In the United States, four Robo-Advisors are duking it out for the top position. With $47 billion under management, Vanguard is a clear front runner. Wealthfront is bringing up the rear with just over $5 billion in assets under management.
But when it comes to recommending a “Robo-Advisor” Wealthfront is always near the top.
- A robo-advisor that helps you invest for the long term
- 0.25% management fee over $10,000
- Tax loss harvesting and other tools to help you manage your portfolio
Modern Portfolio Investing
Most of the top “Robo-Advisors” in the market today create investment portfolios using an investment philosophy called Modern Portfolio Investing. Modern Portfolio investors believe that it’s really hard to beat the market. As a result, these investors try to manage portfolio volatility and keep costs low.
It’s not sexy, but it’s a sound approach to investing. Wealthfront offers a way for investors to buy into modern portfolio theory without having to figure out the details themselves. That’s not to say that the details of modern portfolio theory are hard. They aren’t. But Wealthfront isn’t a platform for people who want to dig into the nuances of every possible investment option.
Wealthfront is an investing platform for prudent investors who want to see their money grow, but don’t want to spend much time thinking about their investments. The process of investing with Wealthfront always starts with your goals and your risk tolerance. Wealthfront asks 4 objective questions, and six subjective questions to help.
You Get What You Don't Pay For
Wealthfront charges a 0.25% management fee on all portfolios over $10,000. They manage your first $10,000 free. This is the lowest fee among the top Robo-Advisors which endears them to me. They don’t charge transaction fees. They don’t charge bogus account setup fees or closing fees. In essence, you get what you don’t pay for. You get great asset management without paying high fees.
On top of the low price management, investors need to watch out for expensive investing fees called expense ratios. Wealthfront keeps these super-low. Wealthfront helps investors choose a few broad-based market indexes at the lowest price possible. Only the international bond fund (EMB) carries an expense ratio over 0.25%.
If you have an after-tax brokerage account, Wealthfront will take advantage of a tax loophole that allows investors to claim capital losses when an investment loses value. This “tax-loss harvesting” tends to be complicated, but Wealthfront does the work for you.
Wealthfront Lets The Algorithm Work
Of course, everything I’ve said of Wealthfront is true of Betterment too (except that Betterment doesn’t manage your first $10,000 free, they offer free based on months). As such, I’m agnostic between Wealthfront and Betterment.
However, Wealthfront always lets their algorithms work, but Betterment sometimes resorts to human intervention. Following Brexit in June 2016, Betterment locked users out of the platform for a few hours. Betterment may have feared a panic selloff, but they also prevented buying during a market wobble. Meanwhile, Wealthfront let the algorithms work.
Wealthfront isn’t content to rest on their laurels. This year, they’ve released three exciting new features.
If you have more than $500K at Wealthfront, they will allow you to use a feature called PassivePlus investing. PassivePlus is a first of it’s kind “Smart Beta” robo-advisor. Smart Beta investing tries to used decreased downward portfolio volatility (Beta) to increase portfolio returns (Alpha). It’s clear that Wealthfront’s captures systemic tax advantages.
Wealthfront also makes the case that their five-factor investing model combined with indexing boosts returns. That’s a claim you would have to investigate on your own. I don’t buy into the factor investing model as a long term sustainable advantage (although I admit it worked in the past).
These are the elements of WealthFront’s PassivePlus program:
- Tax Loss Harvesting: Wealthfront’s algorithms check for daily capital loss opportunities. Over the course of a year, an investor can claim a tax credit for $3000 in capital losses, plus you can offset any gains with losses. Wealthfront virtually guarantees that you’ll never pay the government more than you have to. If you’ve got a big after-tax brokerage account, you should take advantage of tax loss harvesting.
- Direct Investing: Larger investors also reduce costs by participating in Direct Investing. Instead of holding ETFs, PassivePlus investors hold rights to stocks owned by Wealthfront. When done at a large scale, this is marginally cheaper than owning ETFs, so it’s a decent cost savings.
- Five Factor Investing: Wealthfront isn't completely straightforward about what's in their 'secret sauce,' but their newest algorithm is clearly based off of the well-renovned five factor investing model. The Five Factors investing model accounts for Value, Momentum, Dividend Yield, Low Volatility, Volatility relative to the market. Historically, a Five Factor model would not only beat the market, it would reduce portfolio volatility. It's not clear that it's true today.
Investing for college is tough. The timeline is constrained, and you can’t tell your 18 year old to skip college until the market recovers. Wealthfront offers a 529 account that can help you invest and save for your child’s education plans. Its graphical interface make the investing experience less stressful.
Wealthfront’s greatest innovation of 2017 is “Path Investing.” Path investing is financial planning software for the rest of us. Want to know if you’re on track to achieve your goals? Path will help you figure it out. Want to understand the effect of a year or two off? Path can help you understand how it will change your outcomes.
Obviously, Path Investing relies on guessing and human inputs, but it’s a helpful tool to give young people guidance on whether or not they can expect to achieve their goals.
Should you move your portfolio to Wealthfront?
I’m quick to recommend Wealthfront to novice investors, but I don’t think it’s a great fit for everyone. Personally, I don’t have my money at Wealthfront.
Wealthfront uses four objective and six subjective questions to help you determine your ideal asset allocation. The asset allocation they suggested to me was far too conservative for my retirement portfolio. As an investor, you only get to choose between a few portfolio options. That keeps new investors from falling prey to analysis paralysis, but more experienced investors will feel constrained by it.
The clearest advantage of Wealthfront is it’s ability to do systemic tax loss harvesting. Of course, that only matters in unsheltered tax accounts. Since I don’t have an after tax brokerage account, I won’t benefit from it.
The final objection to Wealthfront is that you want something different. A lot of people want to work with a human, not a bot. If you’re looking for a financial advisor, consider connecting with the Financial Gym or with a planner form the XY Planning Network.
If you’re a new investor, Wealthfront is a great investing platform. If you already know the ropes, then there’s no reason to bother with moving your account (unless you need help with tax-loss harvesting).
Would you try Wealthfront? What do you think about robo-advisors?
Wealthfront is our favorite robo-advisor because of their low fees, asset allocation strategy, and their different investment options.