As I explained in a previous post, I’m on a quest to find the best retirement plan to roll over my old 401(k). I’m going to conduct the most thorough research I can — publicly — and then put my money where my mouth is, literally rolling over my old 401(k), worth approximately $85,000, into the best plan I can find.
This week’s online financial advisor review is Wealthfront. In my last post, I reviewed Betterment. These two seem very comparable as frontrunners to win my $85,000 401(k) rollover!
When I kicked off this contest of sorts in The Best Retirement Accounts and 401k Rollovers are Online, I explained how a new class of online financial advisors are fighting to lower fees and provide better service to Main Street investors by using software to automate many manual tasks that traditional financial firms get paid big bucks to do.
In that post I outline how I’m really looking to simplify my long-term investing. If I learned anything from trading the markets professionally, it’s that slow and steady wins the race for retirement planning. Part of simplification is creating a plan and then taking yourself out of the equation as a variable. That’s why online financial advisors are so appealing to me. These types of accounts do all of the value-added tasks a managed account does, but with better execution and with remarkably lower fees.
Full disclosure: At the time of this writing, I do not have a Wealthfront account. However, as part of this ongoing series on online financial advisors, I will roll over my $85,000 401(k) after choosing the best service for me.
Wealthfront at a Glance
Wealthfront is perhaps the largest and fastest-growing online financial advisor in the industry. Based in Silicon Valley, Wealthfront was the first to reach $1 billion in assets under management (AUM), and they did it in just two and a half years. Wealthfront claims to remove all commissions and account maintenance fees, by charging just 0.25% of AUM in your account. And the first $10,000 is managed for free!
Types of Accounts Supported
- Roth IRAs
- SEP IRAs
- Taxable (Individual and Joint)
- Non-profit accounts
- 529 College Savings Plans
- First $5,000 managed free if you sign up through a referral
- Earn free management of an additional $5,000 for every friend you refer, with no limit
- Automated portfolio rebalancing
- Daily tax-loss harvesting
- Direct Indexing
- Tailored Transfers
- Financial Planning
- 529 College Planning
- Selling Plan
- Customized portfolio
Wealthfront charges one fee rate, 0.25% of your account balance. However, the first $5,000 is managed for free if you sign up through a referral. And a referral should be fairly easy to find, since existing users get an additional $5,000 managed for free for every friend they refer to Wealthfront, with no cap on referrals.
Wealthfront is an SEC-registered investment advisor. Apex Clearing, who processes trades for Wealthfront, is a member of SIPC and FINRA.
What is Wealthfront?
Wealthfront is an SEC registered investment advisor that offers automated investment management and financial planning through software. Based on Modern Portfolio Theory, they offer personalized investment portfolios of index funds with designed to adjust according to your personal risk tolerance while staying diversified and tax-efficient.
Wealthfront does not offer individual stock trading. Instead, Wealthfront uses software to create a diversified, long-term portfolio based on your tolerance for risk. Wealthfront uses software to automate investment management and financial planning services that traditional brokers and advisors make big money on.
Wealthfront’s Main Features
Quick, Custom Portfolio Allocation Suggestions
By answering a few simple questions regarding your life stage and risk tolerance, Wealthfront will create a portfolio of stock, bond, and real estate ETFs that get you broad-based exposure. You can change your risk score once a month, but Wealthfront advises against it and urges clients to take the risk score and allocation they recommend based on your answers to their questionnaire.
Automated Portfolio Rebalancing
Portfolio rebalancing keeps your allocations amongst stocks, bonds, and different sectors in balance over time. This is key to ensuring diversification. This feature is done with software automatically, on a daily basis, to continually buy some assets when they are low and sell others when they are high.
I am unsure as to how beneficial daily rebalancing actually is. I really don’t have any data to look at. However, the idea behind more frequent rebalancing is a big one. Rebalancing with a traditional broker would require meeting with that broker face to face and maybe rebalancing once per year. By letting software do it, you can rebalance more frequently. This not only saves time, but also dollar-cost averages your rebalancing transactions.
Automated Tax-Loss Harvesting
Each year, you are allowed to take capital losses to reduce your taxable income in that year. The amount you can write off depends on your income level, but the number most often referred to is $3,000. Financial advisors usually review your portfolio near the end of the year and will sell some losers to help you meet this deduction. Automated tax-loss harvesting is a tool that will do this automatically.
This really only applies to taxable accounts, so I will not be utilizing this feature with a 401(k) rollover. But it is very advantageous for those of you looking to use Wealthfront for your taxable investment accounts.
Tax-Optimized Direct Indexing
When it comes to optimizing earnings in taxable accounts, Wealthfront focuses on Tax-Optimized Direct Indexing as a way to improve the results of tax-loss harvesting while also keeping fees at a minimum. Here’s how it works: Instead of using ETFs or Index Funds to invest in U.S. stocks, Wealthfront directly purchases up to 1,001 individual securities on your behalf.
This strategy allows you to fully take advantage of the advanced tax-loss harvesting opportunities available through the movement of individual stocks – a move which will hopefully lead to greater gains overall. Combined with their Daily Tax-Loss Harvesting service, Wealthfront believes it could add up to 2.03% to your annual earnings.
