfront had only $97 million in assets under management, which means that in just 7 years, the firm has managed to attract more than $19B in capital from investors, which indicates that the industry of passive, long-term investing is evolving and growing at a fast pace.
Wealthfront’s value proposition consists of facilitating the task of managing their clients’ money by introducing a set of low-cost cash management and investment products that reduce the stress of overseeing the financial products they choose, while also optimizing their tax bill.
How Does Wealthfront Work?
Wealthfront products and services can be divided into four different segments:
Wealthfront banking products include a cash account that offers an estimated 0.35% annual percentage yield (APY), which according to the firm is at least five times higher than the national average, as tracked by the Federal Deposit Insurance Corporation (FDIC).
This account demands a $1 minimum deposit in order to be opened, but it does not charge a monthly service fee. Additionally, other important fees like withdrawal and debit overdraft, excess activity, and stop payment fees are also waived. Moreover, ATM transactions are also free on more than 19,000 selected ATMs.
This account enjoys a $1M protection from the FDIC, and it is provided by Green Dot Bank (Wealthfront is not a bank itself).
Wealthfront’s robo-advisory investment service works by following its PassivePlus® investment strategy, which focuses on low-risk and long-term passive investments that, according to the firm, can generate steady returns for investors over time.
Wealthfront also claims that replicating this strategy without their assistance would require around 900 trades per year, 150 hours of work, and nearly $6,000 in trading fees.
One of the most appealing elements of Wealthfront is their low-cost approach. They charge as little as 0.25% in annual advisory fees for the portfolios held with the firm, which they say is only a quarter of the industry average of 1%.
Additionally, the investor has to pay a fund fee that comes from the expense ratios of the financial instruments they use to build portfolios. This fee ranges from 0.06% to 0.13% of the balance of a portfolio.
At the time of writing, the minimum deposit required to open an investment account with Wealthfront is $500.
Wealthfront allows its investors to tap a credit line backed by their investment account, as long as they have an account balance higher than $25,000.
This credit line charges an interest rate between 2.45% and 3.70%, depending on the size of the account, and the application process only takes a few seconds — it can be completed by using Wealthfront’s mobile app.
The funds are commonly deposited within one business day, and clients can borrow up to 30% of their accounts, while repaying the loan on their own schedules.
It is important to note, however, that any significant decline in the value of an investment portfolio held by the client could result in the liquidation of some of their holdings to maintain a minimum cash equity as a protective measure for Wealthfront.
Planning products offered by Wealthfront aim to help clients achieve one of these four goals:
- Buying a home
- Retiring early
- Taking a vacation
- Saving for college
The firm’s algorithms are designed to estimate the long-term impact that different financial decisions may have on clients’ long-term goals. Different products overlap and are modified based on these moves.
For example, a client that decides to buy a home but has already set a retirement account with a certain goal will see their retirement goal’s progress modified after adjusting for the impact of taking a mortgage, or after withdrawing a certain amount to cover the downpayment of the property.
The homeownership planner calculates the impact and feasibility of buying a home based on a set of criteria that estimates the impact of the mortgage on the client’s budget and qualifies the purchase, depending on the result.
The early retirement planner estimates the amount that has to be put down and the size of the monthly contributions needed to achieve a certain goal, taking into account that the funds will be invested over time and that they will yield a certain return that will compound.
Finally, the vacation and college planning features allow the user to set certain goals, and based on the information provided, they also estimate the necessary monthly contribution to achieve it.
For its cash and investment accounts, Wealthfront offers both individual and joint accounts for customers who are 18 years old or older, as long as they have a valid Social Security Number (SSN). Trust accounts are also available.
For retirement accounts, Wealthfront provides a Traditional IRA, Roth IRA, SEP IRA, and rolled-over 401(k)s.
Finally, a college savings account (called a 529 College Savings Plan Account) is also offered by Wealthfront.
Opening an Account
Opening an account with Wealthfront should take no longer than a few minutes — the entire process can be completed online.
The first step to open an account is to go to the website and click the “Get Started” button in the upper-right corner.
Then, the user will be directed to a page that explains the next steps the user will have to take to successfully open an account.
Next, the user will have to fill some basic contact information, along with a questionnaire that will be used by the robo-advisor algorithms to determine the optimal portfolio allocation based on the client’s financial goals and current financial situation.
