Wealthfront Review: Robo-Adviser that Helps You Start Investing with Only $500

person-woman-desk-laptop

Robo-advisers like Wealthfront are online wealth management platforms that offer automated investment advice and portfolio management. Because robo-advisers rely heavily on algorithm-based guidance, they are often more affordable than working with a financial adviser one-on-one. Wealthfront charges no advisory fee on amounts below $10,000. For accounts over $10,000, it charges a monthly management fee of 0.25%. That works out to $18.75 per month for a $100,000 account.

Services like Wealthfront also require far lower account balances to get started. Whereas a traditional financial advisory firm might work with anyone with assets lower than $50,000, Wealthfront only requires that you invest $500 to start. The Wealthfront service includes a diverse portfolio of exchange traded funds (ETFs), tax harvesting, periodic rebalancing, and dividend reinvesting.

In this post, we will review Wealthfront’s services. Read on to find out:

  • How Wealthfront works
  • How much Wealthfront costs
  • The fees and gotchas
  • Pros and cons
  • How it stacks up against competitors

How Wealthfront Works

Wealthfront supports investors with both non-retirement accounts and retirement accounts. For retirement, you can open 401(k) rollover, traditional IRA, Roth IRA, and SEP IRA accounts. Wealthfront also allows you to open joint and individual accounts that you can use to invest money for other long-term financial goals besides retirement. You can also use Wealthfront for trusts.

The Wealthfront investment team invests client funds in low-cost ETFs and focuses its strategy on maximizing long-term return. To get started, Wealthfront measures your risk tolerance by asking you a few questions about your income and liquid assets. After completing the assessment, Wealthfront recommends an ETF portfolio. You can make adjustments to your portfolio by changing your risk tolerance.

ETFs at Wealthfront track indexes for 11 diversified asset classes. The Wealthfront asset classes include:

  • U.S. Stocks
  • Foreign Stocks
  • Emerging Markets
  • Real Estate
  • Natural Resources
  • U.S. Government Bonds
  • Treasury Inflation-Protected Securities
  • Municipal Bonds
  • Dividend Stocks
  • Corporate Bonds
  • Emerging Market Bonds

Key Wealthfront Features

wealthfront

Wealthfront offers a free Portfolio Review service for anyone, including non-Wealthfront clients, interested in getting an assessment of their current portfolio. Wealthfront also has a robust help center you can check out for in-depth information on the investment team’s strategy before signing up.

All Wealthfront accounts include the initial recommendation, diversified ETFs, tax harvesting, and periodic rebalancing. If you have an account size over $100,000, there’s a premium Direct Indexing feature that’s supposed to offer even greater tax efficiency.

Here’s an overview of each feature in detail:

How Much Wealthfront Costs

In addition to the 0.25% monthly fee Wealthfront charges, investors will pay any fees associated with the underlying ETFs in their portfolio. The additional cost of your ETFs will vary. The average expense ratio for ETFs offered on Wealthfront’s platform is 0.12%.

The first $10,000 you invest with Wealthfront is always free. Beyond $10,000, Wealthfront charges a monthly advisory fee that equals 0.25% of the net market value of your assets.

For a simplified example, if your portfolio has a net market value of $15,000, you would pay no management fee for $10,000 and 0.25% for the amount greater than $10,000. In this case, $5,000.

Wealthfront does not currently have a tiered pricing system that charges you a lower advisory fee the more you invest. The management fee is 0.25% across the board.

Portfolio Review

If you’re thinking about moving your portfolio to Wealthfront, the free Portfolio Review feature is the first place to start. Wealthfront connects to your current brokerage account to analyze your fees, taxes, portfolio diversification, and cash drag. Cash drag is the amount of excess cash you have on hand that you should be investing. Based on the results, Portfolio Review will make recommendations on ways your investment strategy could be improved.

Rebalancing

When you become a Wealthfront client, your investment allocation may stray away from the target recommended allocation over a period of time. Wealthfront keeps tabs on your allocations and will periodically rebalance them to be sure they are aligned with your financial goals.

