Introduction to Wealthfront
Robo advisors have grown so popular in today’s market to the extent where they are even posing a serious threat on traditional financial advisors that most people are used to. As you can expect, the increase in popularity led to a rise in the number of robo advisors. This makes it rather difficult to determine which of the dozens of advisors in the market is right for you.
In today’s review, we will be discussing one of the leading robo-advisors in the market today, Wealthfront. We will tell you why a lot of people trust Wealthfront to make the right investment with their funds.
Wealthfront is among the top robo-advisors in the market. They’ve proven themselves to be very helpful for both new and experienced investors. The company is particularly popular among millennials because it has helped in revolutionizing investment to accommodate the young people who have a lot of time but not enough cash for investments or paying brokers.
Wealthfront was launched back in December 2011, and since then, they have grown their assets under management to a staggering $11.2 billion! This goes a long way to show just how established Wealthfront is.
How exactly do you invest with Wealthfront? That’s pretty simple actually. After opening your Wealthfront account, you’ll be required to make a minimum deposit of $500. You’re also given the option of using a tax-deferred individual retirement account.
After making your deposit, Wealthfront will invest the money on different exchange-traded funds (ETFs). They use Modern Portfolio Theory in creating automated asset allocation. The advisor will consider your financial needs and risk tolerance for accurate allocation. Wealthfront also employs automatic rebalancing which boosts the accuracy of automated asset allocation even further.
Another key reason behind the success and popularity of Wealthfront is the free financial planning that they provide to their customers. Wealthfront developed an algorithm known as Path which is designed to help you attain your financial goals in the most efficient way possible. Whether you want to purchase a home, raise college tuition or create a retirement package, Wealthfront’s Path will ensure that you never wander away from your goals. How does it do so, you might ask. Path uses the data on all of your accounts which includes mortgage, banking and savings accounts and creates some sort of path which will help you manage the accounts in the best way possible to achieve the set goal. In case you start pulling away from your objectives, the algorithm will suggest various ways that will bring you back on track. The best part? You will receive all this financial advice free of charge. All you have to do is download the Wealthfront application, and the algorithm will start operating.
Why should you consider investing with Wealthfront?
More Investment Portfolios
Investments at Wealthfront are managed by some of the best brains in the financial industry. They have helped in developing the perfect methodology that assists in identifying the risk tolerance of every investor. They then use technology to make sure that asset allocation is kept on track continuously.
Wealthfront stands out from its competitors because they employ threshold-based rebalancing where portfolios are rebalanced whenever an asset class is moved from its target allocation and not on an annual or quarterly basis as is the case with most other companies.
Wealthfront has a highly diversified investment portfolio. A typical Wealthfront portfolio will have between 6-8 asset classes. The company may invest in foreign stocks, U.S stocks, dividend stocks, natural resources, real estate, emerging markets, emerging market bonds, and treasury inflation-protected securities. They may also invest in the national government, municipal and corporate bonds.
Back in 2018, Wealthfront created the Wealthfront Risk Parity Fund. This new proprietary mutual fund increases exposure to asset classes with high risk-adjusted returns. You will need at least $100,000 in a taxable account to invest in these funds. Also, you can only invest up to 20% of the funds in your account.
If you are not interested in the exposure to the Wealthfront Risk Parity Fund or its high expense ratio, you can decide to avoid investing your money in the funds. Wealthfront will also provide the option of withdrawing your investment in the funds at any time.
Friendly Management Fees
Wealthfront will only charge you 0.25% for management. This is quite a fair rate considering the sort of services and earning opportunity that you will get in return. We compared the management fee at Wealthfront and that of other robo-advisors, and it performed really well too.
Wealthfront will also waive the fee on $5,000 balances if you invite a friend through their referral program and they create an account. This waiver will be applied to both you and your friend’s accounts.
Free Financial Planning
We already highlighted above the free financial planning tool of Wealthfront known as Path. This tool is designed with a complex algorithm than analyzes different data sets to help you manage your funds towards a particular goal.
Say for instance you want to buy a house. This may sound like an easy thing but determining the house you can afford and how you need to spend your money to actualize your dream can be very difficult. Path will help you by analyzing your current financial situation, the home prices in your desired area and the mortgages rates. It will then present you with a figure showing you how much you can afford to spend on a home. It’ll go a step further to readjust the time frame of your savings based on how much you are earning at the moment and how much you may earn in the future. It’ll then show you how much you need to save every month and the best account to save the money in.
Path is also very useful if you are planning on saving funds for your kid’s college tuition. The tool will let you choose the college you want your child to go through. It’ll use this information to project the college costs for when your kid will be ready to join. It’ll also take into account financial aids before it comes up with a monthly savings plan.
Wealthfront has another item known as Time Off for Travel tool that helps you to plan your trips without interfering with your financial goals. This tool will show you how much time you can afford to spend on traveling, the amount of money you can spend on the said trip and how that money will affect the financial goals you’ve set.
All account holders will get daily tax-loss harvesting from Wealthfront. New clients who are transferring in assets may also benefit hugely from Wealthfront’s Tax-Minimized Brokerage Account Transfer service. This service adds the existing investments to the wealthfront portfolio where it’s possible. The transferred securities that cannot be incorporated will be retained until the capital gains get long-term.
If you have more than $100,000 in your account, Wealthfront will use stock level tax-loss harvesting to increase the tax optimization services. For taxable accounts with more than $500,000, a multifactor smart beta will be used to weigh the stocks available in a portfolio using different factors such as low volatility & high dividend yield. This helps in boosting the potential returns, and the best part is that you won’t be charged any extra fees for this service.
Great Line of Credit
If you have more than $100,000 in your account, Wealthfront will allow you to borrow as much as 30% of the total value of their portfolio without conducting a credit check, filling an application or paying any other credit-related fees.
The annual interest rates at Wealthfront vary from 4.5% to 5.75%.
Competitive Savings Account
Wealthfront unveiled a savings account known as Wealthfront Cash Account. This account earns 2.24% which puts it up there with some of the best online banks in the market today. The cash in these savings account will not be exposed to any investment risks and neither will you be charged any fees to keep the account active.
Drawbacks of Wealthfront
The robo-advisor does not purchase fractional shares of ETFs, and hence they can never invest the whole deposit in your account.
Wealthfront also keeps the cash balances at the same level as the fees that you are expected to owe for the next year. This means that there will be some cash drag in your account.
Wealthfront delivers one of the best tax-optimization services of any robo-advisor. They also offer competitive fees, and their continued digital expansion enables them to provide some of the best tools for home, college and retirement planning.
Therefore, it’s more than fair to say that Wealthfront is a remarkable robo-advisor that’s worth considering. They may not have the human advisor that other robo-advisors do, but their digital tools are simply unrivaled.
David is a financial expert who graduated from the University of Fordham (Master in Finance) in 2001. He has 10+ years of experience in private equity and wealth management. With strong expertise in senior-level financial planning, personal financial analysis, and mortgages, David knows his way around personal finance. Before working at CCR he used to be a financial analyst at McKinsey.
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