In this article, I’ll explain why Wealthfront could be the best robo-advisor out there — and what makes it so outstanding.
Table of Contents
- Wealthfront Review: Quick Look
- What Is Wealthfront?
- How Does Wealthfront Work?
- How Much Does Wealthfront Cost?
- Wealthfront Review: Where It Shines
- Wealthfront Review: Where It Falls Short
- Path: Wealthfront's Free, Software-Based Financial Advisor
- Wealthfront's Customer Perks
- Who Should Use Wealthfront
- Wealthfront Alternatives To Consider
Wealthfront Review: Quick Look
| Company Name | Wealthfront |
|---|---|
| Company Type | Investment and financial services company |
| Key Features | Low costs and strong planning tools |
| Downsides | No human involvement |
| Best For | Cost-conscious, hands-off investors |
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What Is Wealthfront?
Founded in 2008 in Palo Alto, California, Wealthfront started as an automated investment firm and since has expanded into banking.
Wealthfront is a robo-advisor, which is a company that uses algorithms to help you invest in one of several low-cost, diversified, pre-built portfolios that is tailored to your needs.
As one of the original robo-advisors, Wealthfront has continued to build its product over the years and now offers, excuse the pun, a wealth of strong features.
Wealthfront Chief Investment Officer Burton Malkiel is the author of “A Random Walk Down Wall Street,” now considered to be a classic in finance writing. In it, Malkiel emphasizes how difficult it is to outperform the market and how individual investors should instead focus on paying as little as possible in fees and transactions.
Wealthfront’s investment philosophy and robo-advisor product matches Malkiel’s point of view.
How Does Wealthfront Work?
When you reach Wealthfront's signup page, pay attention to both clickable options.
If you only want to use Wealthfront for its free financial planning tools, you’ll need to click “explore free planning tool” instead of “Open a Wealthfront account.” Otherwise, you’ll get trapped in a sales funnel and may not be able to access the free tools.
The steps are similar for each choice. But if you’re trying to invest through Wealthfront’s robo-advisor, you’ll start with an online questionnaire.
Wealthfront first asks you to choose your top financial objective, represented by a specific account type, from four options (you can add additional accounts later):
- High-interest cash (cash management account)
- General long-term investing (taxable investment account)
- Retirement investing (Individual Retirement Account (IRA))
- College investing (529 plan)
Once you choose one of these four investment options, Wealthfront will then ask you a series of questions about your income, timeline and risk tolerance.
Wealthfront scores your risk tolerance and then provides a prebuilt portfolio based on your answers. You can edit your answers or manually change your risk tolerance level if you disagree with the algorithm’s results.
Once you set up your Wealthfront account, your decision making is done, and your job becomes solely to contribute more money over time.
Wealthfront uses daily threshold rebalancing rather than quarterly or yearly rebalancing, so your portfolio will never stray more than 3% away from the pre-set portfolio allocations.
How Much Does Wealthfront Cost?
| Advisory Fees | Weighted Average Expense Ratio | Minimum Deposit | Annualized Return | Account Types |
|---|---|---|---|---|
| 0.25% | 0.10%* | $500 | 9.60%* | Taxable, Retirement, Trust, College |
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*Based on Backend Benchmarking's Fourth Quarter 2020 Robo Report. Wealthfront's robo-advisor recommends different portfolios to different clients. Your actual results will vary based on the portfolio option you select as well as future market performance.
Wealthfront is among the least expensive robo-advisors, and is usually bested only by Vanguard Digital Advisor.
Vanguard’s robo-advisor charges an annual fee of 0.15% with average expense ratios of about 0.07% according to Backend Benchmarking.
But as of this writing, there are some Wealthfront promotions floating around that allow new clients to forego the annual 0.25% fee on their first $5,000 invested.
Wealthfront Review: Where It Shines
After reviewing Wealthfront, I’ve identified the following positives:
- Automated investment management. Wealthfront is a trustworthy place to park your investment dollars if you want to take a hands-off, automated approach to managing your portfolio.
- Low costs. Wealthfront's annual fee and average expense ratios are among the least expensive in the industry.
