Wealthfront is an online investment advisor that was founded in 2011 to streamline and automate the investment process for a younger demographic of millennials who are accustomed to managing their daily lives through their smartphones.
Wealthfront Advisors provide investment advisory services to clients but does not provide personalized financial planning to investors, such as estate, tax, or retirement planning.
Wealthfront has an extremely transparent investment process through the publication of its investment methodology white paper and other strategic investment approaches such as smart beta. The company also has a very straightforward, flat-fee structure for its advisory service. Fund fees are passed on to the customer and those with larger accounts in excess of $100k invested in the Wealthfront Risk Parity Mutual Fund face additional expense fees, as do some customers investing in college saving 529 accounts.
One competitive advantage Wealthfront cites is their financial planning tools. The company links to the customer’s outside bank and brokerage accounts alongside the Wealthfront account to provide a complete financial profile. It is then possible to access outside data about the cost of college or the cost of a new home through the Wealthfront platform to see exactly what the customer can afford.
Annual advisory fees of 0.25% are lower than the industry average
Globally diversified portfolios based on investor’s risk factor
Transparent investment methodology explained with white papers
Flat-fee structure that does not decrease as account size grows
No investment advice; help limited to online-based FAQ help center
Limited investor education beyond blog articles and some videos
Wealthfront has been in business for almost seven years and has a high level of investment transparency with their investment methodology white papers. The company’s pricing structure is also very transparent and provides articles and calculators to demonstrate the company’s fee structure.
The company is an SEC-registered investment adviser under the Investment Advisers Act of 1940 and a wholly owned subsidiary of Wealthfront Corporation. Customer accounts are insured by the Securities Investor Protection Corporation (SIPC) up to $500,000 in total value per entity, but limits insurance on cash to $250,000 per entity. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.
Wealthfront’s investment desktop platform is relatively straightforward and easy to use. When opening a new account, customers have the choice of investing straight away, or first building a financial plan to explore major financial decisions. When customers are ready to invest, they get a personalized and diversified portfolio constructed primarily from their reported risk tolerance. Risk tolerance is determined based on a questionnaire that assesses an individual’s subjective willingness to take risk, an individual’s consistency in response to subjective risk assessment questions, and an individual’s objective ability to take risk based on their projected retirement income compared to projected retirement spending needs. Customers are then assigned a risk score ranging from 0.5 to 10 that is used to select a pre-determined model portfolio for investment.
Wealthfront believes it has a competitive advantage in its planning tools. For example, based on a customer’s reported finances, they will calculate a home budget that reflects the mortgage that the customer would likely qualify for while factoring in the all-in costs of homeownership.
As another example, if a customer chooses planning for a child to attend college, Wealthfront will help them set a realistic monthly savings goal, using data from the Department of Education to show the projected cost. Wealthfront’s desktop planning tools present these conclusions in a clear and transparent graphical manner that is easy to interpret and understand.
Wealthfront is an automated investment advisor that allocates customers’ assets to pre-determined ETF-based model portfolios based on an assigned risk score. Customers do not have discretion over their investment choices within a specific risk score. For this reason, Wealthfront does not offer services such as customizable security watchlists or real-time economic data releases used by traders. Wealthfront does not offer simulated or demo accounts because customers are not using the service to manage their own portfolios. The company constructs 20 model portfolios ranging from lower-risk fixed-income to higher-risk equity-based investments, and places customers’ assets in one of the portfolios based on the customer’s risk tolerance determined from a questionnaire.
Wealthfront offers its service on Apple’s iOS and Google’s Android mobile app. Accessing the company’s website on a mobile device gives the user the same interface and experience as the desktop version.
Wealthfront’s mobile app has industry-standard encryption and security with fingerprint and face recognition technology as well as secondary security features such as two-factor user authentication. Like the desktop version, Wealthfront does not offer watchlists, price alerts, or real-time news because these features are not part of the company’s discretionary portfolio management business model.
Wealthfront does not supply separate investment research because customers do not make their own investment decisions. For example, customers do not choose which ETF’s to buy or sell. The company offers a discretionary investment service where the robo-advisor allocates assets to 20 different model portfolios based on the customer’s answers to a risk assessment questionnaire.
Though the portfolios are set, Wealthfront does provide all sorts of webinars, calculators and tools to help investors keep track of goals and their portfolio. These diverse tools are what give Wealthfront a high score in this category even though someone using their platform would not necessarily be conducting research on stocks or investment strategies.
Wealthfront’s investor education is primarily a blog and help center with a very limited selection of investor education videos. The help center is very comprehensive and works on a FAQ framework, but this can be difficult to manage and at times overwhelming, given the broad selection of material available. The site does provide a list of the seven most common customer questions. This can be used as a platform to explore other investment-related topics and questions. The blog has topical investment articles but little in the way of practical investment advice.
Wealthfront prides itself on its financial planning service to “explore life’s possibilities and provides actionable advice.” Wealthfront calls the service Path — built by their team of PhDs, the advice engine that powers all the personalized insights and advice they provide for free online. The site has specific planning advice related to homeownership, retirement, time off for travel (specifically targeted at millennials), and children’s college expenses.
All Wealthfront taxable accounts (individual, joint or trust) are eligible for Daily Tax-Loss Harvesting. The minimum amount required to open an account is $500. The account minimum required to qualify for Stock-level Tax-Loss Harvesting is $100,000 and Smart Beta is $500,000. To access a Portfolio Line of Credit, the customer needs at least $100,000 invested in a diversified (e.g. excluding cash positions, holdings in the Wealthfront Risk Parity Mutual Fund, and any stock in a Selling Plan), taxable Wealthfront portfolio.
Commissions and Fees
All accounts have a 0.25% annual advisory fee regardless of account size plus fund fees mostly of 0.07%-0.16%. Wealthfront selects low-cost ETF based investments from 11 global asset classes to build portfolios.
They do not charge any account-opening fees, withdrawal or account-closing fees, trading/commission fees, or account transfer fees. The only other fee the customer incurs is the expense ratio embedded in the ETFs and mutual funds they own. The one expense ratio Wealthfront earns is the 0.25% they charge for the Wealthfront Risk Parity Mutual Fund, which can represent up to 20% of a customer’s portfolio. Wealthfront 529 college saving account fees are also slightly different.
Customer support is relatively limited. Wealthfront has structured their support specifically for customers who do not wish to use the phone to receive assistance. To this end, the company has a Help Center that is FAQ based and allows customers to search for answers to questions. The Help Center is quite comprehensive, allowing users to type in their question and receive several suggested answers. The volume of information is quite high, however, and it can be time-consuming and slightly tedious to find answers to anything beyond basic or general inquiries. There is live technical support during business hours from Monday to Friday, but there is no investment support or advice offered. Wealthfront does not offer any online chat or social media support.
What You Need to Know
Wealthfront targets millennials who are accustomed to accomplishing tasks on their smartphones and has designed their platform to be easy and hassle-free for people who are comfortable making investment decisions without human intervention or assistance. Most investors using Wealthfront are under the age of 40. With advisory fees of only 0.25%, the servicing offering is quite affordable relative to other providers and offers a small but comfortable variety of diversified investment portfolios for investors with varying risk profiles.
For most investors, portfolios are limited to one of 20 options using various ETFs, but this level of diversification is usually enough for most retail investors.
The service also allows customers to link other financial accounts to get a comprehensive overall look at their financial profile. A more comprehensive view allows customers to explore different financial goals and opportunities.
Wealthfront is an excellent option for younger investors or those wishing to set their investments and put in little effort. See how they compare against other online brokers we reviewed.
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