Wealthfront Review – Do Automated Investment Platforms Really Work?

Wealthfront Review
  • Fees
  • User Friendliness
  • Portfolio Diversity
  • Performance
4.1

Summary

Wealthfront is one of the largest investment platforms out there that is fully automated. Wealthfront wants to make investing less expensive and less confusing. So, can Wealthfront live up to the hype? Read our review to learn more.

About Wealthfront

Wealthfront was founded in 2008 by Andy Rachleff and Dan Carroll as a way to make investing less expensive and less confusing for the everyday person by using automatic investment solutions. Today, Wealthfront is one of the largest fully automated investment platforms currently available, with more than $11 billion in assets under management. Wealthfront offers competitive management fees and high-yield cash savings accounts, which is allowing the platform to quickly gain popularity among younger investors.

Wealthfront is one of the leading robo-advisors, offering investors a simple and easy way to start putting their money to work. Keep reading our Wealthfront review to see if this robo-advisor is right for you.

How Wealthfront Works

Wealthfront is highly similar to competing robo-advising platform Betterment and to many online brokerages. When you set up an investing account with Wealthfront, you’ll be asked questions about your investing style to gauge how aggressive your portfolio diversification should be. Helpfully, Wealthfront presents specific questions about how you would respond to specific scenarios, such as a market downturn, to understand your risk tolerance. Unfortunately, though, you can’t fully customize your portfolio balance between asset classes as you can in Betterment and with many traditional brokerages. Investment options are limited on purpose, as Wealthfront focuses on simplicity.

Here’s how the process works:

  1. Create a Wealthfront Account
  2. Answer a few questions to determine your investing style and risk tolerance
  3. Wealthfront automatically builds a portfolio using ETFs (exchange traded funds)

Using Wealthfront is really that simple. Once you create your portfolio, Wealthfront takes care of the investment management for you. They choose the proper asset allocations, rebalance when needed, and take advantage of tax loss harvesting strategies.

Wealthfront Risk Analysis

Wealthfront Portfolios

As mentioned above, Wealthfront automatically builds portfolios for users based on their investment preferences. The decisions are made at a broad level based on risk tolerance. For example, if you have a low risk tolerance, Wealthfront may allocate more of your portfolio to bonds. If you have a higher risk tolerance, they may allocate more of your portfolio to stocks.

Wealthfront offers 11 different asset classes, which offers slightly more diversification than competing robo-advising platforms. Added asset classes include municipal bonds, natural resources, real estate, and treasury inflation-protected securities. Once your portfolio is set up, Wealthfront will automatically take care of rebalancing it to keep your desired diversification. Note that each investment account can only have one portfolio, although you can open an unlimited number of investment accounts with Wealthfront.

Another major advantage to Wealthfront is that in addition to offering individual investment accounts they also offer retirement accounts. Users can open a retirement account in the form of a traditional IRA, Roth IRA, or SEP IRA.

Wealthfront Premium Savings Accounts

Wealthfront also allows users to open high-interest cash savings accounts. Interest rates are always fluctuation based on federal rates, but at the time of writing, Wealthfront offers a 0.35% annual yield on these accounts, which is more than 8 times what most bank savings accounts offer. Just a year ago, this rate was 2.51%. Nonetheless, the cash account offers a much better interest rate than banks like Chase and Wells Fargo.

Wealthfront Premium Savings

Premium savings accounts are protected with up to $1 million FDIC insurance. While most banks cap insurance as $250,000, Wealthfront is able to offer a higher insurance limit because they spread deposits across four partner banks. This is all done on the backend so users will see a single account balance in their bank account. The extra FDIC insurance makes Wealthfront a great option for high net-worth individuals who want to make sure more of their deposits are insured.

Ultimately, the premium savings accounts are a great place to park your money before investing. While the interest rate is unlikely to match the returns of an investment portfolio, it is still much higher than traditional banks.

