For several years now, we used Wealthfront for our taxable stock accounts. It is a great service, in fact, I wrote about why I liked it so much a while ago.
Well, like everything in life, things change. And we’ve decided to move all our money away from Wealthfront and into Vanguard to hold our brokerage account.
Why did we move everything?
Originally, when I found out about Wealthfront, I loved the idea of having them manage the passive investing. For an additional .25% they would constantly tax loss harvest and invest the dividends smartly. I figured it was well worth the additional cost.
We had our weekly and monthly auto investments set up with them. All was great, then I got an email one day about how they are introducing a new product, “Risk Parity“. It’s some fancy nonsense that they claim with increase the returns and minimize the risk. Blah blah blah… it’s basically an actively traded mutual fund.
Now, that in and of itself isn’t bad, and I don’t begrudge them the ability to make new products and sell them. That’s fine, even if it’s an actively managed mutual fund.
What really got my goat was when they rolled out this product, they created an opt-out strategy to take 20% of everyone’s portfolio and put it into this new fund, that had a ER of .50%* (they have since felt the backlash and cut the ER in half to .25%).
That just doesn’t sit well with me. Here, the whole point is passive investing with some additional features. And they forced everyone into an actively managed fund. Some claim it has to do with investors, and not growing their revenue quickly enough to appease the share holders.
Regardless, this didn’t sit well with me. I don’t like that they went completely against their original philosophy, and created an actively managed fund, and then forced everyone into it. Shenanigans!!!
Moving everything
I decided that we were going to move everything to a brokerage account at Vanguard, since we have old 401k’s and our Roth IRA’s with them. Eventually, down the road, I wanted to consolidate everything there anyway, so thanks for the push Wealthfront.
There are two ways to transition accounts:
- Liquidate everything in your old account. Take the check and deposit into the new account, then purchase the investments of choice in the new account.
- Move everything “In-Kind”
What is “In-Kind”?
An “in-kind” transfer means that there is no liquidation of the investments. The transfer is done by simply changing the holding and management of the investments. This way you don’t create any capital gains, since you are not selling anything.
Be sure that your brokerage will allow this, as some won’t. Also, beware of transfer fees, luckily Vanguard and Wealthfront both have no transfer fees.
What did we do?
The first step was to set up a brokerage account in Vanguard. This is very simple and straight forward. You simply log into your account (or create one if you don’t have an existing one) and create a new account.
Next, I stopped all the auto investments going to Wealthfront. Then, I created the same auto deductions through our Vanguard accounts. I also made it so the auto-deductions go straight into VTSAX every week, of course these can be allocated as you see fit. I also made sure that all of the dividends are reinvested according to the allocation, as well.
Now, comes the fun part. In your Vanguard account, you can select to transfer assets into your account from another brokerage account. You’ll need your account number, and the approximate value of the account, so be sure to have those handy. (FYI – The Wealthfront account number is a little tricky to find. But it’s on your statements, it should be some 8 digit alpha-numeric number in the upper corner by your name.)
Vanguard actually makes this pretty painless. They walk you through their transfer flow, you fill in the boxes and hit go. They will initiate the transfer between the brokerage houses and that’s it. A couple days later you’ll see it all just magically appear in your Vangaurd account.
Be aware, you’ll also see the other account go to $0, so if you are using Personal Capital or something similar you’ll see a dip. It kind of gives you a queasy feeling to see the value dip so much, but it will return the next day, as the transfers are finalized.
Whoa… There’s a dip in there. Wow!!
Also, it takes a little bit to get everything over there. When you own equities that pay dividends they pay it to the brokerage house that manages your account at the time, so even if you have closed the account, you will still see things populate in there periodically. Rest assured, they are going to transfer it over, or at least should. I’d keep an eye on it.
Going Forward
As it stands right now, we have the same portfolio in our Vanguard accounts that we had in our Wealthfront accounts. Everything simply shifted over to be managed by Vanguard.
There are some benefits that we are now losing because of this shift:
- One of the more annoying parts is that the dividends on any stocks or ETF’s can not be set to auto-invest. All of the individual stocks that wealthfront purchased through their direct indexing are now spitting off dividends that I must re-invest manually. Not a huge deal, though, log in and purchase more Index funds with the dividends.
- We also lost the constant tax-loss harvesting. This was one of the main benefits of having Wealthfront in the first place. But as we have gone through, I’ve noticed less and less of an advantage from it. Simply because the market has skyrocketed over the course of the last few years, and it’s hard to tax loss harvest with a market that’s going up.
We did add some advantages though:
- Namely now we can tax-gain harvest. So, when our investments gain in value, we can cash them out and buy the same thing immediately, so long as we keep our capital gains below the minimum tax threshold.
