There are now several automated portfolio managers that will manage a diversified mix of low-cost index funds at portfolio sizes previously ignored by human advisors. As a result, these “robo-advisors” have been rolling out additional features to differentiate themselves from the competition.
Wealthfront is one of the largest independent robo-advisors (i.e. not tied to a specific brand of funds like Vanguard or Schwab). With a younger target audience (20s to 40s), their offering is for folks that are comfortable having nearly all interactions via smartphone or website. Here’s their updated feature list along with my commentary:
Diversified portfolio of high-quality, low-cost ETFs. Their portfolios are a diversified mix of several asset classes including: US Total, US Dividend, International Developed, US Corporate Bonds, Muni Bonds, Emerging Market Bonds, REITs, and Natural Resources. Primarily low-cost Vanguard and iShares ETFs are used. You could argue the finer points of a specific portfolio, but overall it is backed by academic research (Chief Investment Officer is Burton Malkiel).
Financial planning software with outside account integration. Path is Wealthfront’s new financial planning software, launched in February 2017. This service links your external accounts from other banks, brokerages, and 401k plans (similar to Mint and Personal Capital) in order to see your entire picture without having to manually input your balances and transactions. How much do I have invested elsewhere? How much am I spending? How much am I saving? How much can I spend in retirement?
Path can forecast your saving rate using the last 12 months of transactions. Investment returns are estimated using Monte Carlo analysis. It also accounts for your household income, birthdate, and chosen retirement age to estimate how Social Security will affect your retirement income needs. You can change up the variables and see how it will affect your retirement outlook. See Path intro video here, screenshots above and below:
Account types. Wealthfront now supports taxable joint accounts, trust accounts, 401k rollovers, Traditional IRAs, Roth IRAs, and SEP IRAs. They also offer a 529 College Savings account.
Tax-sensitive account transfers. This is good news if you already have an existing portfolio with unrealized capital gains. Other robo-advisors may have a “switch calculator” to help you decide whether to move over or not, but Wealthfront will actually accept your existing investments and manage it for you alongside your new investments.
If you want to switch advisors or move your brokerage holdings into a diversified portfolio, you typically have to sell all your holdings and move in cash. This means you will more than likely have a large tax bill. Instead of selling your holdings, Wealthfront will directly transfer them into a diversified portfolio tax efficiently, saving you that tax bill.
Tax-efficent asset location. They will place different asset classes in your taxable accounts vs. tax-deferred accounts (IRAs, 401ks) for a higher after-tax return. However, they do not treat them holistically (i.e. putting all one of one asset in IRA and none in taxable). Non-Wealthfront accounts are also not taken into consideration.
Use dividends and new contributions to rebalance. They will use your dividends and new contributions to rebalance your asset classes in order to minimize sells and thus minimize capital gains.
Concentrated holding of a single stock? Wealthfront caters to the tech start-up crowd with a unique Selling Plan service for people with much of their net worth tied up in a single stock. They’ll help you sell your positions gradually in a tax-efficent manner. Currently available to shareholders of: Alphabet, Amazon, Apple, Arista Networks, Box, Facebook, Pure Storage, Square, Twilio, Twitter, Yelp, Zillow.
All of the above are good things to do. If you are willing to read and learn, you can do many of the things listed above on your own. Build a portfolio of high-quality, low-cost ETFs. Track your income and expenses using aggregation software. Tax-efficient asset location. Rebalance regularly, using dividends where possible. Don’t sell your existing positions all at once if they have large capital gains. However, something that I wouldn’t want to do is monitor a hundred of little tax lots. Some things are just better left to software.
Daily tax-loss harvesting. Wealthfront software monitors your holdings daily and attempts to find opportunities to harvest tax losses by switching between “similar but not substantially identical” ETFs. If you can delay paying taxes and reinvest them, this can result in a greater after-tax return. The exact “tax alpha” of this practice depends on multiple factors like portfolio size and tax brackets. You can read the Wealthfront side of things in this whitepaper and Schwab comparison. Here is an outside viewpoint arguing for more conservative estimates.
In the end, I do believe there is long-term value in tax-loss harvesting (and I do think daily monitoring can capture more losses) but it’s probably wise to use a conservative assumption as to the size of that value. (Now, you can perform your own tax-loss harvesting as well on a less-frequent basis. I do it myself as there is value, but it’s rather tedious and I’m definitely not doing it more often than once a year. I would gladly leave it to the bots if it were free.)
Direct indexing. If your account is over $100,000, Wealthfront will buy all the stocks in the S&P 500 individually and commission-free. ETF expense ratios are pretty low now, so this is mostly used as an opportunity for more tax-loss harvesting. No other robo-advisor offers this feature. Here is whitepaper that details their position. The net benefit mostly weighs the potential index tracking error against the tax-loss benefits.
Portfolio Line of Credit. If your taxable balance is over $100,000, Wealthfront will automatically give you a line of credit of up to 30% of your balance. There is no application, no fees, low interest rates, and you can get cash in as little as 1 business day. Manage it wisely though, as this is a margin lending product and they may force you to sell your investments if a margin call occurs.
Fee schedule. The fee schedule for Wealthfront is pretty simple. The first $10,000 is managed for free. Assets above that are charged a flat 0.25% advisory fee annually. All of the features listed above are included.
If you sign up via a special invite link, you can get your first $15,000 managed for free, forever (an additional $5k). You can then invite your own friends for more savings (each also gets $15k managed for free, and you get another $5k managed for free for each referred friend.)
Summary. As a DIY investor willing to do most things myself, my thoughts on robo-advisors have often focused on weighing their feature set vs. the additional advisory fee. I don’t like the idea of giving up control, but I find myself keeping track of each improvement in their software capabilities.
In terms of comparing with other robo-advisors, Wealthfront currently differentiates themselves in the following ways: Financial planning software that incorporates external accounts, account transfers that accepts your existing investments and then sells them tax-efficiently, direct S&P 500 indexing, 529 college saving plan option, portfolio line-of-credit, and assistance with selling single company stock. You may or may not find any of these useful to your specific situation, but notice that many of these used to be reasons to pick a (usually more expensive) human advisor.