Daily Tax-Loss Harvesting

Tax-loss harvesting is the process of selling off losses to offset taxes on your investment gains and income. Wealthfront’s investing algorithm can monitor your accounts daily for tax-harvesting opportunities. According to Wealthfront, Daily Tax-Loss Harvesting can improve performance by as much as 1% because of the tax savings.

Direct Indexing

Direct Indexing is the next level of tax harvesting available for Wealthfront clients with larger portfolios. Wealthfront purchases up to 1,000 individual stocks on your behalf. The movement of individual stocks gives Wealthfront more flexibility to harvest investment losses. According to Wealthfront, Daily Tax-Loss Harvesting and Direct Indexing combined can add as much as 2.03% to your investment performance annually.

The Fine Print

Wealthfront is overall transparent in how it charges fees, so there aren’t any “gotchas” to worry about. There is no charge for withdrawals or an exit fee for closing your Wealthfront account. Besides the first $10,000 you invest being free, you can qualify for a waiver on an additional $5,000 when you refer a family member or a friend. After their account is funded, both you and your friend or family member will get the fee waiver on an additional $5,000.

Pros and Cons

Pro: No advisory fee for small accounts. If you’re new to investing, starting small has its benefits. Wealthfront charges no advisory fee on amounts below $10,000. And if you can land a referral, you’ll get another $5,000 managed for free.

Con: There’s a minimum balance. Wealthfront requires a minimum account balance of $500 which is much lower than traditional investment firms. However, other roboadvisers like Betterment will manage your portfolio if you have even less money to invest. Betterment has no minimum balance requirement and doesn’t even charge a management fee if you have $0 in the account. We’ll cover what Betterment has to offer investors in the next section.

Pro: Direct Indexing for larger accounts. You can take advantage of Direct Indexing for increased tax efficiency if you have an account size over $100,000.

Con: The management fee for larger investments. As mentioned, if you have a larger amount to invest, Wealthfront doesn’t give you a break on cost. We’ll discuss a robo-adviser in the next section that has tiered pricing to show you the difference. Wealthfront states the reason for not offering a lower advisory fee for amounts over $100,000 is the value you get from Direct Indexing.

Pro: Portfolio Review and an easy setup process. Wealthfront offers an intuitive way to find out if your current portfolio is performing effectively through Portfolio Review. If you discover Wealthfront is a better option, a representative can assist you in transferring funds.

How Wealthfront Stands Up to the Competition

Betterment is a robo-adviser that offers trades, transactions, automatic rebalancing, and tax harvesting in each of its portfolio management plans. There’s no minimum balance required to start a Betterment account. However, the amount you invest will impact how much you pay for the service.

Betterment has the following management fee structure:

  • $0 – $10,000 account balance: Flat $3 per month fee if you don’t set up auto-deposit
  • $0 – $10,000 account balance: 0.35% annual fee if you have an auto-deposit of at least $100 per month
  • $10,000 – $100,000 account balance: 0.25% annual fee, no auto-deposit required
  • $100,000+ account balance: 0.15% annual fee, no auto-deposit required

As you can see, for someone investing over $100,000 with Betterment, the fee is just 0.15%. That is a better deal compared to Wealthfront’s 0.25% fee. Betterment also utilizes a portfolio of ETFs. The expense ratio for ETFs ranges from 0.09% to 0.17%, similar to Wealthfront.

WiseBanyan is a robo-adviser with no advisory fee, which makes it unique. However, there are nickel-and-diming administrative fees to consider. WiseBanyan offers tax harvesting, but it’s not free. It costs 0.25% of taxable assets up to a $20 cap per month. You can find a list of the other administrative fees here.

WiseBanyan uses ETFs and doesn’t have a minimum investment requirement. The average ETF expense ratio is 0.12%, and the range is 0.08% to 0.13%.

Who Will Benefit the Most from Wealthfront

Wealthfront may be worthwhile for those new to investing or for passive investors who aren’t seeking much customization in their portfolio. You do have the power to adjust your risk tolerance, but you can’t make direct changes.

If you have over $100,000 to invest, you may want to weigh the pros of the Direct Indexing feature against the advisory fee savings you may be able to obtain using another robo-adviser that has a tiered pricing system.

The post Wealthfront Review: Robo-Adviser that Helps You Start Investing with Only $500 appeared first on MagnifyMoney.