Category: Personal Finance Software

Review of Wealthfront: The Best Personal Finance Software Will Replace Your Financial Advisor at a Fraction of the Cost

Executive Summary of Wealthfront Updated for 2015

Wealthfront is an  online investment advisor that now manages over $1 billion in assets, hitting the mark in only two and half years. Their growth model was focused on young tech employees in Silicon Valley who had stock options and no knowledge of what to do with their wealth. They use ETFs to create a portfolio based on your risk profile and investment needs and then invest on your behalf. Their fees are a fraction of the price of a traditional brick-and-mortar investment advisor. By targeting their product to the high-tech 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. Wealthfront charges an advisory fee of 0.25%.

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.

Wealthfront Subjective Risk Tolerance Question

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 only $500 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?

Wealthfront utilizes a company called Apex Clearing Corporation as its brokerage partner. You are the only one who can deposit or withdraw money into your account (except for the advisory fee charge).

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. It’s easy to use and has a great team of advisors. 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. Wealthfront might not be right for you if you are looking for more hand-holding or want to speak with a traditional advisor. While you can pull your Wealthfront account information into Mint, Wealthfront does not take into account investments in outside 401k plans or IRAs.

Wealthfront vs Personal Capital

Wealthfront is different from Personal Capital in that you don’t have an individual advisor assigned to you. Furthermore, Personal Capital allows you to see all of your accounts in one place so if you have a few different IRAs and 401k plans, you may want to look at Personal Capital. The other difference is in the fees. Wealthfront is 0.25% whereas Personal Capital has a graduated scale and your first $1 million is 0.89%. If you need more hand-holding, go with Personal Capital (see my full review here).

RoboParenting: Kids, Electronics, And A Welcome to Our RoboAdvisor OverLords

In the financial world, robots are changing everything. The rise of the Roboadvisor has sent advisory fees down to the lowest levels ever seen. It’s generally considered a good thing. Lower costs for better management. Yet in other aspects of our lives, we fear the robot. Parenting is one of them. Any parent who wants to maintain their sanity on a long car ride has handed their toddler a device or turned on a DVD. Most of us have done the same at home, despite knowing that “experts” don’t think it’s a good idea. Roboparenting is not a good idea. From the NYTimes:

Parents, grateful for ways to calm disruptive children and keep them from interrupting their own screen activities, seem to be unaware of the potential harm from so much time spent in the virtual world.

“We’re throwing screens at children all day long, giving them distractions rather than teaching them how to self-soothe, to calm themselves down,” said Catherine Steiner-Adair, a Harvard-affiliated clinical psychologist and author of the best-selling book “The Big Disconnect: Protecting Childhood and Family Relationships in the Digital Age.”

Before age 2, children should not be exposed to any electronic media, the pediatrics academy maintains, because “a child’s brain develops rapidly during these first years, and young children learn best by interacting with people, not screens.

Parenting is tough. There are no breaks for parents and while there are millions of books and experts, none of them have written specifically about your little bundle of joy. We’re also in a new time where kids are learning in a new way and interacting with technology that we didn’t have just a few years ago. We don’t know exactly what the long-term affect will be. The thing is, technology provides a lot of great things for families. My teenage son uses Apples Facetime to hang out with his cousin everyday over the summer. His cousin lives two states and a twelve hour drive away. That’s pretty awesome. I couldn’t do that when I was a kid. His relationship will benefit from technology. At the same time there’s a lot of crap on the Internets. Stuff that is disgusting, wrong, or just a total waste of time. Handling it all is a tough task for a parent. We follow a few simple rules for technology that have helped us a lot.

1. Your friends are my friends. This means we get full access to the passwords, settings, and friends list for all applications, platforms, social networks, and devices. It also means that certain friends have to go (this is a great rule for couples as well).

2. Parents set restrictions. We have the iPhone and have turned off Safari. Extreme? Maybe. We replaced it with a custom browser from Mobicip that allows us to better tailor the browsing. We also set restrictions at the carrier level through Sprint and on the Wireless network through the router. Inevitably something bad gets through so we also talk to our kids about bad stuff using the book “Good Pictures, Bad Pictures.”

3. No technology alone. Phones and computers are used out in the open.

4. No technology at the dinner table.

5. People come first. Relationships at home matter most.

6. Technology goes to bed at 9 (though we do watch a movie on the weekends).

Our underlying thought is that technology is a tool. It can be used for good or bad purposes. It can be a negative addiction or a way to connect with people and learn new things. It really depends on how it is used.

Let me get back to personal finance for a moment. Is the RoboAdvisor always a good thing? I have Personal Capital’s app on my phone. It used to give me daily updates on my portfolio, but they turned that feature off. The logic was that it violated the spirit of their investment philosophy. Companies like Personal Capital and FutureAdvisor are taking a long term approach to investing. If you find yourself constantly checking your portfolio, you’re doing it wrong and your RoboAdvisor is getting in the way. Technology has it’s advantages but it shouldn’t be in your face. Rather it should give you greater confidence that you don’t need to constantly monitor market swings because you’re properly diversified.

What about your budget? Do you follow the set it and forget it model where you put the major pieces on auto-pilot and then stick to your cash account or are you in all the details, constantly updating your budget status? If it has taken over your life, maybe it’s time to rethink your method.

While it’s hard to see much of a downside to the RoboAdvisor now, I can see how it might be frustrating come retirement when you want someone to talk to about how to best withdraw your money. This is the one area where it would be nice to talk to someone. Currently, the companies that combine a real-live advisor with a RoboAdvisor are Personal Capital, FutureAdvisor, and Learnvest. It’s a nice touch, but even that has some limits. There remains a space where you want someone with you helping you. It’s always at the difficult moments. The death of a loved one. A child’s illness. Those are moments where it would be nice to be able to call someone and ask them to sit down and tell you how to access a death benefit or an emergency fund.

So the rise of our Robot overlords can be a good thing, but at some point, both kids and investors want a human touch. As parents we can step in and teach our children and help them. Hopefully someone is there to help you when you need to be saved from technology or brought back to investing reality.

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