The next step is to go through the investment plan outlined by the robo-advisor, which provides a detailed overview of what the firm will do with the money invested (such as which financial products will be bought and why, along with the risks involved).
Finally, once the user agrees to the investment plan, a final step involves transferring the funds to the account. At the time of writing, Wealthfront supports bank transfers made via ACH.
The minimum deposit accepted at the time of writing is $100 for Wealthfront investment accounts, while for cash accounts, the minimum deposit is $1. These deposits are typically credited within one to three business days.
Additionally, 401(k) rollovers have to be done by following the instructions provided on the website.
Wealthfront comes packed with great features, from tax loss harvesting to portfolio rebalancing, which we’ll cover below.
|Fees||0.25% Annual Fee|
|Account Types||Joint, Taxable, Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts and 529|
|Platform||Mobile (iOS / Android) and Website|
|Assets Under Management||Over $20 billion|
|Promotion||Get $5,000 managed for free|
|Socially Responsible Investing|
|Support||Phone and Email|
The PassivePlus® investment strategy followed by Wealthfront’s algorithm is designed to liquidate financial instruments that have produced a negative result to claim the tax credit resulting from the capital loss.
This tax credit can be used to offset the capital gains tax generated by the ETFs that have been liquidated at a gain, and the resulting tax credit can be reinvested to produce further returns through buying other ETFs.
By doing this, Wealthfront claims to increase the overall return of the portfolio by a range between 0.58% and 1.07% per year. The complexity of executing this strategy would be out of reach for inexperienced investors due to a variety of technical taxation and investment matters.
Stock Level Tax Loss Harvesting
The stock-level tax-loss harvesting program is another feature of the proprietary PassivePlus® investment strategy devised by Wealthfront to improve returns over time.
This strategy takes advantage of the multiple tax-loss harvesting opportunities presented by buying the individual stocks that comprise a broad-market index (such as the S&P 500) rather than buying an ETF (which is a basket of stocks that trades as a single instrument).
By using complex algorithms, the stock-level tax-loss harvesting program quickly takes advantage of the losses carried by certain individual stocks to offset the tax bill for the current year.
On the other hand, this feature is only available for taxable accounts with a balance between $100,000 and $500,000.
Risk parity is a feature that follows an approach similar to Modern Portfolio Theory (MPT), which aims to generate the highest risk-adjusted return possible given a mix of different asset classes, such as bonds, stocks, commodities, and others.
However, risk parity aims to give the same risk-adjusted weight for each of the asset classes included in the portfolio. By doing so, studies show that the portfolio may be able to achieve higher returns compared to Modern Portfolio Theory (MPT).
However, using this feature (according to Wealthfront) makes it more difficult to properly allocate the tax credits received via the tax-loss harvesting feature, and it also limits the borrowing capacity of the account holder due to the increased volatility of the portfolio beyond what’s acceptable for Wealthfront.
This Risk Parity Fund can represent a maximum of 20% of the balance of the client’s portfolio.
The Smart Beta feature offered by Wealthfront uses a set of five different indicators to estimate how funds can be more adequately allocated in the stocks that comprise the S&P 500.
Traditionally, this broad-market index determines the weight of each stock based on its market capitalization, which means that the bigger the enterprise, the larger the weight it will have on the index.
Research has shown that market capitalization is not the most efficient factor to determine the weight that each individual company should have on the index, and this is the main reason why users could benefit from using the Smart Beta feature.
Using Smart Beta does not generate an additional fee for users who opt-in, and it can be used along with the stock-level tax-loss harvesting add-on to reap some extra benefits from it. On the other hand, it is only available for clients that have a portfolio balance higher than $500,000.
The portfolios designed by Wealthfront’s robo-advisory solution are usually comprised of exchange-traded funds (ETFs) (with the exception of the Smart Beta portfolio). (ETFs are financial instruments that reflect the value of a basket of stocks, usually to mirror the returns of a certain benchmark index.)
Wealthfront regularly monitors the ETF market to identify the best products based on their expense ratios, portfolio turnover rate, and their capacity to mirror the results of the benchmark they track.
As of July 2020, following are the ETFs used by Wealthfront to expose their clients’ portfolios to different asset classes:
- US Stocks – Ticker: (VTI)
- Foreign Stocks – Ticker: (VEA)
- Emerging Markets – Ticker: (VWO)
- Real Estate (REITs) – Ticker: (VNQ)
- Natural Resources – Ticker: (XLE)
- US Government Bonds – Ticker: (BND)
- TIPS – Ticker: (SCHP)
- Municipal Bonds – Ticker: (VTEB)
- Dividend Stocks – Ticker: (VIG)
It is important to note that while most of the ETFs used by Wealthfront are managed by Vanguard, the company explicitly says it does not receive compensation for incorporating these ETFs into their portfolios.
