Executive Summary of Wealthfront
Wealthfront has introduced online personal finance advisory services tailored to the nouveau riche of Silicon Valley with a low cost plan and a best-in-class methodology that will quickly turn it into a top destination for online personal financial management. By targeting their product to an intelligent subset of the general population, they have created something that everyone will appreciate. It is easy to use, intuitive, and very clean from a design standpoint. Their investment methodology is outstanding as well, as you would expect the best personal finance software to be. Trades are free. You pay for advisory services on portfolios with a value greater than $25,000.
Overview of Methodology
Wealthfront utilizes Modern Portfolio Theory (“MPT”) to help investors create a personalized risk adjusted portfolio based on their investing horizon, appetite for risk, and portfolio size. Diversification and strict reallocation ensure that your money is utilized in the best way possible. This methodology is utilized by wealth advisors and investment professionals worldwide to provide the best possible return with the lowest desired risk. Their proprietary software will reallocate your portfolio to ensure that you maintain the needed balance to maximize returns. Their whitepaper on their investment methodology says:
Prior to the launch of the Wealthfront Online Financial Advisor, it was not practical to offer MPT to everyone because delivering a complete solution was too complex. Specifically, the effort required to optimize an asset allocation, the identification of the ideal securities to represent each asset class and the identification of an individual’s true risk tolerance has been beyond the scope of free, web-based tools.
Setting Up Your Wealthfront Portfolio
Setting up a portfolio with Wealthfront is a simple process.
First, investors are asked a series of questions to test their risk tolerance from a subjective standpoint and from an objective standpoint. I was asked questions about what I would be willing to lose in certain situations as well as my age, after-tax income, and amount ready to invest. The former are the subjective risk tolerance questions and the latter are the objective risk tolerance questions.
Next, you are presented an Investing Plan that tells you what to invest in, the percentage of your total investment to allocate to a given security, and the dollar amount to spend on each investment. Wealthfront relies primarily on ETFs for investment. They do this to capture broad markets and also because the ETF expenses are lower than mutual fund expenses. The company does not receive compensation for recommending ETFs from specific companies. I find it reassuring that there is no additional commission coming to Wealthfront when I purchase the securities. Their recommendations are unbiased and based on a survey of thousands of ETFs. Know that if they recommend 10 Vanguard ETFs, it’s because those are the best available. Wealthfront requires that you have at least $5,000 to invest, but their fee structure makes it very affordable for investors getting an early start on building wealth.
Wealthfront Advisory Fees
Wealthfront’s fee structure is easy to understand. They charge a monthly advisory fee based on an annual rate of 0.25% of assets under management during the month.
Here is an example provided by Wealthfront:
Jane invests $50,000 in a diversified portfolio on Wealthfront. Jane begins investing on April 5th and invests through the end of April, for a total of 26 days. Wealthfront’s annual fee rate is 0.25 percent. To simplify this example, we will assume that the net market value of Jane’s assets remains $50,000 for every day in the month of April. Therefore, Jane’s advisory fee for the month of April equals: (0.25% / 365) * (the net market value of managed assets greater than $25,000) for every day on which the assets were managed = (0.25% / 365) * $25,000 * 26 = $4.45.
How Much Are Wealthfront’s Brokerage Fees
In addition to their advisory fee, you’ll have to pay third party fees on the ETFs and broker commissions, which will vary for each customer. The ETF fee will probably be in the 0.15% – 0.20% per year range and the commissions are not fully disclosed but in the sample portfolio that I put together, Wealthfront estimated that the commissions would be $1.12 on a $15,000 investment, $3.20 on a $50,000 investment, and $7.56 on a $100,000 investment. Very nominal commissions. You’ll pay additional broker commissions when Wealthfront rebalances your portfolio. The rebalancing is an automatic process that ensures that you maintain the correct investment mix. Your portfolio will naturally drift from the optimal balance as certain indexes and markets out perform others. Studies show that rebalancing could add up to 0.4% per year over ten years. Wealthfront also considers the tax implications and commission costs when rebalancing.
Is Wealthfront a Broker?
No. Wealthfront opens an investment account with Interactive Brokers for you. This account is your account and you are the only one that can deposit or withdraw money into the account. Interactive Brokers is one of the best stock brokers (see my fee comparison for more information) and another good sign that Wealthfront is committed to low cost and the best value. Interactive Brokers handles a lot of volume and is very trustworthy.
After opening the account, you will purchase the securities. You can also start an IRA (Traditional, Roth, or SEP) or rollover your 401k. The focus for Wealthfront is simplifying the investment process. They do it very well.
Should I Open An Account With Wealthfront?
I highly recommend Wealthfront. This is the best personal finance software for investment management available online because of their fee structure and ease of use. Whether you are starting on your personal financial journey, or well on your way, you’ll enjoy Wealthfront’s low fees and great service. This should appeal to anyone looking for a DIY approach to financial management. Wealthfront is ready to replace your financial adviser’s high fees with world-class financial management for a fraction of the cost.