Account Requirements

Wealthfront investment accounts require a $500 account minimum, although there is no minimum balance for high-yield cash savings accounts. $500 is a relatively low account minimum and clients likely need a minimum of $500 for the service to be worthwhile.

Like most other US-based robo-advising services, Wealthfront is only open to US residents with a US-based bank account and a social security number.

Wealthfront Account Types

Users can open a variety of different investment portfolios and bank accounts. Below are the account categories and different types of accounts available.

High-Interest Banking

  • Individual
  • Joint
  • Trust

General Long-Term Investing (Taxable Accounts)

  • Individual
  • Joint
  • Trust

Retirement Investing

  • Traditional IRAs
  • Roth IRAs
  • SEP IRAs

College Investing

  • 529 Account (529 College Savings Account)

Wealthfront offers every account type you could possibly need.

Wealthfront Pricing and Fees

Wealthfront competes directly with robo-advising services like Betterment on pricing, offering the same 0.25% annual service fee as Betterment’s Digital account. While Wealthfront also levies exchange fees for the ETFs that the service invests your money in, these exchange fees top out at 0.13% – far lower than Betterment’s maximum of 0.40%. There are no fees for trading or transfers, but also no discounts for large account holders.

Wealthfront users can get $5,000 managed for free by inviting a friend to the platform. For every friend that signs up, you will get $5,000 managed for free (saving you $12.5 per year).

Wealthfront Fees

 

Wealthfront’s high-yield savings accounts do not charge any account fees – any balance in a Wealthfront cash account is not subject to the 0.25% management fee and there are no transfer costs.

We will discuss all fees later in our Wealthfront review when we assess the true value of the service and whether or not it is a good fit for you.

Wealthfront Platform and Tools

Wealthfront offers both a browser-based desktop application and a mobile app. Both are extremely easy to navigate once you have an account set up since most options walk you through a series of steps rather than present a large amount of information at once.

Wealthfront Mobile App

One of the helpful tools within Wealthfront is the ability to project your assets at retirement based on your current account returns and investing rate. You can see how much money you’ll have left after retirement based on different monthly savings rates, as well as input specific goals – like buying a home or saving for a child’s tuition – to see how they will impact your savings. 

Wealthfront Retirement Tool

Wealthfront Asset Projection

One issue with Wealthfront’s platform is that it somewhat difficult to understand how different asset classes in your portfolio are performing over time. Most of Wealthfront’s visualization tools are focused on projecting future wealth, rather than giving clear indications of short-term performance. This can be frustrating for hands-on investors, although anyone who wants to invest and walk away won’t mind the lack of performance metrics.

When it comes to transferring cash to your accounts, Wealthfront makes it easy. The interface for making one-time deposits is the same as that for setting recurring deposits, so you can quickly and easily get yourself onto a regular investing schedule. Before you do set recurring deposits, the asset projection tools can help you understand how that will affect your future account balance.

Wealthfront Deposit

Finally, Wealthfront makes it simple to link bank accounts and external investment accounts, as well as to list real estate holdings. This makes Wealthfront useful as an overarching asset management platform since you can monitor your total worth rather than just your holdings within Wealthfront accounts.

Overall, the Wealthfront website and app are built for simplicity. You won’t find a lot of the advanced research tools and portfolio management tools that you will find at traditional brokers, but Wealthfront is not a traditional broker. Wealthfront is a robo-advisor that is built for investors who want to take a hands-off approach to investing.

Notable Wealthfront Features

Wealthfront offers a few unique features that are designed to make the service stand out from other robo-advisors.

Borrowing

Wealthfront offers a portfolio line of credit to investors who have more than $25,000 in their investment accounts. The portfolio line of credit allows you to access cash quickly so you can cover important expenses without emptying your investments. Your line of credit will allow you to borrow up to 30% of your account value at a relatively low interest rate (2.4%-3.65% at the time of writing). It should go without say that borrowing money with a line of credit should be done responsibly.

