Update August 7th, 2017
Investing. It’s incredibly important, because it’s essentially the only way you’ll be able to grow your wealth enough for whatever your savings goal is, be it college or living for (increasingly more) years after you stop working.
It’s also confusing. When you start throwing around terms like ETFs and you’re worried about tax implications and then you think about the recession again and…needless to say, it’s enough to turn anyone off from the prospect of investing. In fact, a survey earlier this year by Stash showed that 69% of Millennials don’t invest because they find it too confusing. Maybe that’s why one in three Americans haven’t saved anything for retirement.
But investing has come a long way from a bunch of guys in suits watching tickers scroll by.
Wealthfront is an automated investment management and financial planning service that truly allows anyone to be an investor, making it simple, cheap, and hassle-free. Keep reading to learn if Wealthfront is right for you and your money.
What is Wealthfront?
Wealthfront is an automated online financial advisor and brokerage platform. That might sound complicated, but the "automated" part makes things streamlined and extremely easy to use for beginner investors. Unlike other investment options, which are actively managed by a fund manager (or even yourself), automated investing platforms like Wealthfront are able to make changes to your portfolio more quickly, and without the fees that come with paying a human being to do it for you.
Wealthfront follows the modern portfolio theory, which basically says that investors can and should construct their portfolio in such a way that complements their aversion to risk. Don’t want to take changes? Your portfolio can be relatively conservative with bonds that have low risk but won’t grow substantially over the years. Want more growth, faster? Allocate more money to something riskier like stocks, which are more volatile but offer the opportunity for huge gains.
When you sign up for an account, you’ll be asked questions about your risk tolerance, and your Wealthfront portfolio will be based on that. Your portfolio is made up of index funds, which is made up of all of the stocks in an index (like the S&P; 500). Since an index fund holds so many stocks, it balances out with a return that’s usually average. You won’t get huge growth, but you also likely won’t lose money by trying to beat the market.
Consider this: billionaire Warren Buffett made a million-dollar bet with hedge fund managers that he could beat actively-managed investments over a ten-year period with index funds. Eight years in, he’s well in the lead.
This is what Wealthfront is trying to give the average (or even novice) investor: easy-to-use investment features that give "regular" people the same investing opportunities that high-income earners have. With just $500 needed to open an account, anyone can be investing like a pro in no time.
What features does Wealthfront offer?
Wealthfront wants to be a one-stop-shop for your investment needs. To that end, they’ve worked a few key points into their platform that makes it easy for anyone to determine their risk acceptance, open an account, and begin investing their money without investing too much of their time.
Wealthfront offers a variety of retirement vehicles. SEP IRA, IRA, Roth IRA, 401k rollover; if you can use it to retire, Wealthfront offers it.
Not sure exactly where you need to be on your path to retirement? Wealthfront can help with their Path service. Connect all of your accounts and Path will show you where you are, and where you might be in terms of taxes, Social Security, and returns down the line.
The Wealthfront blog states that, "Each dollar spent on investment management fees or commissions is a dollar less that’s invested and capable of earning you additional returns in the future."
Think back to that Warren Buffett bet. As Fortune notes, Buffett’s S&P; 500 index fund was working with a relatively modest return of 6.5%, but thanks to fees, the actively-managed funds would have needed a return of 9% to match that. Actively-managed funds can have a fee of 1% or more.
That might not seem like a lot, but Wealthfront has a 0.25% annual advisory fee on all accounts over $10,000 (and there are never any trading fees). That makes it ideal for people with relatively low-balance accounts, because no fees will add up to big savings compared to other platforms. For a $100,000 portfolio with an average annual return of 6%, the difference between 0.25% and 1% over the course of 30 years is over $100,000 in returns being eaten by fees. Even if Wealthfront's average returns are equal to an actively managed account, you'll still come out on top with the amount you save in fees.
Once you set up an account with Wealthfront, they don’t want you to have to have think about it again if you don’t want to. That’s an enticing promise for people who feel like investing means following every piece of financial news and learning what every symbol on CNBC’s stock ticker means.
Besides automatically helping you make the most of your money when it comes to taxes (which we’ll get to in a bit), Wealthfront also offers automatic portfolio rebalancing by continuously monitoring your portfolio. That means that the portfolio composition that was created when you told Wealthfront how risk averse you are stays in place.
It also means that you don’t have to go in and tinker every time there’s a market change. Similarly, Wealthfront offers a Selling Plan service that "helps all employees who hold public company stock to sell their shares tax-efficiently and commission free" and Tailored Transfers to help you sell investments tax-efficiently.
