I keep getting questions about the pros and cons of Wealthfront, probably because they are advertising pretty heavily on Facebook and other platforms. So, it’s time for a Wealthfront review.
The most important thing is to make sure Wealthfront is legit. It is SIPC insured (that’s like FDIC insurance for brokerages) so it at least has to be a real financial organization. Of course, that doesn’t mean that Wealthfront has good investment advice or good service advice, but it does mean that if they go under all of the sudden, then Wealthfront is safe insofar as your money is insured.
Wealthfront reviews agree that Wealthfront is not a scam.
Wealthfront’s trademark is “Self-Driving Money.” It’s value proposition is that it will take care of your money, and manage it for you. Wealthfront is a robo-advisor, and one of the mini-investor platforms.
Wealthfront fees are low. The main Wealthfront fee is the advisory fee of 0.25% on the amount deposited with Wealthfront. Of course, like any other wealth app, or brokerage, the investments Wealthfront uses have their own expenses. According to the company, the funds Wealthfront uses charge between 0.06% and 0.13%, which are very low fees for mutual funds.
You’ll pay more than that some places as an annual fee on your IRA.
Wealthfront Cash Account
The Wealthfront Cash Account is a high-interest checking account. Since Wealthfront is not a bank, it runs its checking account in association with a bank. In this case, Green Dot Bank offers the checking cash account and debit card.
Currently, the Wealthfront Checking Account pays 0.35% APY, which is lower than the high-interest Marcus savings account which is currently paying 0.50%, however, the Wealthfront interest rate is a good return for a checking account.
Wealthfront charges no fees on its checking account. There is no monthly account fee, no overdraft fees, and no stop payment fees. It also offers free debit card withdrawals at ATMs in its network. However, there is a Wealthfront fee of $2.50 if you use an out of network ATM, or a teller, in addition to any fee charged by the ATM, so the Wealthfront Debit Card is not a good way to access your funds from non-network ATMs.
The minimum to open a Wealthfront cash account is $1.
How Safe Is Wealthfront
Both Wealthfront cash accounts and investment accounts are insured. Wealthfront has additional private insurance to insure its checking accounts up to $1,000,000.
Wealthfront is a passive investing service. It does not offer a trading platform to buy and sell stocks, and it does not invest money directly into stocks. Instead, Wealthfront uses pre-build portfolios of low-cost exchange traded funds (ETFs) to create Wealthfront returns for its clients.
One Wealthfront con is that they company does not detail any of its portfolios online prior to signing up, thus, it is difficult to check Wealthfront performance and Wealthfront’s track record against its lofty claims.
Until your account has a significant amount of funds, tax-loss harvesting won’t have a major effect on you. However, as your money builds over time, or if you invest a larger amount in Wealthfront, tax-loss harvesting can help lower your tax bill. Wealthfront does tax-loss harvesting for free as part of its automated investing process.
Opening Wealthfront Account
The minimum to open a Wealthfront investing account is $500. However, a balance of $500,000 is required to get into it’s Smart Beta program which is “more intelligent” than lower-balance portfolios. An account minimum of $100,000 is required to get stock-level tax-loss harvesting, and Risk Parity, which seeks to increase your returns more than it increases your risk.
How Good Is Wealthfront
The methodology behind Wealthfront portfolios is well-known, and used by many different financial advisors. What makes Wealthfront good for beginners is it offers the ability to build a well-diversified portfolio of index funds automatically with as little as $500. Buying and managing the index funds is not rocket science, and one could do it on their own, but it would take several trades, and vigilant management. The whole point of a robo-advisor is to take the work out, not to do something new and different.
Theoretically, more advanced Wealthfront features like Risk Parity and Smart Beta provide higher Wealthfront returns than the standard portfolio gets. They require higher minimum balances for those features both because they are more expensive to execute the number of trade required, as well as requiring more money to effectively spread around. Spreading $5,000 across a dozen investments not only leaves very little invested in each security, it provides little additional return in real dollar amounts.
Like many brokerages, Wealthfront offers margin loans. Margin lending is a loan secured by the securities in your portfolio. What makes Wealthfront loans different is how easy the company makes it to access your margin loan as cash withdrawn from your account, and not just for use to purchase additional securities.
As a secured loan, Wealthfront interest rates are lower than traditional unsecured personal loans, or credit card interest rates. Interest rates are variable. Current rates are 3.65% for most customers. Those with balances above $500,000 qualify for lower rates.
For customers with a minimum $25,000 balance, a line of credit is automatically available without any sort of credit approval up to 30% of your account balance. Since there is no credit check, the Wealthfront loan won’t affect your credit score.
Like almost everything these days, there is a Wealthfront App. The Wealthfront App allows you to manage your money without having to log into your computer or call someone. You can transfer money between accounts on the app, or check on your investments to see your Wealthfront performance and see if your Wealthfront returns are good, or if you need to consider other options.
One great feature of the Wealthfront App is the wealth planning data that allows you to see the trade-offs between scenarios. For example, if you pay $2,500 per month for mortgage instead of paying $2,200 per month for a mortgage (and saving the difference), how will that affect your ability to meet your retirement goals?
Wealthfront versus Betterment
Wealthfront’s closest competitor is Betterment. Both offer a robo-advisor type of experience. Both build portfolios out of ETFs. Both are safe and insured. Wealthfront charges the same as Betterment for the main advisory fee, 0.25%. However, Betterment charges 0.40% if you want phone access to CFP professionals.
Betterment’s high-interest cash account pays more than Wealthfront’s high-interest checking account. It is 0.40% APY at Betterment vs Wealthfront at 0.35%. There is a $250 minimum investment amount at Betterment vs Wealthfront with no minimum investment. Unlike Wealthfront, Betterment offers no loan option for its customers using a margin account.
Wealthfront is a good, low-cost robo-advisor for both beginners and advanced investors. It’s time-tested hands-off approach to asset allocation using low-cost ETFs is a well-known strategy for successful investors. For beginners, Wealthfront can be your main bank and turn your paycheck into small investments, allowing you to easily pay yourself first. For more advanced investors, Wealthfront can be an easy way to manage part of your investable assets using passive ETF strategy while using a discount brokerage or mini-investor for your remaining funds.
People who frequently deal in cash will require a local credit union or bank in addition to Wealthfront in order to handle quick turnaround of cash transactions, or large cash deposits. In this case, funds should be deposited in the local bank, and only the monies not needed for quick use should be transferred to Wealthfront.
About the Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor.
He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson did not own any securities mentioned above, however, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.