This robo-advisor invests your money for you.
For many people, investing sounds complicated. How do you get started? Should you manage your money yourself? And if you hire someone to grow your money, whom should you choose?
Wealthfront is an investment firm that caters to a specific type of person. Consider letting it grow your money if these philosophies resonate with you:
- You believe in investing for the long term.
- You want low fees.
- You believe software can manage money better than humans.
Let’s dive into Wealthfront so you can see if it’s right for you.
A closer look at Wealthfront
Founded in 2008, Wealthfront is headquartered in California’s Silicon Valley. According to SEC filings, it has over $10 billion in assets under management.
Driven by software
With most asset management companies, humans make most of the investment decisions. Wealthfront takes a different tack: Its proprietary software decides where to invest your money.
According to Wealthfront, this robo-advisor strategy is a better way to grow your money. Supporters of this technology say it can make more accurate investment decisions than humans can, mainly by deploying algorithms and mathematical rules.
How Wealthfront grows your money
Wealthfront’s philosophy is to grow your money with a diversified investment portfolio. To that end, it invests in index funds.
Index funds explainedBuying an index fund means you buy all the stocks and bonds in an index — or a curated list of investments. For example, the Dow Jones Industrial Average is an index consisting of 30 major companies.
Many financial advisers recommend index funds because they give your money broad exposure to the market. Instead of putting all of your money into a few stocks, you spread your money around to decrease risk.
Instead of constantly moving your money in the stock market, Wealthfront puts your dollars in index funds and waits for the market to grow. In the meantime, it uses three strategies to grow your money:
- Diversify your portfolio. Wealthfront’s software keeps your investments diversified to maintain the risk profile you’re comfortable with.
- Keep taxes to a minimum. With software that executes trades strategically to keep your tax bite low, you’ll have more money left to grow over time.
- Reduce fees. Wealthfront seeks low-cost investments so you pay less in fees. It also charges a lower annual advisory fee than the industry average.
Which accounts can you open?
- Taxable (individual and joint). Build long-term wealth.
- Trust. Hold assets on a beneficiary’s behalf.
- 529 college savings plan. Helps you pay for higher education expenses.
- Traditional IRA. You don’t pay taxes until you withdraw during retirement.
- Roth IRA. You pay taxes on contributions, but future withdrawals are tax-free.
- SEP IRA. Save for retirement as a self-employed contractor or sole proprietor.
How much does it cost?
Wealthfront charges an annual advisory fee of 0.25% — lower than the industry average of 1%. It doesn’t charge trading commissions. If you signed up before April 1, 2018, you’ll pay no management fees on the first $10,000 you invest.
It’s free to open an account. Additionally, you won’t pay fees for withdrawals, account closure, account transfer or trades.
The minimum opening deposit is $500.
What are the benefits of Wealthfront?
- Get a robo-advisor. Wealthfront relies on investing software, which the company says is more effective than human wealth managers.
- Simple — and low — fees. Wealthfront charges an annual advisory fee of just 0.25%.
- Set it and forget it. Wealthfront manages your investments for you — there’s no input required from you.
- Financial planning. Wealthfront’s Path tool will analyze your financial data and assemble a custom plan to grow your money. Use it to save for a house, college, retirement and more.
- Automatic deposits. You can schedule weekly, biweekly, monthly or quarterly deposits into your Wealthfront account.
- Keeps your risk profile intact. Whatever your personal tolerance for risk, Wealthfront will constantly rebalance your portfolio to match it.
- Reduces your tax bill. Wealthfront uses a strategy called Tax-Loss Harvesting to keep your taxes to a minimum. This involves strategically selling some exchange-traded funds (ETFs) at a loss so you can offset income on your tax return. If you have at least $100,000 in your account, you’ll qualify for Direct Indexing, which is a more advanced version of Tax-Loss Harvesting.
What to consider before signing up
It’s your money, and you want to protect it. Before signing up for Wealthfront, understand what the company is all about and its downsides.
Make sure you’re comfortable with software-based investment decisions
Do your own research on robo-advisors. Before signing up for Wealthfront, you should trust that software can invest your money effectively.
Understand who’s driving Wealthfront’s investing philosophy
Wealthfront’s chief investment officer is Dr. Burton Malkiel, one of the most prominent proponents of the efficient market theory. In a nutshell, it says nobody can beat the market. This runs counter to the philosophy of value investors — those who believe you can profit in the market when people undervalue securities.
Because Wealthfront subscribes to the efficient market theory, it believes in passive investing. Instead of trying to beat the market by actively managing customers’ money, it waits for the market to grow long term.
You’ll have a cash balance in your account
After you make a deposit, Wealthfront invests your money. Whatever it can’t — or doesn’t — invest, you’ll have a remaining cash balance in your account.
This happens for two reasons:
- It isn’t possible to buy fractional shares of ETFs through Wealthfront. Because ETFs generally cost between $30 and $100, Wealthfront won’t be able to invest all of your funds.
- Wealthfront calculates the fees you’ll probably owe for the next year. Then it’ll keep a cash balance in your account equal to that figure.
These factors lead to cash drag — some of your money isn’t growing in the market but is sitting in your account as cash.
Relatively high minimum deposit
Wealthfront’s $500 minimum deposit is on the high side compared to what other robo-advisors require. For example, Betterment — one of Wealthfront’s closest competitors — has no minimum deposit. Compare robo-advisors here.
How to get started
1. Visit the Wealthfront website and click Invest Now.
2. Complete the questionnaire, which includes questions such as why you want to invest, what kind of financial advisor you want, your pre-tax income, your tax filing status and your risk tolerance.
After completing the questionnaire, you’ll receive a diversified investment plan. Click Open My Account to continue.
3. Create an account by entering your name and email address and creating a password.
4. Enter your mobile phone number for security verification.
I’ve signed up. Now what?
After you sign up, you’ll have the option to enter some more information so help Wealthfront recommend investment accounts.
If you click Great, ask away, you’ll proceed to give information like your tax filing status and whether you already participate in a retirement plan.
If you click No thanks, you’ll see a page where you can open various accounts.
Look into Wealthfront if you want someone to manage your money for you. It’s a company built on passive investing, a strategy with lots of fans. Legendary investor Warren Buffet, for example, advises most consumers to invest in index funds — a common form of passive investing.
Another bedrock of Wealthfront’s strategy is relying on software for investment decisions. The company says it produces better results than human-powered returns. Crucially, the cost savings produced by a robo-advisor model means you’ll pay a low annual advisory fee.