Wealthfront

Josh Patoka
December 2, 2020

Wealthfront is one of the first and largest, fully automated Robo-advisors. It’s an excellent option for new and experienced investors who don’t have time to devote to hands-on investing. All taxable and retirement brokerage accounts invest in index funds tracking specific U.S. and international stock and bond ETFs. All accounts include complimentary holistic financial planning and portfolio rebalancing.

You can also deposit your non-investment cash into a high-yield Wealthfront Cash Account. This account is FDIC-insured, fee-free, and can earn up to 19 times the national average interest rate.

How Wealthfront Manages Your Money

Wealthfront will ask you a series of interview questions to personalize your investment plan. This plan also takes your risk tolerance and age into consideration to determine your portfolio mix and asset allocation. As you grow older, Wealthfront rebalances your portfolio to a more conservative asset mix.

Wealthfront primarily invests your cash into U.S. and international stock and bond index funds. You can also expect to hold some foreign stocks and bonds for further diversification. Most portfolios invest in six to eight of the eleven available asset classes.

Portfolio rebalancing is free with all accounts. Instead of merely selling overweight asset classes to rebalance, Wealthfront first uses your new funds to buy underweight shares. Wealthfront also uses tax-loss harvesting to keep your taxable investment income low when they sell shares.

Because Wealthfront practices a buy and hold investment strategy, Wealthfront doesn’t try to time the market. Your new funds invest at the current market price and have an objective to match the overall market performance. This passive approach keeps investment fees low.

Index Funds

Wealthfront’s standard investment strategy is investing in U.S. and international index funds. These funds have low expense ratios and can give you exposure to the market’s most significant asset classes, including:

• U.S. stocks
• Developed global markets
• Emerging markets
• Dividend stocks
• US government bonds
• Investment-grade corporate bonds
• Emerging market bonds
• Municipal bonds
• Treasury inflations-protected bonds (TIPS)
• Real Estate 
• Natural Resources

Investing in multiple asset classes’ models the Nobel-winning Modern Portfolio Theory. This is the most common investment method for Robo-advisors.  

Instead of only owning U.S. stocks and bonds, Wealthfront invests some of your cash in international assets. Doing so gives you exposure to the entire market and diversifies your portfolio. This diversification can limit your downside risk. You also enjoy the growth in smaller asset classes that can have more potential growth than a developed blue-chip company. 

Wealthfront may add alternative assets like real estate and natural resource index ETFs to your portfolio. These assets can hedge against inflation while maintaining tax-efficiency.

The average fund-operating fee is between 0.06% and 0.13% of the fund balance. These fees are in-line with other Robo-advisors that likely invest with the same ETFs. The index fund manager collects this fee, which is separate from Wealthfront’s annual advisory fee.

PassivePlus Investing

Wealthfront offers several investing features that can optimize your returns. As some of these strategies carry more risk, Wealthfront only allows a percentage of your portfolio to invest in specific PassivePlus tools.

Automatic tax-loss harvesting is free and standard with every taxable investment account. When it makes sense, Wealthfront will sell investments to capture investment losses, which will minimize your taxable investment income.

With a minimum $100,000 account balance, you can access two more Passive Plus strategies. Risk Priority and Stock-level Tax-loss Harvesting use advanced algorithms to earn potentially higher returns and diversifying your portfolio.   

Stock-level Tax-loss Harvesting analyzes a specific asset class you hold for individual stocks that can reduce your tax bill. Instead of buying the index fund, Wealthfront buys shares of each company in the index. Wealthfront will sell underperforming companies instead of the entire index fund to reduce your tax bill.

You also have access to a “risk parity fund” with a $100,000 minimum balance. This account has a 0.11% annual expense ratio and focuses on earning risk-adjusted returns to outperform your standard Wealthfront investment strategy potentially. You can have up to 20% of your portfolio in the risk parity fund. This fund doesn’t pair well with tax-loss harvesting.

Accounts balances above $500,000 can use the Smart Beta strategy. The Smart Beta implements “advanced indexing” to weigh your assets by several factors, including value, momentum, volatility, and dividend yield. There is no additional fee, and Smart Beta works with the built-in tax-loss harvesting.

Wealthfront Cash Account

The Wealthfront Cash account is a high-yield savings account that earns 0.35% APY. It can be a great alternative to a traditional savings account. You can earn an above-average interest rate, and the account is FDIC-insured up to $1 million.

As Wealthfront only buys whole shares of stock investments, you can keep your idle cash here to earn more interest before you have enough to invest. You can also utilize this account to preserve some money for short-term saving goals like a down payment for a home or to build an emergency fund.

Portfolio Line of Credit

Within your individual, joint, or trust account, you can borrow up to 30% of your account balance. This option is available to account sizes of at least $25,000.

The current interest rates are between 2.40% and 3.65% APR. While this borrowing option can be cheaper than a personal loan, your borrowed funds do not earn investment income. Also, you may need to repay a portion of your loan balance early if your portfolio value drops sharply.

Advantages of Wealthfront

Tax-loss harvesting: This benefit is standard with all Wealthfront taxable accounts and can reduce your annual tax bill. Other Robo-advisors charge extra or require a minimum account balance to qualify.

Multiple account options: You can use Wealthfront for taxable, trusts, and retirement accounts. Opening a 529-college savings plan is also possible to help save for your child’s college tuition.

High-yield cash account: The Wealthfront Cash Account is FDIC-insured and has one of the best yields for bank accounts. There are no account fees, and the initial balance is only $1. You can make unlimited transfers and direct deposit and a debit card are upcoming features. 

Financial planning tools: Despite not having human advisor access, Wealthfront’s Path is a robust digital holistic financial planning tool. Path can help project your net worth, determine how much you need to save for college, and calculate your early retirement with different life scenarios. 

Disadvantages of Wealthfront

Minimum $500 opening deposit: A $500 minimum investment isn’t hard-to-reach. But it’s relatively steep as other Robo-advisors with similar fees require a balance as little as $1.

No fractional investing: Other Robo-advisors buy fractional shares of index funds, so you never have idle cash in your brokerage account. If you only want to invest $10 at a time, Wealthfront may not be your best option.

No human advisor access: The point of a Robo-advisor is to remove human oversight to reduce investor fees. Other platforms offer add-on advisor access. Wealthfront does provide a suite of in-depth financial calculators to make a personalized money plan. Their licensed customer support can help answer your general investing questions.

Is Wealthfront Safe?

All of Wealthfront’s investments carry an inherent risk of investing, which is investment products may lose value. As Wealthfront invests in index funds, the volatility and potential risk is less than only investing in individual companies or “penny stocks.”

For additional peace of mind, Wealthfront is SIPC-insured. If Wealthfront fails, your brokerage assets up to $500,000 are protected. The Wealthfront Cash Account is FDIC-insured up to $1 million. You will see the partner banks where your cash is kept by checking your monthly account statement.

Is Wealthfront Right for You?

Wealthfront can be a good option if you want hands-off investing in index funds. It’s also worth using Wealthfront if you wish to have automatic tax-loss harvesting and can make the initial $500 deposit to start investing.