There’s a reason robo-advisors are popular among savvy investors and the self-employed.
These online companies use special software to manage your investment accounts on your behalf.
Robo-advisors, and the computers that run them, have proven to be less expensive, and better investors than humans.
Robo-advisors also tend to be easy to use, mostly because they are fully online, fully automated, and come with helpful online tools.
If you’re a woman who is ready to invest but don’t want to deal with the typical mansplaining some financial advisors make us endure, a robo-advisor may even be the answer.
These companies are run by computers and not people, so you can set your account up without having a face-to-face meeting with anyone.
Most have 24/7 online or phone customer service though, so you can get your questions answered if you have any.
What is Wealthfront?
I personally like the way Wealthfront is set up due to its affordable fees, easy-to-use interface, and holistic approach to investing and wealth-building.
To understand the problem Wealthfront is trying to solve, it helps to know where they got started.
According to the company’s website, the idea for Wealthfront was born out of the financial crisis of 2008.
One of its founders realized high net worth individuals were paying high fees without getting the personalized service they deserved, so they created Wealthfront as an alternative to working with traditional financial advisors.
Since then, Wealthfront has grown astronomically, and the company now manages over $10 billion in assets.
Some of the main benefits of Wealthfront include:
- You don’t need a ton of money to get started. Wealthfront lets you open an account with a minimum investment of $500. This is a huge deal if you’re just getting started investing and don’t have a lot of money to save yet.
- You can use Wealthfront to fund a traditional IRA, Roth IRA, SEP IRA, or a traditional investment account. You can also roll over an old 401(k) to Wealthfront or use the service to manage a 529 account. In other words, you have the option to open a Wealthfront account to supplement retirement funds you already have or start building from scratch.
- Wealthfront uses exchange-traded funds, or ETFs. ETFs are marketable securities that track an index or basket of assets. They work similarly to index funds, and tend to come with extremely low fees.
- Wealthfront uses a formula to automate your investments. Instead of having a human financial advisor listen to your story and pull an investment plan out of a hat, Wealthfront uses computers and complex algorithms to create a solid investing plan based on your tolerance for risk and timeline.
- Your funds are automatically rebalanced for you. One benefit of using Wealthfront is that your investments are automatically rebalanced on your behalf. So, if the program helps you determine you need to invest in 75% stocks and 25% bonds, your investments will automatically be moved back to those levels periodically without any work on your part.
- Wealthfront uses a savings model called Path to help you reach financial goals. Path is a tool built into the Wealthfront Platform that helps you determine whether your current investing strategy is going to work. By answering a string of questions about your current finances and future goals, you can find out about the lifestyle you may be able to live in retirement. If you’re not on track to secure the future you want, Path suggests tweaks you can make today that can help you change that.
- You get automatic tax-loss harvesting. Wealthfront offers tax-loss harvesting for all accounts and stock-level tax loss harvesting for accounts with $100,000 or more on deposit. This service sells off investments that have taken a loss in order to reduce your taxable income.
- Refer your friends. Wealthfront offers a referral program called the Wealthfront Invite Program that lets you receive $5,000 in account management with no fees for each person you refer.
- Pay low fees. Like other robo-advisors, Wealthfront charges lower fees than traditional financial planners. These lower fees mean more money is left in your portfolio over time, making it easier for you to build wealth. We’ll go over the exact fees Wealthfront charges in the next section.
How much does Wealthfront cost?
By this point, you hopefully understand that Wealthfront will manage your investment or retirement accounts on your behalf and take care of most of the grunt work for you.
They’ll help you figure out how much you need to save now to reach your goals, and they’ll even help you maintain your ideal asset allocation over time.
Best of all, they use computers and real data to decide which investments you should bet on versus financial advisors who may prefer to sell investments that pay them big, fat commissions.
Of course, this expertise costs money. Wealthfront fees are less than the typical 1% you would pay a financial advisor, but it’s still important to understand how the fee structure works.
Overall, Wealthfront charges an annual advisory fee of .25% for their services, although this amount is spread out and deducted monthly from your account.
In addition, you’ll also pay the “expense ratio embedded in the ETFs and mutual funds you will own.” They also earn one expense ratio for themselves — the 0.25% they charge for the Wealthfront Risk Parity Mutual Fund among customers who purchase this fund.
On the flip side, Wealthfront doesn’t charge hidden fees such as fees for opening an account, fees for closing your account, trade fees, commissions, or account transfer fees.
