How Does Wealthfront Make Money

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

When it comes to widespread adoption by individual investors, Wealthfront was an early leader among robo-advisor platforms. It has continued to rank highly among the finest robo-advisors available and has added several useful financial planning features.

Investors seeking truly diversified portfolios in line with their financial goals will find a lot to like about Wealthfront: low investing minimums, reasonable management fees, free financial planning tools, a sleek and user-friendly interface, a cash management account with competitive yields, and a growing array of value-added features.

Wealthfront has many worthy rivals, but its services are hard to identify serious flaws in.
Does it imply you need to immediately register a Wealthfront account and transfer all of your taxable brokerage assets to them? Perhaps. But before we get into that, let’s take a moment to go through what Wealthfront is and how it compares to other options.

Wealthfront’s Key Features

Wealthfront’s robo-advisor algorithm supports many types of investment accounts, including a standard taxable account, three IRA options, and a college savings plan.

There are further Wealthfront account options available. Among them are a cash management account and a low-interest portfolio line of credit that may be used to borrow against an investor’s stocks.

An Investing Arrangement for One’s Own Money (Taxable Brokerage Account)
Individual Investing Account (also known as “generic investing”) is Wealthfront’s first product and is a taxable investment vehicle.

In the case of a personal investment account, the advising fee is a fixed 0.25 percent of AUM (AUM). Balances are spread out among a number of different exchange-traded funds (ETFs) that provide exposure to different asset classes and have minimal fees. Companies like Vanguard and Schwab back many of them. There are six main kinds of money here:

  • U.S. stocks
  • Foreign stocks
  • Emerging markets
  • Dividend stocks
  • Natural resources
  • Municipal bonds

By default, Wealthfront invests client funds among a small number (often two or three) of extremely low-cost sector or index fund alternatives in each asset class. Clients’ stated investment goals and risk tolerance are used to guide the algorithm’s periodic rebalancing of their asset allocations. There is no charge for making a trade.

All Accounts Have Tax-Minimization Capabilities

There are in-built tax savings features for all accounts in Wealthfront. This happens on a daily basis through routine tax-loss harvesting for accounts with a value of less than $100,000.

To offset capital gains earned by rebalancing trades, Wealthfront sells out of holdings that incurred losses during the prior tax year.

Tax-Loss Harvesting at the Stock Level and Risk Parity for Higher-Balance Accounts

Stock-level tax-loss harvesting is a more advanced tax minimization approach that may dramatically lower customers’ tax payments and is used by taxable accounts with balances over $100,000.

In order to balance out any gains elsewhere, Wealthfront’s algorithm will buy up to 500 stocks from the S&P 500 and up to 1,000 stocks from the S&P 1500.

The additional benefit of permitting socially responsible investing (SRI) techniques is that Wealthfront clients can manually remove any S&P equities from participation in stock-level tax harvesting, and hence from the portfolio as a whole.

You may tell Wealthfront not to invest in any company you specifically blacklist, such as a cigarette or fossil fuel company.

Wealthfront’s Risk Parity Fund is a mutual fund managed by Wealthfront that is used to diversify taxable account balances higher than $100,000.

In order to reduce exposure to market fluctuations and perhaps boost long-term returns, the Risk Parity Fund employs sophisticated trading tactics beyond those used by Wealthfront’s default investment portfolios.

Investors are not required to remain in the fund and can withdraw their money at any time, however there is a 0.25% AUM management charge for the fund.

Smart Beta and Risk Parity at Wealthfront

Wealthfront’s Smart Beta program, which may improve returns, is available to users with taxable account balances over $500,000.

Smart Beta makes use of strategies that were formerly the sole purview of financial planners and wealth managers. It improves performance while still indexing and closely follows the movements of underlying indexes by optimizing exposure to a set of well-known investment characteristics (common sources of risk).

