Wealthfront brokerage firm review. Fees & commissions, advantages & disadvantages, minimum requirements & promotion offers for opening a new online account with the online investing robo advisor.

What is Wealthfront?

Wealthfront is an automated investment service that allows clients to open a retirement account, or a personal account. The difference between the two accounts is that the personal account can be withdrawn without penalties, whereas the retirement account will incur penalties upon early withdrawal before retirement age.

When creating each account the user has the option to choose their risk tolerance, age, and other factors to determine asset allocation. Asset allocation will determine how aggressively the portfolio will grow.

Wealthfront Performance

It depends on the account, but the stock market historically sees on average a 10% return each year. Figure 1 below shows the returns from an account over 10 months.

Wealthfront Performance

In this scenario the retirement account shown has seen a 13.6% time-weighted return and a 13.4% money-weighted return.

The Personal Account has seen similar returns at 14.5% time-weighted and 15% money-weighted.

Wealthfront defines Time-weighted returns as, “…the daily returns of your account from the time it was initially funded until the present. It is a common way to compare investment advisors because it ignores the timing of deposits and withdrawals which can negatively or positively impact performance. It is for this reason that all investment funds are measured based on time-weighted return.”

In other words, this means that despite the timing of deposits and withdrawals, the account will see this rate of return over a long period of time.

Money-weighted return as defined by Wealthfront is, “…the return of your account given your specific pattern of deposits and withdrawals. It is the most common way to evaluate an account's performance, but it is not a good way to evaluate an investment advisor because the advisor has no control over the timing of deposits and withdrawals.”

Money-weighted returns factor in the timing of deposits and withdrawals and show actual returns.

Returns can also come in the form of tax deductions. Wealthfront utilizes tax-loss harvesting, which saves money on taxes. Smaller accounts will see less tax deductions. For example, the account shown in the images saw only $12.25 in deductions through a tax credit, because of foreign-taxes paid due to Wealthfront’s diversified portfolio including foreign assets.

Additionally, the portfolio shown saw $72.16 in reinvested dividends. These dividends were paid out because of dividend stocks, and other assets that periodically pay returns. All Wealthfront users have the option to send these dividends to their bank, or to have them automatically reinvested.

Another benefit of Wealthfront is their Direct-Indexing feature. This feature, defined by Wealthfront, boasts that, “When combined with our Daily Tax-Loss Harvesting service, the countless opportunities presented by individual stocks in this manner could add an average of 2.03% annually to your investment return.”

This feature is only available to accounts with a minimum balance of $100K.

What other benefits does Wealthfront offer?

A recent addition to Wealthfront is the "My Path" perspective:

Wealthfront Review

My Path allows creation of a customizable investment plan according to individualized goals. In the example, the graph illustrates the required deposits to retire at age 30, and receive $2000/month in retirement. The age and amount to receive each month are customizable.

Wealthfront Investing Review

What are the disadvantages of choosing Wealthfront?

Wealthfront charges an advisory fee of 0.25% per year for accounts valued over $10,000. Wealthfront's competitor, J.P. Morgan Chase, charges no fees to invest with them.

However, it is possible to raise the threshold for fees from accounts over $10,000 to accounts over $15,000 by having someone sign up through a referral link. Each referral increases the amount managed for free by $5,000.

Another disadvantage is that one does not control the exact portfolio asset allocation. As a Wealthfront user, the portfolios are already created based on the questionnaire completed during account setup. For those that want more control over asset allocation this can be a major annoyance.

Another slight disadvantage to Wealthfront is that if one chooses to invest smaller amounts of money, there will be money in the account that is not invested. For example, if there is extra money left over after purchasing a share, but less than the amount needed to purchase another share, then that money will sit in the account, providing no benefit. This can be seen in Figure 4 as an asset named, “Cash”.

Overall, the example account has shown above average returns over a 10-month period, as seen in figure 5.Figure 5.

Note that the example account is below $10,000 valuation, so no fees have been processed in this example.

What are the exact dollar value returns, not percentages?

By calculating contributions minus “right now” value, actual returns by dollar amount can be calculated.

(Actual Account Value – Contributions) + (Actual Account Value – Contributions) = Net Returns
($6,795.75-$6,417) + ($2,768.54-$2,588) = $559.29
Total contributions = $9005
"Right now" value = $9564.29

For these accounts we can see a net return of $559.29, over a 9-month period.

Overall Wealthfront is a service that can make an investor’s life much easier, and simpler. With only a few drawbacks, Wealthfront is a solution for many who want a set-it and forget-it investment solution.

Wealthfront Review Summary

You would be hard pressed to find a better system than Wealthfront’s personal investment account that doesn’t charge an arm and a leg. While the account isn’t totally free, every savvy investor should know that there is no such thing as free lunch. Compared to a traditional investment account, Wealthfront’s is cheaper, easier, and creates higher returns.

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