Wealthfront offers an example of how fees can look on their website:
“An account with an average monthly balance of $100K will have a monthly advisory fee of $20.55. Assuming 30 days in the month and 365 days in the year, the math is as follows: $100,000 * 0.0025 * (30/365) = $20.55” per year.
Since a typical financial advisor who charges 1% of your portfolio would take $1,000 per year ($83.33 per month) regardless of how they performed, this is typically considered a good deal. I’d say it’s a great deal.
Who Should Use Wealthfront?
Anyone could benefit from using Wealthfront, particularly if they’re getting started with investing for the first time.
The platform is affordable, easy-to-use, and approachable for beginning investors. Since the entire user experience is online, getting started doesn’t seem nearly as nerve-wracking.
After all, you won’t have to ask around for referrals for a financial advisor or do a ton of research to find one.
You can also skip over the part where you wonder whether your financial advisor is on your side, or trying to upsell you to earn a higher commission.
Since Wealthfront uses computers and data to find your ideal investments and allocation, you don’t have to worry about divided loyalties or deciphering any annoying financial-advisor speak.
Wealthfront is also a great place to start for women (or men) who don’t have the time or desire to make a ton of decisions when it comes to their investing plan. While the company tailors your plan to your needs, they do so by asking you questions about your financial goals. What age do you want to retire, for example?
Do you want to take a sabbatical to travel the world? If you were able to ratchet up your savings slightly from what you’re saving now, how different could your future be?
Wealthfront’s Path planning tool takes the guesswork and the hoping and praying and replaces it with a real plan – a path — that is realistic and based on data.
If you need this type of help (don’t we all?), then Wealthfront could be for you.
How to Get Started
While it might take you a while to compare robo-advisors and decide you’re ready to get started, the process required to open an account with Wealthfront is a piece of cake.
It all starts with their questionnaire, which you can access from the Wealthfront homepage.
Here are your next steps:
Step 1: Go to the homepage and click on “invest now” or “open an account.” From there, the platform will ask you a wide range of questions meant to help guide them as they build your portfolio from scratch. In addition to your age, questions you’ll need to answer will cover your appetite for risk, your investing goals, and your income.
Step 2: Receive a detailed analysis from Wealthfront. Once you answer the questions posed during the questionnaire, you’ll receive a landing page with your ideal asset allocation. When I entered in my information (age 38, two kids, income information, etc.), they suggested I open a taxable investment account with 35% U.S. stocks, 26% foreign stocks, 17% emerging markets, 8% dividend stocks, and 14% municipal bonds. They also gave me a “risk score “of 8.5 out of 10, which reflect my general willingness to ride the ups and downs of the market without panicking.
Step 3: Open your account. If you like the risk score they’ve assigned you and believe in the investing plan they’re suggesting, you can take the next steps to open your account. Remember that the account minimum is only $500, so that’s not a huge hill to climb. Click “get started” to move on to the next level.
Step 4: Answer more questions. Once you take steps to open your account, you’ll need to answer quite a few more questions so Wealthfront can create the best investing plan for your needs. For example, you’ll offer up tax information (do you file as head of household?), your annual pre-tax income again, and information on the types of investment accounts you already have.
Step 5: Transfer money. After the second set of questions are answered, Wealthfront will present you with a selection of accounts they think you should open based on your income, age, and other factors. For example, they might suggest you open a Roth IRA to supplement your work-sponsored 401(k) along with a 529 account for your kids. To fund your accounts, you can set up an ACH transfer from your bank account. You can also use a check if you’re funding a 529 account.
Step 6: Let Wealthfront do the hard work for you. Once your account is up and running, you can set up regular contributions so you can continue growing wealth. You’ll also have the option to play around some more with the Path tool. You can even connect other bank accounts to your Wealthfront account to find out about little tweaks you could make to reach your goals faster.
The bottom line
If you’re ready to invest but don’t want to do it alone, a robo-advisor may be just what you need.
These online financial managers take the guesswork out of investing without charging an arm and a leg. Plus, they use real data to come up with the investments they suggest.
It’s hard to beat that for just .25% per year. If you’re ready to start building wealth, sign up for Wealthfront here.
Some of the links in this and other posts generate a commission. I never recommend products that I don’t truly believe in. Seriously – I get asked to write about stuff all the time and turn down hard cash if I’m not feeling it.
Holly Johnson is a financial expert, award-winning writer, and Indiana mother of two who is obsessed with frugality, budgeting and travel. Her personal finance articles have been published in the U. S. News, Wall Street Journal, Fox Business, and Life Hacker. Holly is founder of of the family finance resource, ClubThrifty.com, and is the co-author of Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love. Learn more about Holly here.