- Top-notch financial planning tools. I'll talk more about the tools, called Wealthfront Path, shortly. But Wealthfront arguably leads the robo-advisor industry in terms of the free digital planning tools it provides to clients.
- Advanced tax-loss harvesting. Wealthfront's multi-layered approach to limiting the tax burden of its customers draws rave reviews from several major financial publications and websites.
- Rare focus on college savings. Saving for a family member's college education usually isn't the top priority. When you need to worry about an emergency fund, a retirement plan, a mortgage and the family cars, it's easy to forget about saving for college. But Wealthfront makes it a focus of its efforts.
- Strong cash management account offering. Wealthfront's banking option offers 0.35% APY, no fees and requires only a $1 minimum deposit.
Wealthfront Review: Where It Falls Short
After reviewing Wealthfront, I’ve identified the following negatives:
- No human involvement. There's no human-involved financial planning and no customer support live chat. If you want to actually interact with a person in real time, you'll need to call Wealthfront's customer service department (open only during business hours).
- Cash heavy. Wealthfront withholds cash from your investment account that's equal to your annual fees for the year. The investment firm doesn't use fractional shares either, so you may see more cash in your portfolio than you'd expect.
- Not very customizable. Like almost every robo-advisor, you don't get to pick individual stocks through Wealthfront. Beyond your risk tolerance, there isn't much you can customize unless you invest at least $100,000. At that point, Wealthfront lets you specify companies in which you don't want to invest. But as of this writing, Wealthfront's website indicates more customization may be available in the future.
- Not easy to navigate to free tools. Wealthfront makes it difficult to access their free financial planning tools if you're not signing up for and depositing into a Wealthfront cash management or robo-advisor account. It's possible, but as I mentioned earlier, you have to click on "explore free planning tool" the first time you go through the signup wizard.
Path: Wealthfront’s Free, Software-Based Financial Advisor
Backend Benchmarking, which closely monitors every major robo-advisor and provides quarterly data, named Wealthfront its “best robo for digital financial planning.”
I’ve also seen Path, the name of Wealthfront’s financial planning software, one website described as a free full-service financial advisor without the human; another site described it as a software-based financial advisor.
The best part of Path? It’s free, even if you aren’t a Wealthfront client.
The tools balance simplicity and sophistication in design and information. Available on mobile and desktop, Path pulls in data from all your outside financial accounts. (You can even link your Coinbase account to incorporate your cryptocurrency holdings.)
If you’re squeamish about giving a company access to your account, Path may not be for you, but this sort of thing is becoming commonplace among financial tools.
Here’s a sampling of the ways Path can help.
Retirement
Assuming you’ve linked all your accounts, Path analyzes your spending activity and uses government data to predict how much you’ll spend in your retirement years. Path also takes into account your assets, planned retirement timeline, inflation and future Social Security benefits to estimate how much you’ll have for retirement.
Home Planning
I'm starting to plan for building a house, so this is the tool that excites me the most. Path incorporates your personal finances, home prices and mortgage rates to estimate the price range for the houses you can afford to buy, which can be challenging to figure out. Path pulls in data from popular real estate sites Zillow and Redfin, so you can even shop for houses through Path.
College Savings
Path allows you to pair your 529 college savings plan with the college you’re targeting for your student. You can use Wealthfront’s 529 option or an outside account. Path helps you develop a monthly savings plan based on the costs of the college you’re targeting, even estimating financial aid.
Time Off Work
Whether you’re planning to take a leave of absence or a vacation, Path helps you calculate how long you can afford to go without your income and how that will impact your long-term goals such as retirement.
Wealthfront’s Customer Perks
In addition to its digital planning tools, here are some other benefits that Wealthfront offers its customers.
1. Cash Management Account
Wealthfront's cash management account earns 0.35% APY on uninvested cash, which is not far behind some of the best high-yield savings accounts in 2021.
You can open a Wealthfront cash management account for just $1, and you won’t face any annual fees.
Wealthfront offers its banking customers $1 million in FDIC insurance by white-labeling four different banks. That’s four times more than a traditional bank account.
Wealthfront will give you an advance on your paycheck up to two days early if you set up direct deposit.
2. Line of Credit
If you hold at least $25,000 in your Wealthfront account, you’re able to borrow up to 30% of your account value.