Tax Loss Harvesting

Tax-loss harvesting is designed to help minimize investors’ tax burdens at the end of the year. Wealthfront automatically looks for ways to lower your tax bill by locking in losses that lower your capital gains. While tax efficiency is a plus, tax-loss harvesting only helps you save money on losing investments. Losing investments are part of the game, but most investors would prefer better performance to lower tax bills.

Wealthfront offers stock-level tax-loss harvesting for users with more than $100,000 in assets. This is a more granular approach that can result in even more tax savings.

Risk Parity

Risk parity is a feature that is available to Wealthfront users with over $100,000 in their investment accounts. This feature is designed to better balance your portfolio to mitigate risk (by modifying asset allocation). Risk Parity will split your capital across a broader range of asset classes (based on Modern Portfolio Theory).

This is definitely a worthwhile feature. I’m surprised Wealthfront only offers this feature for larger accounts, considering it may help portfolio performance (which we will discuss next).

Smart Beta

Smart Beta is a feature that changes the allocation of stocks within your portfolio. While most index funds and ETFs weight stock allocations based on market cap, Smart Beta takes a different approach. Smart Beta considers factors like company value, momentum, dividend yield, market volatility, and market beta. The goal is to create a less-volatile and more tax-efficient portfolio.

Smart Beta is only available to clients with over $500,000 in their investment portfolios. Once again, it seems strange to limit the most innovative offerings to high net-worth accounts. If these features actually improve performance, you’d think Wealthfront would apply them to all accounts so they could boast better performance.

Wealthfront Performance

Now we get to the most important part of the review. How well do Wealthfront portfolios perform?

Wealthfront has averaged a 7.25% return on its higher-risk portfolios since inception, with a 4.66% return over the past five years. Over the same five-year period, the S&P 500 has averaged 8.1% returns. While Wealthfront claims that actual returns on an after-tax basis are likely to be higher thanks to the platform’s tax-loss harvesting practices, it is unlikely to compete with simply investing in an index fund.

Wealthfront Historical Returns

This is one of the most disappointing parts of Wealthfront (and robo-advisors in general). Robo-advisors are relatively new services that have the potential to disrupt the financial industry. That said, the performance is lacking. We’ve noticed this issue across all robo-advisors, including Betterment, Wealthsimple, and Acorns. With all of the innovative investing tools these advisors offer, they are still unable to beat the S&P 500.

Most of the custom portfolios are unlikely to yield better returns than simply investing in a broad market ETF or mutual fund. Furthermore, users are paying a management fee to achieve these inferior returns. While the service is ultimately designed for simplicity, it is underperforming broad market funds that are incredibly easy to invest in.

Most funds benchmark their performance against the S&P 500, but Wealthfront doesn’t offer any benchmarking tools.

Wealthfront seems to defend these returns by bringing up their tax optimization strategies. The company builds portfolios with low turnover index funds. They also apply daily tax loss harvesting which can lower your tax burden. That said, tax loss harvesting is only effective on investments that result in losses so it’s not much to brag about. While this feature would be exciting on a portfolio that outperformed the S&P 500, it’s less exciting on a portfolio that lags behind the broader markets.

How Does Wealthfront Compare to Other Robo-Advisors?

Wealthfront’s main competitor is Betterment, which has slightly more assets under management but offers the same 0.25% management fee as Wealthfront. Compared to Betterment, Wealthfront’s ETFs have a lower maximum exchange fee (0.16% versus 0.40%) and Wealthfront offers a wider variety of asset classes for portfolio diversification. However, Wealthfront doesn’t allow fine-tuning of how your money is allocated into different asset classes within a portfolio, while Betterment does. Furthermore, Betterment’s historical performance for risk-heavy portfolios is significantly stronger than Wealthfront’s – although both platforms trail the S&P 500 over the past 10 years.

With all that in mind, the high-yield savings accounts that Wealthfront offers are noteworthy. These cash accounts are not available with most other robo-advisors and the annual return exceeds that of even bank-backed high-yield savings accounts. 