Dividend Reinvestment Aids Rebalancing
When you get dividends from a traditional broker, usually the only choice you have it to take the dividend in cash or reinvest it in the same mutual fund. This choice does nothing to keep your allocations in the right balance. But, with the addition of software, Wealthfront can smartly take a dividend payment you receive from a stock ETF that has risen substantially and invest it in a bond ETF that appears to be priced too low, for example. This is a very efficient use of cash generated from your account.
Wealthfront Invite Program
You can earn “free” management by inviting friends that sign up for the service and fund their account. The current program offers you free management of an additional $5,000 in assets for EVERY person you invite to the service that funds their account. This has the potential to add up over time.
Here’s the math:
Wealthfront after seven referals: ($100,000 – first $5,000 – (7 x $5,000)) x 0.0025 = $150/year
- Five-minute account setup
- No minimums for withdrawals or deposits
- Account minimum only $500
- Automatic deposits
Who Would Benefit From Using Wealthfront?
Wealthfront is very appealing for a few user groups:
- Long-term passive investors with low current account balances. The first $5,000 is managed for free if you score a referral. Need I say more? If you fall under this threshold, you get some really powerful tools while only paying the miniscule fees within the ETFs themselves.
- Those who want to go with the most reputable online financial advisor in the industry. I believe Wealthfront has the best traction and reputation in this growing industry. If you like the features that online financial advisors bring to the table, but are unsure about quality and reputation of some options, then go with Wealthfront. It has strong growth, is a fixture in Silicon Valley, and works with high-profile groups such as the NFL.
- Influencers who can get their family and friends to sign up, too. Wealthfront’s incentive model is tailor-made for people who can recruit others to sign up for the service. When you refer a friend who creates and funds an account, you and your friend each get an additional $5,000 managed for free.
Who Is Wealthfront Not Good For?
If you have a large account, really anything over $100,000, you have cheaper options. Cheaper doesn’t necessarily mean better, but you could get many of the same features from a few competitors.
If you want to trade stocks and options, or think you can beat the market, then Wealthfront isn’t for you, either. If you’re looking for online brokers, check out our picks for best online stock trading brokers.
Getting Started with Wealthfront
Wealthfront’s landing page looks like this (above). It’s powerful to see how far and fast Wealthfront has come, and you get a real sense of the minds behind the business — who will be managing your retirement savings — by reading a bit on that page.
Once you’re finished there, click “Invest now” to start your questionnaire. The first thing I want to point out is that while Betterment only asks you about your age, and uses this as the basis for your portfolio, Wealthfront asks a few additional questions. They ask for your annual income and liquid assets, plus several more questions.
I do really like the added questions around risk tolerance. Asking important questions like this shows that Wealthfront does not take for granted making their investor comfortable. Age is only one factor, and even if you are only in your 20s, some people just don’t have a huge appetite for risk. Wealthfront does a great job with this.
Once you answer these questions, Wealthfront actually shows you your optimal portfolio. To me, this establishes a good level of trust. Wealthfront is confident in the value they bring to the table that they don’t hide behind a sign-up form, or ask people to commit before seeing what breakdown they prepare for you. I like this a lot.
My Wealthfront Allocation for a 401(k) Rollover
Here’s how Wealthfront determined my retirement savings should be allocated. If you total them up, Wealthfront recommends an allocation of roughly 89% stocks and 11% bonds, given my age and risk tolerance.
I was curious how my income and liquid assets would affect this mix, so I tested it by changing the numbers to much lower than actual. This had no effect on my risk tolerance or allocation.
I touched on fees a bit earlier in the post, but I want to go into detail on the fee structure here. As an industry, these online financial advisors crush traditional investment management when it comes to fees. Of course, each OFA has its own fee structure to differentiate itself.
The Wealthfront fee structure is very straightforward. The first $5,000 in each account is managed for free. After that, they simply charge 0.25% management fee on the rest.
So, an $85,000 portfolio would cost me $200 per year.
I got this by subtracting $5,000 (freely managed) from $85,000 and multiplying the balance by 0.0025.
Now what is really interesting is their Invite Program. This program gets you an extra $5,000 managed for free for each time a person uses your unique referral code and funds their own Wealthfront account. Your friend also gets an extra $5,000 managed free.
There is no cap on referrals at this time, which means if you have enough friends, you could have your account managed entirely for free, no matter what size.
Remember, the ETF’s themselves do charge fees to operate, but these are far lower than traditional mutual fund fees. The average ETF fee at Wealthfront is 0.12%.
Will Wealthfront Get My $85,000 Account?
Wealthfront is clearly at the top of its class with its offering. The low fees and automation are exactly what I am looking for to implement my retirement strategy of “hands off, low stress.”
Their recommended allocations and estimation of my risk tolerance seem right on. I mainly want to be able to trust that my money is working in the most efficient manner possible. I get this feeling from Wealthfront. They cover all the major features I need. As far as trust, both Wealthfront and Betterment seem to be at the top of the heap.
Check back for my side-to-side comparison of Wealthfront and Betterment to see how these services stack up against each other, and then I’ll make my announcement of which service will get my account! Stay tuned.