Wealthfront's loan interest rates are 2.35% to 3.65% as of March 2021 depending on the size of your account.
You can pay back the loan on your own schedule, but if the value of your investment account drops, Wealthfront may put you on a payment schedule.
Money expert Clark Howard prefers that you pay for unexpected expenses from an emergency fund that he recommends you establish before you start investing. But if you run into a situation where you'd typically charge something to a credit card and you don't have the money to pay it off in full when the bill comes, Wealthfront's line of credit can be a much less expensive option.
3. “Autopilot”
Wealthfront touts “Self-Driving Money,” which is its work-in-progress effort to automate and optimize where every dollar in your paycheck goes. The company bought a software firm in 2020 to work toward that goal.
Most notably, it launched what it calls “Autopilot,” which allows you to set a maximum balance on your checking or cash management account. If your balance exceeds the maximum by at least $100, Wealthfront will transfer that money to an account you’ve designated in advance (the company, of course, recommends your Wealthfront investment account).
Autopilot may be a good option for folks who tend to spend excess cash rather than invest it.
4. Best-in-Class Tax-Loss Harvesting
Wealthfront's approach to taxes may be the best among robo-advisors. If you're a tax nerd, you may appreciate reading Wealthfront's white paper.
Here’s a simplified version of Wealthfront’s tax plan:
- Daily tax-loss harvesting. Wealthfront says its automation allows it to look for opportunities to benefit your tax position daily. That's not often the case for traditional (human) full-service financial advisors.
- Focuses predominantly on ETFs. Wealthfront's portfolios include plenty of index funds, which are more passively managed (read: inexpensive). ETFs are preferable to index funds from a tax standpoint.
- Reinvests dividends to rebalance your portfolio. Rebalancing your portfolio via dividends helps minimize sales and can lead to fewer realized capital gains.
- "Tax-Minimized Brokerage Account Transfer." Many investment firms won't fuss over the optimal tax strategy when you're transferring in assets. Wealthfront follows a list of automated protocols that does. For example, the company waits to sell assets that would produce short-term capital gains taxes until you've held them for at least one year.
- Stock-level tax-loss harvesting. Also called "direct indexing," you must invest at least $100,000 with Wealthfront to be able to take advantage of this feature. Wealthfront claims it's the only robo-advisor to offer direct indexing, which involves owning each individual stock within an index in an effort to control capital gains and limit the tax impact.
Wealthfront offers additional tax-related benefits for investors with accounts of at least $500,000 and $1 million.
Who Should Use Wealthfront
Wealthfront’s robo-advisor can appeal to a wide variety of investors. But if you fit more than one of the descriptions below, you probably will be super happy investing with Wealthfront.
- Cost-conscious. If you care about fees as an investor — and you should — you'll appreciate how Wealthfront's total cost compares to other options in the robo-advisor industry.
- Hands-off. You won't be happy if you like picking individual stocks. But if you prefer to invest your money smartly but with minimal effort, a robo-advisor such as Wealthfront will appeal to you.
- Enjoy digital charts and tools. Its free financial planning tools are a large part of Wealthfront's appeal. If you like charts and data, especially when it comes to your personal finances, you probably will enjoy Wealthfront.
Wealthfront Alternatives To Consider
If you'd like to compare Wealthfront to another robo-advisor, take a look at Betterment.
If you're looking for a different investment method, money expert Clark Howard strongly recommends Vanguard's Personal Advisor Services (PAS) to anyone looking for a financial advisor. PAS is a hybrid robo-advisor that gives you remote access to full-service human financial advisors while utilizing the company's robo-advisor to handle your investments.
For more alternatives, consider managing your own investment portfolio, checking our list of the best robo-advisors or browsing our list of the best investment companies.
Final Thoughts
If you want a robo-advisor or if you simply want some excellent free financial tools, Wealthfront is a great option.
Now that you've read my Wealthfront review, it may be a good idea to make sure that a robo-advisor is the right choice for you before investing. If you're sure you want to invest with a robo-advisor, you may want to take a close look at Betterment as well.
However, in terms of robo-advisor options, you can’t go wrong with Wealthfront. It could be the best robo-advisor overall.
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