Wealthfront is an online, SEC-registered, investment adviser that provides its customers with a personalized and diversified investment portfolio that is monitored regularly and rebalanced periodically. However, Wealthfront pays no attention to security selection, but rather focuses on asset allocation because the company’s methodology is based on the modern portfolio theory. In other words, Wealthfront first analyzes an individual’s risk tolerance and current situation; then it uses that risk score to calculate optimal asset allocation; and lastly, it recommends the best exchange-traded funds (ETFs) for the portfolio. The best ETFs tend to be those with the lowest annual expense ratios, minimal tracking error and sufficient liquidity.
Unfortunately for Wealthfront, any practical investor should be able to replicate their service for free and with minimal effort, especially given the free questionnaire they provide. On Wealthfront’s home page, you can begin personalizing your investment mix by specifying the account type, amount to invest, your age and selecting the orange “Personalize It” button. You will then be asked to answer 10 questions that fine-tune your risk profile. Finally, you are presented with what Wealthfront believes is your optimal portfolio. Your optimal portfolio comprises six ETFs, each belonging to a separate asset class, which are weighed based on your risk tolerance. A younger investor with a high risk tolerance would allocate a large portion of his capital to U.S. stocks and emerging markets, whereas an experienced, risk-averse investor would allocate most of his capital to bonds.
To better understand why Wealthfront chooses a particular ETF over others, hover your mouse over “Why,” which is located to the right of each ETF. A window will pop up listing the top three ETFs for the category and explaining why the one chosen is preferable to the rest. Everything from the ETF’s asset allocation to its tax form is considered. For instance, with so much hoopla around SPDR ETFs, many tend to pay a higher-than-necessary expense ratio for mere tracking ETFs. Meanwhile, Wealthfront regularly explains that Vanguard’s funds have a much lower expense ratio, yet track just as well as their competitors.
Wealthfront is a service for long-term investors that can also be viewed as a better alternative to target date funds because it considers more than the investor’s age when choosing an asset mix. Moreover, Wealthfront recognizes that its service is not extraordinary or mind-bendingly complicated, so its advisory fee is quite reasonable. They charge a monthly fee based on a 0.25% annual rate on assets over $25,000. In other words, investing $500,000 with Wealthfront has an effective annual fee rate of less than 0.24% since the 0.25% fee only applies to $475,000 of the half million. Perhaps the main reason an individual would choose Wealthfront over doing their own investing is if the individual prefers an entirely hands-off approach; Wealthfront will invest your capital for you and rebalance it periodically to maintain optimal allocation.
monthly advisory fee varies based on portfolio size