Retirement Accounts (IRAs)

Wealthfront provides access to standard IRAs, Roth IRAs, SEP IRAs, and 401(k) rollover IRAs, among other individual retirement account options.

Wealthfront’s retirement accounts are very similar to its taxable investing accounts, including the use of the same robo-advisor algorithm, investment options, asset mixes, and tax minimization strategies, but with the added benefit of tax deductions and federally mandated annual contribution and withdrawal limits.

Wealthfront allows its clients to create multiple retirement accounts, but not multiple retirement accounts of the same type. When it comes to retirement accounts, most customers only need one Roth IRA and one regular IRA. Clients who are self-employed have the option of adding SEP IRAs to their portfolios.

College Savings Account (529 Education Savings Plan)

Investors planning ahead for the cost of private school or further education can open a 529 college savings plan with Wealthfront.

Contributions grow tax-free and, if used for qualified higher education costs, withdrawals are free of state and federal income tax.

Wealthfront’s robo-advisor algorithm allocates and manages assets in the plan in accordance with the account holder’s time horizon and risk tolerance.

If a state’s 529 plan offers more favorable tax benefits (such as a higher yearly contribution limit) than Wealthfront’s nationally available alternative, the company recommends that potential 529 plan holders look into that state’s plan instead.

Accounts Payable (Cash Management Account)

In terms of competing with the finest free checking accounts, Wealthfront’s cash management account holds its own.

It’s called the Cash Account, and it’s on par with the best high-yield checking accounts in terms of its low minimum deposit and high rate (currently 2.00% APY). Benefits available to those with a Cash Account include:

  • A no-cost debit card accepted at no-surcharge ATMs around the country
    Early direct deposit with a qualified payer is possible for up to two days.
  • The Wealthfront mobile app has the convenient capability of sending checks, both once and on a regular basis.
  • App-based check deposits on a mobile device
  • Apple Pay and Google Pay for in-store and online payments PayPal, Venmo, and the Cash App for peer-to-peer money transfers
  • There are hardly any costs associated with the account, and none associated with making withdrawals, overdrawing, or having too much activity.
  • Wealthfront’s partnering financial institutions offer FDIC protection up to $1 million, four times the minimal amount.
  • Autopilot is a clever transfer tool that allows you to make automatic payments to your own investment account — With a simple maximum Cash Account amount, Wealthfront will automatically transfer the excess to your Investment Account, less a $100 buffer.
  • Self-Driving MoneyTM is an even more all-encompassing feature that instantly transfers money from your Cash Account to your budgeted expenses (such as bills to be paid via check), emergency fund, other savings goals as per your personalized savings plan (which allows you to save concurrently for future objectives such as an international vacation and a down payment on a house), and investment accounts.

Portfolio Credit Line

Clients with individual investment account balances of $25,000 or more have access to Wealthfront’s low-cost borrowing product, the portfolio line of credit. When you use your line of credit, it won’t have any effect on your credit score or need a credit check.

Investment account withdrawals are limited to no more than 30% of the account’s value, or $3,000 for every $10,000 in assets. Similar to home equity products, the interest rate on a Wealthfront portfolio line of credit varies with the balance and is now between 2.40% and 3.65%.

There is no predetermined schedule for making payments, although interest is compounded daily, making prompt repayment of withdrawals preferable.

Wealthfront will automatically assign incoming transfers to your line of credit while draw amounts are outstanding, eliminating the need to make a separate payment or manually allocate transfers.

Wealthfront’s Benefits

Reasonable management fees on all balances, higher-than-average cash account rates, a variety of tax-advantaged account options, and low-cost portfolio leverage are just a few of the reasons why Wealthfront is so attractive.

  1. All balances are subject to reasonable management fees.

Regardless of the size of an investor’s portfolio, Wealthfront charges a fixed management fee of 0.25%. This is a fraction of what is charged by some other robo-advisers and a thousand times less than what is typically charged by human financial advisors for comprehensive service.

