Wealthfront is one of several robo-advisors to come on the scene in the last few years. It offers an automated investment service aimed at young adults investing for the first time. In this review, we put Wealthfront to the test to see how it stacks up.
If you wanted to invest in the stock market a few decades ago, the only way to do so was to hire a broker. You would tell them what you wanted to buy. They would buy it for you and charge you a pretty high fee to do so.
Then just fifteen years ago, online discount brokers became popular. Traders had the power to buy and sell stocks on their own hands. The problem, of course, is that the average Joe knows very little about stocks. So letting him build his own portfolio was an often money loser.
Today, the newest craze in the stock market world is the up and coming robo-advisor. Wealthfront is one of the most prominent and well-respected robo-advisors. They pledge to have computer algorithms invest your money in the smartest and safest way possible. That doesn’t mean your investment is without risk. But it does mean they have a diversified offering to insure your risk level is moderated. All you have to do is fund your account and Wealthfront will do the rest.
Wealthfront charges it’s customers two fees to invest with them.
- An advisory fee based on an annual fee rate of 0.25%
- An embedded ETF fee that averages 0.08%
The first $5,000 you invest with Wealthfront is managed fee-free (for DR readers!) and if you refer a family member or friend, you can get another $5,000 managed free. For example, let’s say you have $150,000 invested with Wealthfront. You’ve signed up a friend, so your first $10,000 in assets is managed free. This means that $140,000 of your money will incur the advisory fee and likely the ETF fee. At a combined fee rate of 0.33%, you will be charged $462 a year in fees. Break that down over twelve months and you’re paying $38.50 a month.
What happens for multiple accounts? Wealthfront bases their fees on an individual, not on an account. So if you have multiple accounts, the advisory fee and ETF fee are charged as a whole and then split among your accounts evenly. The first $5,000 (or $10,000) in fee free management also applies per individual. One account, 100 accounts … doesn’t matter. The same fee rate applies.
Wealthfront 529 College Savings Plan
In addition to standard investing accounts, IRA’s and trusts, Wealthfront offers a 529 college savings plan. The fee structure on the 529 is a little different than what you see above because there is an added program administration fee.
- An advisory fee based on an annual fee rate of 0.25%
- Underlying ETF expense fee of 0.12% – 0.15%
- A program administration fee equal to 0.01% – 0.05%
On the same balance from the example above, $150,000 invested would be charged 0.45% annually on the high end. Knock of the first $15,000 managed for free, and the annual fee is roughly $608. Monthly the cost would be $50.
Tax Savings – The beauty of a 529 plan is that the revenue earned in the account is 100% federal tax free. Not only that, but depending on the state you live in, the money invested can be written off your state tax return. But what happens if you save all of this money for your children, and then they get a scholarship?
Wealthfront has a specific FAQ for this situation answered as follows:
If the beneficiary receives a qualified scholarship, account assets up to the amount of the scholarship may be returned to you without imposition of the additional 10% federal tax on earnings. A qualified scholarship includes certain educational assistance allowances under federal law as well as certain payments for educational expenses (or attributable to attendance at certain educational institutions) that are exempt from federal income tax. The earnings portion of a withdrawal due to a qualified scholarship is subject to federal and any applicable state income tax at the distributee’s tax rate.
Wealthfront Free Financial Planning
Wealthfront has launched a new service which offers free financial planning whether you are a paid client or not. When you download the Wealthfront mobile app, you have the ability to build a financial plan.
For example, if you are in the market for a home purchase, Wealthfront can provide you a bevy of details that will help you during the home-buying process. Taking your personal financial details (like net-worth, credit score, etc.), Wealthfront will offer you neighborhood appreciation data from Zillow that can show you exactly where your dream neighborhood might be hiding.
This feature can also be used for retirement planning, saving for kids college expenses and a variety of other important financial goals.
Wealthfront Tax-Loss Harvesting and Direct Indexing
Tax Loss Harvesting – Typical investment accounts look at tax-loss harvesting just once a year but Wealthfront does it every single day. So if an ETF in your Wealthfront portfolio loses money and Wealthfront decides to sell it at a loss, Wealthfront can use that loss to offset gains to lower your tax bill. Based on research from Wealthfront, they estimate that this single feature can add an increased value of after tax returns by more than 1.5% annually. Tax-Loss Harvesting is available in Wealthfront’s PassivePlus® investment suite.
Direct Indexing – Direct indexing is more advance form of tax loss harvesting. Rather than buy an ETF, you can buy each individual stock within the ETF and write off losses to individual stock performance vs. the totality of ETF performance. This feature is available in your Wealthfront account but only for those who have invested $100,000 or more. This feature is again available in the PassivePlus® investment suite.
Wealthfront also offers an advanced indexing platform, which weighs your individual stock buys more intelligently. This feature kicks in after investing $500,000.
Should You Invest With Wealthfront?
When you compare this robo-advisor to it’s main competitor Betterment, Wealthfront shines in a few important areas. First, the fee structure is beneficial to any investor who has less than $2 million to invest. Second, the tax-loss harvesting and direct indexing features allow Wealthfront users to save more on their tax returns. Finally, Wealthfront offers a college 529 plan (and a good low fee plan) where Betterment does not.
Unlike other robo-advisors however, Wealthfront actually adheres to the name. Other outlets like Motif Investing and Betterment are starting to bring in human brokers and advisors to assist clients vs. sticking within algorithms and computer support. I like that about Wealthfront and I think getting started with them and their current promotional offer of the first $5,000 free is a great way to test the waters.
At the end of the day, if the return you’re getting with Wealthfront is worth their ~0.33% annual fee, then investing with them is a no-brainer.