- I can now allocate a good chuck of our portfolio as I see fit. The unfortunate, or fortunate depending on the point of view, part of using a robo-advisor is that you have really no say in the investments you are getting.
Consolidation
One of the major undertakings that is going to take a while to work through is consolidating our investments back to a simple and manageable allocation.
Wealthfront was great because it automated all of the allocation management and because of that they were able to purchase many individual stock and keep the overall portfolio balanced. Now I am responsible for it and I’m a dummy, so I have to make it simpler.
As we go forward, we’re going to be selling all the individual stocks and buying back into various index funds. I’m currently using all our dividends and new contributions to buy into VTSAX.
I will say that I liked the way they had the portfolio spread between US, International and Emerging markets. While I might not maintain the exact allocation they did, I do believe I will carry some portion of each going forward.
I’ll also maintain some bond allocation, and potentially purchase some REIT’s as we begin to explore this option. Again, this is a benefit to not having Wealthfront, as I can move to this when I want.
Breaking Up Really Isn’t All That Hard To Do
All in all, it wasn’t super painful to initiate the transfer. We have to consolidate everything into a simpler portfolio, but we also want to minimize the taxes, so this will take a while, but we have a strategy and patience for that.
For as cumbersome as their website is, Vanguard made the process pretty painless and straightforward. And while Wealthfront was good for us at the time, we’ve moved on. I think it’s all for the better.
Thanks for the write up! I need to make a similar consolidation this year. I didn’t know about the no auto reinvesting the dividends with Vangard. How annoying!
Well it’s not a vanguard thing. It’s a stock & etf thing. Since you can’t buy partial shares of those. So long as you’re in mutual funds you are able to.
don’t forget your beneficiary forms! a lot of people wait to do this when opening a new account but the easiest way is to get the info and do it when you start. we had ours 10 years at ameritrade and i just got them straight last year and it was a pain.
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Thanks for the reminder!! Although, I think it defaults to spouse, which is who it would be anyway.
Just gotta do a secondary.
I hope other robo-advisors don’t try to adopt this strategy. I agree, it’s bad for business. Wouldn’t sit well with me either!
Yeah, stupid. I think they started feeling the heat and reduced the fees on their new fund, but yeah. Still the principle really erked me.
I read about that scheme (scam, maybe?) that they were pulling and that angered me too. I have a small SEP-IRA from 2015 that I need to rollover to my Solo 401k. Main thing that’s good about Wealthfront is that, from what I can tell, they charge no fees to move to another brokerage. That’s big, since it means you can start with Wealthfront, since it makes things easy, then move onto Vanguard or something else later.
You are right. There were no transfer fees, and they didn’t make a fuss. It really was pretty painless.
As for rolling over a SEP into the solo, depending on who the solo is through you might not be able to. Vanguard doesn’t allow roll-ins, Fidelity does. That’s one reason we went with them for the solo while we had it.
Ugh, how sneaky! I would have moved it too.
Do you mind me asking what % do you allocate to bonds? Total bond market?
Ms. Fiology recently posted…The Pillars of Single FI
Yeah, sucks, but what can you do? Lucky I caught it in time.
Just checked, we have about 5% in bonds at the moment. We’re very heavy in equities, but I plan on moving that around over the next few years as we transition from accumulation to retention.
Thanks for sharing. How many years out from your retention phase do you plan on adjusting your allocation to favor more bonds?
Ms. Fiology recently posted…The Pillars of Single FI
So my theory is, we keep it heavy in equities while we are building up. Then the last year or so we move all our new allocations to bonds/cash so we have access to it and build in a cash buffer since that will have the least time to growth, etc.
Don’t know if that makes sense. Maybe I’ll do a post on it.
Please do! I am observing and reading what others do before I definitely nail down my exact strategy. Although, I know it can evolve over time. Besides a 6-month cash emergency fund, I’m 100% equities. Mind you I’m in right in the prime of my wealth accumulation phase.
Ms. Fiology recently posted…The Pillars of Single FI
Sure… it’s in the queue… thanks for the idea and request!
That feels a little scammy. Most investors probably will just stay and put up with it. That’s why I prefer DIY investing. You have total control. We mostly invest in index funds so it’s not that complicated.
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Yeah we’re going DIY. Its not that hard, just gotta consolidate it all back now so we can keep track nice and easy.
It feels real scammy. The reason people would use a service like this is to become more passive. But you can’t be passive if you have to worry about an email opt-out offer. If they simply would have it opt-in then I’m sure there would have been little blowback. Bad move on their part.
Yeah, it came across as a little on the weird side. Hence we left them, which is a shame in a way, because I enjoyed the service.