How Does Wealthfront Compare to Traditional Financial Advisors?

Wealthfront is definitely a better option than most traditional financial advisors. Generally, financial advisors charge a ~1% management fee for doing exactly what Wealthfront does. When you hire a financial advisor for investment management, they usually split your money across mutual funds. That is the extent of the “financial advice” you receive. From my personal experience, these funds do not beat the S&P 500, and the advisory fee quickly eats into your investment returns.

Wealthfront utilizes ETFs that are more tax efficient than most mutual funds and they only charge 0.25%. If you are choosing between a traditional financial advisor and a robo-advisor like Wealthfront, the robo-advisor is likely to be more cost-effective in the long run.

What We Like About Wealthfront

The main reason for investors to choose Wealthfront over another service is convenience. Wealthfront can’t compete with Betterment or even traditional index funds on performance, but it does offer simple pricing, automated portfolio balancing, and none of the confusion that comes with trying to track performance metrics in your own portfolio.

Wealthfront makes a point to invest in funds with low management fees and expense ratios, making for favorable investments. They also feature tax efficiency features like daily tax loss harvesting.

Wealthfront’s retirement projection tool makes it easy to see how changing your recurring deposits and large purchases can affect the money you’ll have available in the future. The projection tool is convenient for financial planning and goal setting.

On top of that, Wealthfront’s high-yield savings accounts – which are opened separately from investment accounts and do not carry any fees – are highly attractive. The yield of these accounts makes them a highly attractive alternative to traditional savings accounts, and once your money is in a Wealthfront savings account it’s easy to move it around to investment accounts with Wealthfront as well.

Can You Trust Wealthfront?

Wealthfront has been around for over a decade and manages more than $20 billion in assets. The service connects easily to most financial institutions, so it’s easy to move money back and forth between linked accounts without fees.

It’s safe to assume that your money is secure with Wealthfront. This isn’t some brand new service managing a few million dollars. This robo-advisor manages over $20 billion in assets, making it one of the largest robo-advisors.

Who is Wealthfront Best For?

Wealthfront is best for investors who want to combine a high-yield savings account, investment accounts, and a holistic financial overview all in one place. Wealthfront makes it simple to keep all of your money on the platform and to monitor assets that are beyond the scope of Wealthfront’s management capabilities. The financial projection tools are helpful for anyone thinking about retirement and who is trying to plot a course to get there. However, investors who like to take a hands-on approach to investing will likely be disappointed by the lack of performance metrics and the inability to fine-tune portfolio balances.

With all of the different investment tools and brokerage account options available to investors, it’s hard to see where Wealthfront really shines. There’s no doubt that the service is more cost-effective than a human financial advisor. That said, it’s hard to look past the fact that the portfolios can’t beat the S&P 500. You could beat Wealthfront’s performance by purchasing a single broad market ETF (i.e. $SPY) in any investment account.

One possible use of Wealthfront is to take advantage of the platform’s free high-yield savings accounts while keeping investments at another robo-advisor or invested in one or more index funds.

Wealthfront is currently not available for Canadian clients. If you are looking for a Canadian robo-advisor, you may consider Wealthsimple.

Conclusion

Wealthfront is a capable robo-advisor that offers a wide range of asset classes and free high-yield savings accounts. While the platform offers excellent tools for retirement planning and wealth management, it falls short on investment performance and features for hands-on investors.

Pros

  • Low-cost ETFs top out at 0.16% exchange fees
  • More asset classes than most competing robo-advisors
  • Free high-yield savings account with $1 million in FDIC insurance
  • Retirement tracking tool allows for saving for other goals along the way
  • Integrates easily with other financial accounts to serve as holistic wealth management tool
  • Tax loss harvesting service can help minimize your tax burden

Cons

  • Historical returns are low compared to other robo-advisors and to the S&P 500
  • No way to fine-tune how money is allocated across asset classes

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