Is Wealthfront worth it?

Robo-advisors like Wealthfront, betterment, and wealth-simple have been exploded a lot in the past couple of years. I even used Wealthfront for a while and still login sometimes to see any updates they have. Betterment surpassed 3 billion in assets under management in 2015 and Wealthfront isn’t too far behind with 2.6 billion under management. But robo advisors are often good for people who either don’t have the skill or confidence to build an investment portfolio on their own. For people with uncomplicated, yet who are timid and scared of investing, Robo-advisors are likely a perfectly fine solution to get them interested in investing. They are not great full extremely complicated financial situations which might require a full-service investment advisor. They fall somewhere in the middle between do it yourself investing (like I promote on this blog) and a full-service advisor with an in-depth detailed advice. I’ll be focusing on Wealthfront for this Robo-advisor piece simply because I have used them in the past and I still like using their projected net wealth calculation. But ultimately, I found the fees and lack of any other services a reason to leave the platform.

Platform:

When you login to wealthfront via the app or the website you get a very nice-looking page showing you your investment portfolio and a retirement plan of how much your investment (and any linked investment accounts) will be worth by the time you retire. Then if you go into your investment account with wealthfront it gives you a breakdown of you asset allocation with the current market value in each asset class and it gives you your rate of return for each investment class and an overall rate of return. As you can see the platform breaks down your overall investment account with the time weighted returns, the total dividends for the chosen time frame, estimated taxes saved (if you have a taxable account) and the wealthfront fees you have paid.    

Front page:

Investment page:

It’s pretty slick and easy to manage since all you have to do is select transfer funds at the top and the investment platform handles the rest of the buying and selling to rebalance your account.

The investment targets are chosen based on your risk tolerance, when you create an account, they ask you a few questions to determine your risk tolerance and they make a suggestion for you based on your answers which includes targets for US, foreign stocks, emerging markets, bonds, etc. But you can always increase or decrease your risk tolerance as you see fit.

As far as the rest of the platform is past the investment side of it, Wealthfront has a pretty nice retirement planning side and a goal. You can give it the age you plan to retire at, link all your investment accounts and give wealthfront how much you expect it will return and how much you’ll be depositing in there every month, and it will spit out the first graphic above. You can add in goals, as you can see I have added a car purchase and a home purchase, it will tell you whether or not those goals are still obtainable without impacting your retirement date and goals.

The one downside with the retirement planning side is the accounts don’t stay linked for every long but this is likely more a product of the investment accounts I use rather than wealthfront itself.

You can add goals into the retirement planning side and estimate how much you want to spend on say, a house, car, grad school, etc. It will then tell you if your goals are achievable and how it will impact your retirement. It’s a good way to get an idea if those goals are something you should be pursuing or not. But with things like extra schooling, it’s not a great estimator because it doesn’t take into account any possible raises or extra income you might get from those expenditures.

Further, wealthfront offers a few more things:

Cash account: Wealthfront offers a cash account (pretty much a checking account with yield) that is currently yielding 0.10% APY as of writing this article.

Tax loss harvesting: it’s a method of selling stocks which are at a loss in order to offset capital gains tax liability – this is useful but far less useful if you are saving a small amount and putting most/all of your investments into tax deferred investment accounts like an IRA.

Money Optimization (automate your savings): they advertise that you can set up how much you want to keep for bills, food, and other expenses, and how much you wish to go to investments per paycheck. It’s slick and you determine how much you wish to save for each category of expenses.

Fees, the one factor in which wealthfront lacks

One issue with any service like this is there are often fees you have to pay (how else are they supposed to make their money?). The wealthfront fees are pretty small. On investment accounts they have a fee of 0.25% on all assets under management. They are deducted monthly and wealthfront doesn’t charge any account opening fees, withdrawl fees, trading/commission fees, or account transfer fees.

For an example of their fees with an account balance of $100k that will have a monthly advisory fee of $20.55 or $246.6 per year. These advisory fees are on top of the expense ratio embedded in the index funds that they choose for you. These are not hugely expense fees but with them being on top of fees you already have with index funds, there’s not a real reason to pay them when there are free options out there. However, what I can say is that wealthfront’s fees are still below average for an actively managed mutual fund or advisors which are often around 0.66% of assets per year.