But that’s ok, it forced me to do what I was putting off anyway.
I kicked Betterment to the curb on my investments. I get their idea’s of doing stuff, but good god, the number of transactions it spawned was terrifying come tax season…. Stupid stuff that bothered me was it automatically selling the funds to pay fees because they don’t believe in keeping anything in cash….
Luckily, Wealthfront kept enough cash for fees and other odds and ends on hand. So there were no events that triggered that.
Also, their direct indexing makes sense. Instead of owning the S&P500, they simply bought enough of the stocks to have some of each, then traded among those. It’s a clever game. And I figured it was worth it for the small fee.
Those are some of the reasons I liked them. I didn’t like the fact they changed their philosophy and shoved everyone into actively managed funds. Even though they say it will increase returns and reduce risk… blah blah blah. That makes me second guess everything, what’s next? Are they going to just shove us into something else we don’t want that’s more expensive?
Now I’m doing it myself. Not as scientific and not as automated, but I can accomplish the same style, without having to worry about unwanted effects on our portfolio.
Hey, Mr. WoW. That’s such a shame. I was very intrigued by Wealthfront and its philosophy when it first came on the scene. But like you, I don’t like “shenanigans” either. You made the right move switching to Vanguard. And I never heard of an “in-kind” transfer before. I learned something today! Thank you, sir.
“In-Kind” transfers are helpful. They’re not always available, but luckily both Wealthfront and Vanguard handle them, with no fees nonetheless.
Here’s some more reference material: https://investor.vanguard.com/account-transfer/other-questions
What’s an “in kind” transfer?
When you transfer “in kind,” you simply move your investments to us “as is.” There’s no selling or buying involved and no tax consequences either. Vanguard receives your investments at the market value on the date of the transfer. An in-kind transfer is one of the quickest and easiest ways to move an account.
What types of investments can and can’t be transferred to Vanguard in kind?
Investments you can transfer in kind include:
Stocks.
Bonds.
Most options.
Exchange-traded funds (ETFs).
Unit investment trusts.
Certificates of deposit (CDs) held in a brokerage account.
Most mutual funds (although money market funds will be sold and transferred as cash).*
Investments you can’t transfer in kind include:
CDs held directly with a bank.
Certain options.
Limited partnerships and private placements.
Certain mutual funds and other investment products offered exclusively by your current firm.
Certain low-priced securities traded over the counter (OTC) or on the pink sheets market.
Commodities.
Annuities.
Life insurance policies.
MR WOW, thanks for your post!
For your in-kind transfer to Vanguard, how did Wealthfront/Vanguard handle the cost basis information for your investments? Was that done properly? How would you verify with Vanguard that your cost basis was transferred appropriately?
Thanks!
I honestly didn’t look. I think in 2011 the holding companies are required to document the cost basis. And since Wealthfront started after that, I just figured they maintained the records to be compliant. Once it shifted to vanguard, all the cost basis information was in our accounts.
So, to answer your question… Faith?
“they rolled out this product, they created an opt-out strategy to take 20% of everyone’s portfolio and put it into this new fund, that had a ER of .50%.”
Not cool. Seems like they’re capitalizing on people’s laziness to just accept it. Good thing you caught it and moved out!
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That’s exactly what it was. Capitalizing on inertia and laziness. I remember specifically getting that email and thinking that something didn’t sit right. It was really ambiguously worded.
Again, can’t begrudge them from trying to expand their product line and create new products, but forcing people into it, isn’t my cup of tea. Especially when it goes against the core model. I do believe they felt the backlash, after we had moved everything I saw that they have cut the ER in half to .25%. All that means to me is that they were ripping everyone off at the beginning, how can you reasonably cut the cost in half and still be ok with it???
Questionable at best.
Had a similar experience breaking up with betterment. It was a whirlwind romance, until rising costs gave me a headache every night. In retrospect, it was a stage on the path to DIY finance, and I’m grateful to be where I am.
As for building up a cash buffer to protect yourself from SORR, may want to check out a recent guest post by Gasem on xrayvsn.com. dovetails nicely with your “place a few years of living expenses in bonds” prior to retirement strategy.
As a final note, what I ended up doing with all those random ETFs from betterment was little by little contributing appreciated shares to our new ( as of last year) donor advised fund, where we batch several years of giving we planned to do anyway and simplify our taxable investments by purchasing fewer vanguard mutual funds when we invest in taxable.
Enjoyed the post,
CD
That’s a very interesting article. I’ll have to look into making a model and seeing how it works.
We don’t have a donor advised fund, at least not yet.
And I agree with you… these things have their place in the world. It’s just not for me anymore.