Why I Use Wealthfront

I’ve been meaning to write this article for a while, and with the recent revelation that Betterment is upping their cash management rates from .15%  for the highest value accounts to .25% across the board, I guess it’s time.  Even the grand pooba himself has taken to writing about this change.  For me (us), I’ve been using Wealthfront for a while now, several years, in fact.  I’ve toyed with the idea of moving to Betterment, going even so far as to open an account, just never funded it.  I’ve also toyed with the idea of just doing it myself by opening a taxable account at Fidelity or Vanguard.  I mean, .25% management fee adds up over the long haul, so why not just eliminate it altogether?

I was introduced to Wealthfront by my boss, someone I greatly admire and respect, several years ago.  He had mentioned that a lot of the Valley folks were using it for their windfalls from IPOs.  So, I did some of my own diligence and figured I’d give it a shot.  I invested the minimum, which I think was $5,000 at that time.  I watched it to see what happened.  Seemed easy enough, I liked the interface, the theories make sense and it’s pretty cheap.  So, I went with it, I took the first step.  Now, over three years later I’m still a customer and here’s why I like it:

The Basics

Wealthfront, like most of their competitors, are an online digital money management service.  You invest with them and they manage your money.  They just do it with computers and algorithms, not people, so they can charge considerably less for the service.  The other interesting part is that there is zero emotion to it.  The most dangerous part about investing is the emotional side.  Even professional brokers are prone to this, and your returns will suffer for it.  Thankfully, my computer has no emotion, and will continue to do what it’s told regardless of how the market is performing or what the news says.

You have an portfolio of super low-cost ETFs that are diversified across a range of investment categories depending on your risk profile.  Mine has US stocks, International Stocks, Emerging Market Stocks, Dividend stocks, Bonds and natural resources.  I believe the average expense ratio before their fees is .2%, or there abouts.

Of course, you can set up an ACH with your bank account and set up auto deductions, which takes even more of the emotion out of it.  If nothing else, their blog is fantastic for all the financial articles on it.  Do take it with a grain of salt, since there is quite a bit of marketing sprinkled through it, but it’s pretty interesting nonetheless.

But, there are some other things that I like about it:

Tax Loss Harvesting

This idea is pretty prevalent across all these “robo-advisors” (which sounds so ominous, but I digress).  The basic principle is that when an investment loses value, you can sell it, take the loss and write it off against your capital gains or your income.  But with TLH, you take the loss then turn around and purchase another similar performing investment that will mirror what you just sold.  That way you can stay invested, and take the loss as well.  There are some caveats to this, wash sales – meaning you can’t buy the same or similar investment within 30 days – are the main one.  You can do this on your own, but you have to watch yourself, and it’s a pretty good time sink to do it.  With Wealthfront, this is all done through a fancy computer algorithm, so it happens continuously throughout the year.  You can just watch it pile up as the year goes on.

For the losses, you can use up to $3,000 to reduce your AGI, and you can use anything further to offset any capital gains.  Anything that you don’t use, can be stored in a vault (by your accountant) for future use.  So at this point, very simply, the reduction in AGI alone more than pays for the service.  In CA, I think you have to have somewhere on the order of $550k invested with them to have the expenses out weigh the tax deduction just from the AGI reduction.

Direct Indexing

Once you hit certain account thresholds, Wealthfront starts adding various services all while keeping the cost structure the same.  Direct Indexing is another thing that you could do on your own if you really wanted to, but again, it’s just easier to have a computer do these types of things for you.  This is basically owning the stocks themselves opposed to the ETF.  At the current time, they only do this with US Stocks and you are limited by the amount of your account.  So for the lowest account value where this service is available (100k at the time of writing), they trade 100 stocks for you (all commission free, of course) then 500 stocks then 1,000 as your balance grows.  This works in conjunction with the TLH, since now you can trade the individual stocks any time something drops.  It also helps that instead of owning an S&P 500 ETF, you own the stocks themselves, so there is no fund over-head for this portion of your portfolio.

Dividend/Investment Rebalancing

Everyone, at least the self-selected folks reading this blog, knows that you need to rebalance your portfolio every so often to maintain your risk profile and allocation.  Again, you can do this on your own, but it takes some time.  You sell the assets that have appreciated and buy the ones that depreciated.  Simple.  The issue is, that if you do this once a year, you usually end up selling the higher one and buying the lower one, incurring the taxes with the sale.  So the way they get around this, is they take the dividends that you earn through the year, along with any recurring investments, and purchase the asset class that needs a holdings increase.  Now, they still will rebalance by selling assets, but that is the last resort.

Other stuff

They do a variety of other things, as well.  They tax optimize any redemption so that you take the lowest tax hit that you can.  They tax optimize any roll overs from other accounts.  They give you the first $10K invested free, so their effective rate is actually below .25%.  They also have a referral program that you can get $5,000 invested for everyone you refer.  The referred person also gets an additional $5k free.  It works great when you can refer your wife 😉 $20K more managed free ($10 initial + $5k referral + $5k sign up bonus).

What I don’t use it for

While they offer 401k’s, IRAs and 529s, I really don’t see any point in using them, unless you really are lazy enough to not look at multiple accounts.  Of course, personal capital makes that no longer an issue.  But really, there’s no reason to use any of these accounts through Wealthfront.  The true advantage to this service is all based on optimizing your taxes, and these other accounts are already tax advantaged, so you’re just paying an additional management fee for no good reason.

There is one other disadvantage that I’ve seen, that’s not really one, I suppose.  But you can only have one bucket under each account.  I know with Betterment you can set up different buckets with different allocations for a variety of reasons, eg: buy a house, retirement, a new computer, etc.  Wealthfront just allows one bucket with the same allocation.  So while it’s not really a disadvantage, some folks might not like that.

Conclusion

I’m very happy with using them.  I’ve been with them for quite a while.  I like the simplicity, and I like the technology.  The app is great and easy to use.  I haven’t had any issues, and it’s maintained the returns that I would expect to have.  It’s kind of fun to watch all the trades and adjustments happen real time.  I guess you could say this isn’t truly passive investing, but then again, I’m not doing a damn thing, and this is all emotionless based on the best studies and algorithms.  I guess if you are curious to try it out, I would suggest it.  I know you can do all the things that they do for you and save yourself the .25% fee, but really I’d rather be living my life than concerning myself with that minutia.

*****No, they didn’t pay me for any of this.  Of course, if someone from Wealthfront wants to pay me for this, I’m more than willing to listen.  I just like the service and figured I’d write about it to maybe help some other folks.*****

4 Comments

  • Todd February 28, 2017 at 8:32 pm

    Thanks – this is timely as I’ve been on the fence about Betterment recently myself. Which week of the Chaquatua will you be attending?

    Reply
    • Mr WoW February 28, 2017 at 11:06 pm

      Yeah of course. I’ve been using wealthfront for a while. I like it, but it’s a personal choice, so make sure it’s right for you.

      We’ll be at the first week in Ecuador. Are you going?

      Reply
      • Todd March 1, 2017 at 4:30 pm

        Yes sir, I’ll be there – can’t wait!

        Reply
        • Mr WoW March 3, 2017 at 12:28 pm

          Awesome!! We need to get a group together that we can chat and share ideas before hand.

          Reply

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