Furthermore, while the above are the primary ETFs used by Wealthfront, they also have a list of secondary ETFs used for the tax-harvesting programs, as the tax legislation in the US does not allow claiming of tax credits if the same financial instrument is sold at a loss and then repurchased at short notice.
The percentage allocated on each of these ETFs varies depending on the results of the robo-advisory optimal portfolio composition based on the user’s financial goals.
However, certain features like Smart Beta or the stock-level tax-loss harvesting do not use ETFs, as the funds are invested in individual stocks.
After a certain period, the fluctuation in the value of certain financial securities and the current percentage allocated to each asset class varies from the original percentage set by the robo-advisor.
As a result, Wealthfront periodically rebalances the portfolio of its clients to continue to allocate the percentage initially suggested by buying and selling the different assets within the portfolio.
By doing so, taxable securities will generate tax debits or credits depending on whether the investor had a capital gain or loss, and Wealthfront aims to minimize the impact of this by using its advanced tax-harvesting programs, which means that assets at a loss are likely to be the first ones sold as part of the rebalancing.
There is no pre-scheduled timeline for this rebalancing since Wealthfront follows an approach that monitors how much the percentages have drifted from their original target — and only once that gap has reached a certain level, they execute the rebalancing.
Since there’s no way to tell when that will occur, there is no timeline as to when the rebalancing will take place.
Wealthfront currently offers four different financial planning services, all of which can be used for free as part of its robo-advisory services, even though they will still be subject to the annual 0.25% advisory fee.
These services are:
- Early retirement planning: Clients can either open a retirement account with Wealthfront or they can roll over their 401(k)s. By using algorithms and based on the retirement goals of the client, Wealthfront determines the amount that has to be set apart and the periodic contributions that must be added to the account to achieve these goals by investing the funds using a tailored portfolio allocation.
- Vacation planning: This service is designed to help clients in planning for their ideal time off by stating how long they want to go away, whether they are planning to work while vacationing, and how their current living expenses will be affected during the time off.
- College planning: Clients can use the college planning feature to start a fund for their kid’s future college tuition. The app will outline the required contributions to achieve any amount that the client would like to achieve.
- Homeownership planning: By integrating with third-party services, Wealthfront can analyze the exact property that the client intends to purchase, assessing various metrics including the price, the minimum down payment required, the amount of the mortgage payments, and other similar variables. As a result, the robo-advisor will qualify the purchase depending on its feasibility for the client and how ideal it is for his/her financial goals.
Wealthfront Pricing & Fees
Wealthfront charges a flat 0.25% annual advisory fee on the account balance. This fee is calculated by multiplying the daily value of the account by 0.25%, divided by 1/365, which is the daily fee.
At the end of each month, the sum of the daily fees will result in the monthly advisory fee charged to the account.
Additionally, clients have to cover the expense ratio associated with the ETFs that comprise their portfolios.
Cash accounts offered by Wealthfront do not charge any fees except for debit card fees which include out-of-network ATM fees of $2.50 + an ATM owner fee, bank teller fee of $2.50 + teller fee, a 2.75% international transaction fee, and up to $5.95 cash load fee at selected retailers.
Wealthfront does not charge a fee for depositing or withdrawn money from the account.
- The flat 0.25% advisory for investment accounts is lower than the industry average of 1%.
- The minimum deposit required to open an investment account is low.
- The cash account only requires a $1 deposit to be opened.
- The annual percentage yield provided for cash deposits is five times higher than the national average.
- There are no deposit or withdrawal fees.
- Cash accounts do not charge any maintenance or other similar fees.
- Investment accounts can be easily opened and set up using Wealthfront’s online platform.
- The tax-loss harvesting programs increase the long-term returns by taking advantage of tax credits.
- The Smart Beta and Risk Parity features are very attractive for clients with a high net worth.
- Clients can benefit from the credit line offered by Wealthfront to fund any short-term expense at a decent interest rate.
- The planning features are very user-friendly, highly intuitive, and automated.
- There are no additional fees charged for using the financial planning features offered by Wealthfront.