Historical performance of Wealthfront

How does their historical performance compare against the portfolio that we recommend here (which is typically some combination of VT/BND). Well for their most risky portfolio at a “Risk Score” of 10 after fees is 9.56% since inception with a taxable account and 9.73% with a tax-advantaged account – a risk score of ten puts you into 98% equities and 2% Municipal bonds.  Since their portfolio begins in 2012 we can do the same. Since 2012 a portfolio of 98% VT and 2% BND has given us a return of 12.00% per year. While the combinations of ETFs wealthfront chooses which for a risk score of 10 are: 45% VTI, 20% VEA, 19% VWO, 14% VIG, 2% VTEB, they still under perform a far simpler portfolio. However, maybe their median portfolio outperforms?

According to wealthfront their average client chooses a risk score of 8. This would give you the following targets:

45% VTI, 16% VETB, 15% VEA, 15% VWO, and 9% VIG.

The above portfolio would give you a rate of return of 9.59% with a taxable account and a 10.13% with a tax advantaged account. Since wealthfront, at a risk score of 8 has the portfolio in 16% of municipal bonds, we should compare our VT/BND strategy with the same amount of bonds. With 84% in VT and 16% in BND, our portfolio has returned 10.76% since 2012. So only slightly better than the wealthfront portfolio.

Finally the lowest risk score of 0.5 has the following portfolio:

35% VTEB, 18% VTI, 15% BND, 12% SCHP, 7% VIG, 7% LQD, 4% VEA, and 2% VWO.

Wealthfront’s risk score of 0.5 would put you into a portfolio of 69% bonds. This portfolio according to wealthfront would average 4.96% since 2012 with taxable accounts and for tax advantaged accounts it would average 5.20%.

But with our simple portfolio we’d simply be invested in 69% BND and 31% VT and ours would have had a return of 5.89% per year since 2012.

Summary:

Wealthfront’s methodology is to pick things that are generally uncorrelated with each other so as to reduce risk and keep investment returns acceptable. This is the basis of modern portfolio theory. And Wealthfront has a far cheaper method of doing this than any actively managed mutual fund would. Your expense ratio on the ETFs they choose is very low and the advisor fee is also quite low as well. I really like the simpleness and sleekness of the platform and I really like the retirement planning portion of wealthfront. I haven’t used much of the banking side of wealthfront but I’ve heard that’s good – and I liked the cash account when I used it more.

However, I can’t say that the advisor fee doesn’t bother me a lot. It does. There are better and most importantly, free investment platforms out there. And given the returns are decent but under performing (possibly) the simplest portfolio you can construct; it makes little sense to have to pay a fee for under performance. However, I do believe it makes complete sense for someone to start investing with wealthfront and then eventually move to another platform as they gain more confidence – or simply want to simplify things drastically – seriously even tilting towards certain factors I don’t have more than 4-5 funds in even my most complicated portfolios (excluding my 401k, but there’s no good options in it for a total world index fund).

The one thing I do love and still use some with wealthfront is its investment tracking and retirement projections. It’s easy to use and I like being able to add goals and see how much my retirement goals are impacted. But those are things you can use free of charge and without having money in wealthfront’s cash account or investment accounts. I have personally left wealthfront entirely because I was tired of being charged extra fees for something I can do and manage on my own. The main thing I like about financial advisors is, the thing wealthfront is lacking, advice on the tax implications of selling certain assets and personal recommendations to keep your asset allocations and investments during market crashes. If your advisor can keep you invested in a market crash, he’s probably earned his fee, in my personal opinion. However, wealthfront has nothing like that in place. However, wealthfront is a perfectly fine place to start investing! But without a message urging you to stay invested if you try to withdraw your money, I’d frankly shy away from such a investment advisor.

What I’d do is simply opening up an M1 Finance account and investing in VT/BND with an age-appropriate bond allocation (age – 20 = % in bonds – if negative no percent in bonds or whatever fits your risk tolerance). And simply never touch it except to rebalance every year. But I firmly believe there’s enough DIY resources out there supported by academic research, like this website, and many others, that people largely don’t need financial advisors unless they have a very complicated situation or are simply afraid to invest on their own. And finally, if you’re looking for further ways to enhance returns check out our high risk and ultra-high risk newsletter.

Note: the M1 referral link gives the reader $10 extra dollars to invest with if they choose to fund a taxable with $100 dollars within 30 days of opening the account or fund an IRA with $500 within 30 days of opening an account. The author of this article will receive a $10 dollar compensation as a result of the reader opening an account. The compensation for both parties occurs 30 days after the deposit occurs and assumes the full amount is retained in the account until the end of 30 days from the deposit day. The author uses and endorses M1 Finance. The link to M1 finance is a referral link. The $30 dollar referral lasts until M1 stops offering it.

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