All of these features are for the best; if you aren’t entirely sure what you’re doing, you may end up doing more harm than good by trying to outsmart the market to prevent risk and losses. With Wealthfront you don’t have to, and you can let compound interest run its course while Wealthfront’s algorithms tweak your investments along the way.
The tax implications of investing is one aspect that can really make people without a lot of experience (or money) nervous. After all, who wants to put their time and effort (and, again, money) into something and end up with a huge tax bill in April?
Wealthfront touts tax-loss harvesting as one of the major ways that their platform is the right one for you.
If you’re like many people who don’t have any idea what tax-loss harvesting means, here’s the basics: You pay taxes on your investments. When a particular fund isn’t performing well, you can sell it and recognize the loss as a tax credit. This can offset the gains in your better-performing funds, essentially lowering your tax bill.
Usually, this strategy of selling and replacing is done manually by a fund manager. But with that manual work comes heavy fees, and it’s usually only available on high-value accounts (typically accounts valued at $5 million or more). That’s where the tech side of Wealthfront comes in: their software monitors accounts and ditches poor-performing funds of a portfolio and replaces it with a similar-but-better-performing fund, and it can do this daily rather than the more common annual tax-loss harvesting. Wealthfront also makes sure you don’t run afoul of the IRS’ wash-sale rule, which regulates claiming investment loses.
For accounts over $100,000, Wealthfront also offers Direct Indexing, which essentially takes all of the stocks in an index and purchases them individually, then harvests the losses on each stock (rather than just at the index level). It’s like a supercharged version of the tax-loss harvesting they offer on all accounts. And accounts over $500,000 are eligible for Wealthfront's "Advanced Indexing" feature, which "works to increase your returns by weighting the individual securities in your portfolio more intelligently" and minimize the tax impact on your returns.
These combined features are examples of the sort of service – digging into the little details that novice investors might not even know exists to them – that makes Wealthfront feel like it’s useful for the everyday investor rather than just people with a lot of money to pay someone to manually manage their accounts.
We’ve talked a lot about 529 plans, along with the challenge of balancing your child’s education with your own savings and retirement. Luckily, Wealthfront has rolled out a 529 plan option so you can do even more of your investing on the same platform.
Like its other products, Wealthfront is trying to make funding a 529 account as simple as possible, from signup to management to recommending a personalized savings plan. It’s also touting fees of 0.43-0.46%, a third of the 1.25% that normally comes with advisor-sold 529 plans, and is similarly waiving the fee for the first $10,000.
In addition to a 529, you can use Path to help with college planning. After selecting a college, you’ll see real time expenses, get an estimate for the financial aid you’re eligible for, and build a savings plan. Paired with a Wealthfront 529, you’ll have a clear plan of just how much college will cost, and exactly how you’ll be able to afford it.
Portfolio line of credit
Need some quick cash? Wealthfront customers with accounts valued at $100,000 or above are eligible for a line of credit up to 30% of their account value. Interest rates are currently between 3.25-4.5% and there are no additional fees, so it can be a good source of money for investors.
Alternatives to Wealthfront
Wealthfront’s main selling point is that it’s a sort of "set it and forget it" type of investing. That means that if you want a more hands-on experience – actively managing your money – you’ll want to look at Wealthfront's competitors. A money manager can help you do this, and you can use Guidevine to find a financial advisor for investment management.
You can also use Wealthfront competitors like Betterment. Betterment offers similar services to Wealthfront, with some differences in the investment options available and the fees charged. For example, Wealthfront has a flat fee of 0.25% for accounts with over $10,000, while Betterment starts out with a 0.25% fee that increases to 0.40% as your account balance rises.
Finally, if you’d rather manage your own money, banks like Charles Schwab and investment platforms like Vanguard and ScottTrade offer comprehensive investment options with straightforward index funds, but with the benefit of more control over where you’re putting your money. Other platforms like Schwab also allow cash balance accounts (like a money market account), whereas Wealthfront doesn’t. Again, watch for fees; Schwab, for instance, has advisory fees of up to 1.5% and management fees for ETFs up to 0.5%
In the end, choosing the right platform for your needs is all about finding the one that you’re most comfortable with. That means ‘comfortable’ in every sense of the word: the system you’re comfortable using, the risk you’re comfortable taking, and the fees you’re comfortable paying. Wealthfront is a great investing platform for beginners that scales as you get older and is the perfect place to start for anyone looking to jump into investing without paying an arm and a leg.
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