  1. Excellent Cash Account Yields

The annual percentage yield (APY) on all balances in Wealthfront’s cash management account (Cash Account) is 2.00%. This is more than several competitive bank accounts, including some savings accounts designed for cash management, pay out.

  1. Cash Management Account Holders Get a Free Debit Card

Wealthfront provides all Cash Account members with a free debit card that may be used at millions of locations worldwide. You can make as many as six withdrawals every statement period from your savings account, but the limit does not apply to your Cash Account, which is a free checking account. That’s why it’s a good option for regular bills and other expenses.

  1. There are several types of tax-advantaged accounts available.

Wealthfront provides access to the three main types of individual retirement accounts (IRAs) available today. This grouping has broad popularity among retirees and business owners alike.

  1. Flexibility in Socially Responsible Investing for High-Asset Investors

Although Wealthfront doesn’t have a dedicated socially responsible investing plan, clients with $100,000 or more can choose to omit certain stocks that don’t satisfy their requirements.

  1. Saving and Investing Made Simple With Autopilot and Self-Driving MoneyTM

With Wealthfront’s Autopilot, you may invest with a little sum and then forget about it. You can direct Wealthfront to invest any cash in excess of your maximum Cash Account amount.
Similarly, Self-Driving MoneyTM makes it easy to save, pay bills, and invest in both taxable and tax-advantaged accounts as per your long-term financial strategy.

  1. Portfolio Line of Credit Offers Low-Cost Secured Leverage

Secured and cost-effective leverage is available through Wealthfront’s portfolio line of credit. Aside from credit cards, unsecured personal loans are the most frequent form of leverage for consumers who do not own real estate, and their interest rates are competitive with those of home equity loans and lines of credit.

Wealthfront’s Drawbacks

The downsides of Wealthfront include a fee structure that is unfair to high-net-worth investors, a lack of customization for those with smaller portfolios, and a small selection of funds.

  1. The management fee is the same for all balances.

The 0.25% AUM fixed management charge that Wealthfront applies to all balances is both a benefit and a drawback of the service.

When compared to the fixed dollar-amount fees offered by competitors like Acorns and Stash, this is a viable option for investors with smaller portfolios. However, this is not ideal for high-asset investors who may profit from tiered fee arrangements in the asset management industry.

  1. Individual stocks and non-stock instruments are not available to investors with balances less than $100,000.

Investors with less disposable income have fewer options when it comes to purchasing assets on Wealthfront.

If your Wealthfront account value is less than $100,000, you are not permitted to own individual stocks. Instead, you’ll have to make do with Wealthfront’s limited selection of exchange-traded funds.

Moreover, Wealthfront clients are not allowed to trade foreign currency, futures, or options. To do this, you need the assistance of a comprehensive brokerage.

  1. There are few ETF options.

It’s worth reiterating that Wealthfront has a small range of ETFs. Its exchange-traded funds (ETFs) are well regarded by independent experts and come with cheap fees. However, they cannot satisfy the desire of skilled investors for a greater variety of strategic options.

  1. There is no socially responsible investing option for low-income investors.

Clients of Wealthfront with less than $100,000 in investable assets cannot use the platform’s primary socially responsible investing tool, the option to remove specific stocks from your portfolio. Platforms with wider access to SRI funds and strategies are the best bet for those who want to invest ethically.

Bottom Line

Among the many available robo-advisors, Wealthfront ranks highly. Because of its low price and user-friendly interface, it is also a great online stock broker for inexperienced traders.

However, Wealthfront isn’t a good fit for everyone’s investment strategy or budget. For those who want personal care, it’s important to note that Wealthfront can’t replace the bond that forms between a client and a full-service financial manager.

It lacks human financial counselors and portfolio managers and provides less individualized guidance.

For those who choose to take a passive role in their investments, this shouldn’t be a concern. However, it is worth restating so that active investors are not taken aback by the information provided by Wealthfront.

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