- 401(k) accounts can be easily rolled over to Wealthfront.
- Clients cannot trade individual securities outside of what the robo-advisor recommends.
- No human advisory services are offered by this firm, even though most of its rivals do offer this possibility.
Wealthfront is a great robo-advisor for beginner investors. But it’s not the only option available.
Wealthsimple is another US-based robo-advisor that offers services similar to those provided by Wealthfront.
However, as an advantage, it provides access to a qualified financial advisor if needed. The minimum deposit required to open an investment account with Wealthsimple is just $1, compared to the $500 required by Wealthfront.
On the other hand, Wealthsimple charges a 0.5% advisory fee, which is 0.25% higher than what Wealthfront charges.
In broad terms, Betterment and Wealthfront offer very similar services. They charge the same 0.25% advisory fee, and they both manage more than $10B in assets for their clients.
However, Betterment offers access to Certified Financial Planners (CFPs) for clients who prefer a human touch. And they don’t require a minimum deposit to open an investment account.
On the other hand, Wealthfront seems to have an edge on the financial planning side, as Betterment charges $200+ for their financial planning packages. They include a 30-minute consultation with a CFP, while Wealthfront uses automated features to help its clients based on their financial objectives.
Although their tax-loss harvesting features are fairly similar, Wealthfront’s stock-level TLH should further boost the long-term returns of investors who participate in this program. This feature is not available with Betterment.
Who Should Get/Avoid Wealthfront
Wealthfront is a low-cost, user-friendly, and well-designed robo-advisor backed by a highly-trained leadership team that includes Burton Malkiel, a financial expert with many years of experience in the field of investing, and the author of one of Wall Street’s favorite books, A Random Walk Down Wall Street.
Investors who wish to turn on autopilot mode for their investments can benefit from the easygoing approach offered by Wealthfront when it comes to money management, and they can also enjoy the interesting features offered by the firm, including the Smart Beta and the Tax-Loss Harvesting features, both of which would be hard for a retail investor with little experience to implement.
The low advisory fees charged by the company may be the most enticing element of their value proposition, and their time-tested strategies should provide enough assurance to investors that their money is well-handled.
On the other hand, Wealthfront services are not suited for day traders or any other type of active traders because they don’t give investors the possibility of building their own portfolios.
Here are the most frequently asked questions from people about Wealthfront.
What Are the Costs to Invest with Wealthfront?
For investment accounts, there’s a 0.25% advisory fee, charged monthly. Additionally, the client has to pay for any expense charged by the exchange-traded funds (ETF) that comprise the investment portfolio.
For cash accounts, there are no fees except for debit card fees.
The Portfolio Credit Line offered by Wealthfront charges an interest rate between 2.45% and 3.7% per year.
How Easy Is It to Make Withdrawals?
Withdrawals can be easily set up by using Wealthfront’s user-friendly interface, and there’s a minimum withdrawal limit of $250.
Any number of withdrawals can be made at any given point in time as long as the balance of the account remains higher than $500.
Funds withdrawn from Wealthfront typically show up 3 to 4 business days after the request is sent.
There is also a holding period of five days before any money that was recently deposited on the account can be withdrawn.
How Does Wealthfront Define “Long-Term Investing”?
Long-term investments assume a holding period longer than five years for each individual security contained within the portfolio.
What is the Minimum Investment with Wealthfront?
The minimum deposit required to open an investment account with Wealthfront is $500.
What Are My Options to Fund My Wealthfront Account?
Wealthfront accounts can be funded via ACH wire transfers.
How Are My Investments Protected with Wealthfront?
All investments made with Wealthfront enjoy a protection of up to $500,000 from the Securities Investor Protection Corporation (SIPC) of the United States. Of those, a maximum of $250,000 can be claimed in cash.
This protection is triggered if the broker-dealer firm is, at some point, unable to give their money back to clients, but it does not offset any losses experienced as a result of market downturns.
Wealthfront is a sophisticated, low-cost robo-advisor available for United States residents that has many interesting features for investors who want to transfer control of their assets to seasoned financial professionals while following a long-term passive investment strategy.
Their investment strategy and extra features are robust, and the background of Wealthfront’s leadership teams makes this firm one of the most credible players in the global robo-advisory market.
Get our free Stock Market Playbook to learn how to invest your first $500 in the stock market.
Plus our best money tips delivered straight to your inbox.
Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.