Wealthfront has been a competitor in the pack of robo-advisors which have emerged during the past several years. For a long time it wasn’t clear which investment option would emerge as the true industry leader. For a couple of years we rated Betterment and Wealthfront at the same level, because they both offered similar services, at similar prices, while expanding in impressive ways.
Over the past year we’ve started to observe ways in which Wealthfront and Betterment are starting to part ways in terms of quality. Both services have become more sophisticated, but Betterment still feels intuitive, while Wealthfront feels complicated. Furthermore, changes in basic pricing policy make Wealthfront more expensive for the average investor, with premium services only available to the very wealthy. It simply isn’t the robo-advisor for the everyman that it once seemed destined to be. We’ll still review it fairly, but we wanted to explain why we’ve changed our recommendation.
Founded in 2011, Wealthfront quickly became a known entity in investment-by-algorithm for the masses. They now manage more than $4 Billion for thousands of different customers. Their portfolios, built on Modern Portfolio Theory (MPT), show reliable returns, but may be too conservative for the returns desired by many.
Wealthfront’s philosophy is becoming increasingly familiar to anyone interested in steady investment growth over the long term. The question is, do they still offer the value they once did?
Wealthfront’s Model and Costs
Wealthfront is similar in many ways to Betterment. Both services let users deposit funds, which are automatically distributed into a small selection of ETFs and index funds. Because ETFs are composed of hundreds of individual stocks, this plan achieves immediate diversity. Rather than trying to cherry-pick a winning stock or two, this diversity-first model capitalizes on the steady growth of entire economies.
However, diversification is not the ultimate end in itself. Because Wealthfront’s portfolios are highly conservative in their distribution between asset classes (higher recommended bond allocations than Betterment, further attempts to diversify with “Natural Resources” and “Real Estate”), these portfolios can seem deeply risk-averse, to the point where returns are seriously compromised. For example, in 2016 Wealthfront portfolios returns almost 2% less than Betterment’s (4.64% to 6.51%). Some people may want to be insulated from market turbulence to this degree, but we’re also trying to build our wealth for retirement, right?
Wealthfront isn’t the best choice for investors who love to manage all the details of their portfolios, but that’s not their goal. Wealthfront exists to make it easier for new investors to get started on their investment journey. They allow users to start accounts for normal brokerage, retirement, Trusts, and corporate entities.
Wealthfront’s costs are standard for the industry (0.25% annually for basic users), but the company puts up some barriers to entry for the average user which we don’t care for. Wealthfront won’t let you start an account with a balance below $500. They also won’t let you withdraw less than $250. Betterment charges 0.25% as well, but without the minimum deposits and withdrawals of Wealthfront. Those minimums may not seem like much, but they’re a major impediment to the demographic who most benefit from robo-advising: new, non-wealthy investors. Wealthfront also restricts their premium services to investors with balances below $1,000,000. Betterment offers their version to anyone with more than $100,000, which is another great value for people on the road to wealth.
One good aspect of Wealthfront is that they don’t charge this 0.25% for accounts below $10,000 (it used to be $15,000). After that, users pay the standard 0.25%, which includes or replaces management fees, trading fees, commissions, and account maintenance, as well as a number of features and perks. All users also pay the basic costs associated with the ETFs in their portfolios, an average of 0.06% annually.
Perhaps Wealthfront’s biggest value proposition is ease of use. You can start an account in minutes, and end up with a magnificently diversified portfolio. When you start your account, Wealthfront asks you ten easy questions, to gauge your investment goals and risk tolerance. The ETFs which go on to compose your portfolio are determined by how you answer these questions.
However, Wealthfront isn’t as simple as it once was. Even as they’ve introduced new features, like lines of credit, the system has begun to feel more bloated. Go ahead, look on their website for simple answers about pricing. We’ll wait. The information is there, but it’s buried in paragraph after paragraph of text. Betterment gets right to the point, which seems appropriate for a service that’s supposed to be simple simple simple.
Tax-Loss Harvesting is now a standard robo-advisor feature that Wealthfront offers at no extra cost. In this process, Wealthfront’s algorithms automatically sell losing options, automatically replacing them with winning options from the same asset class. This “locks in” losses and cuts down on an account’s tax burden at the end of the year/cycle. Wealthfront saves their taxable account clients a reported 2% annually from this method. This feature is not unique, but it’s a perk if you’re a Wealthfront customer to be sure. Betterment offers the same, but with additional tax coordinated portfolio options as well.
What ETFs Does Wealthfront Include in Your Portfolio?
Wealthfront has a bare-bones collection of standard ETFs, mostly from Vanguard. The ones that go on to build your portfolio will be determined by how you answer questions when starting your account. Your portfolio will be composed of some combination of these ETFs:
- VTI – Vanguard Total Stock Market ETF
- VEA – Vanguard Developed Markets ETF
- VWO – Vanguard Emerging Markets ETF
- VIG – Vanguard Dividend Appreciation ETF
- LQD – iShares Investment Grade Corporate Bond Fund ETF
- EMB – iShares Emerging Market Bond Fund ETF
- SCHP – Schwab Treasury Inflation Protected Securities ETF
- VNQ – Vanguard REIT Index Fund ETF
- XLE – Energy Select Sector SPDR
- MUB – iShares Municipal Bond Fund ETF
You’ll notice that these selections are very similar to those that Betterment use to build their clients’ portfolios. It’s a winning strategy in either case.
Wealthfront is as secure as you’d hope. They don’t actually hold your portfolio, leaving that duty to Apex Clearing, a company whose sole business is financial security and integrity. Your brokerage account with Wealthfront is protected by SIPC insurance, for up to $500,000. Wealthfront also uses strong encryption standards.
Final Thoughts on Wealthfront
Wealthfront just isn’t the simple solution for the beginning investor that we wish it was. With minimum deposits and withdrawals, inaccessible premium features, increasingly opaque informational resources, and basic perks you can find with any competitor, we just don’t think Wealthfront distinguishes itself like it once was. We know we’ve been talking about Betterment a lot in this review, but that’s on purpose. Where the two services used to seem neck-and-neck as far as value and sophistication, we now see Betterment as the clear winner. Things chance, and our financial platforms need to keep pace. Wealthfront hasn’t, hence our change in tone.