Unless you’ve been on a mission to Mars for the past 2 years or never bothered to the financial news, you must have heard about about robo advisor. Robo advisors are the hottest thing nowadays in the world of retail investment and for a very good reason – they are cheap, technological, and transparent. As financial advisors lose grip in the market, robo’s are increasing in popularity.
One of the most prominent robo advisors in the U.S market nowadays is Wealthfront. The firm has been getting superb media coverage, excellent customer reviews, and is already managing US 4bn in assets, only second to Betterment in this market. The firm specializes in $100,000+ accounts and has a special program that enables you to pin-point opportunities that you can declare as a tax loss.
The firm’s fees are very moderate especially if you compare them to traditional investing firms. Just 0.25% annual fee on any amount over $10,000. For example: if you manage $200,000 of your funds with Wealthfront, you will pay only $475 a year, in addition to the ETF expense ratio (Wealthfront focuses on the lowest expense ratio ETF’s so you are looking at ones that will only cost 0.1%). So managing a sizable account at Wealthfront will cost you, all in all, less than $750 a year. That is in comparison to probably double or triple the fees if you were to manage your funds through a dedicated financial adviser.
What I absolutely like most about Wealthfront is their Chief Investing Officer, the renowned author Burton Malkiel. If this name doesn’t ring a bell, then you should start reading more investment books right now (lean how to prepare for investing here). Mr Malkiel is an economist at Princeston, and he specialist in identifying crises and bubbles. His most famous book “A Random Walk Down Wall Street” is about that exactly. That makes me feel more re-assured than with any other investor, as famous as he may be (perhaps with the exception of Warren Buffet)… I would much rather have my money manged by someone who has a nose for coming crises and can prevent them than someone who is known for his opportunity identifying skills. With value investing which I preach for, the whole point is to keep a steady line and enjoy the compound interest over the long term.
Wealthfront boasts a appropriate algorithm to create a diversified and cost-effective profile based on your requirements. A standard profile would normally consisting of a mix of various assets – government bonds, natural resources, municipal bonds, stocks, TIPS, REIT funds, etc.
Below are some of the great quotes I found on Wealthfront’s website:
Why Software Is Better Than People for Financial Advice
Intelligent Dividend Reinvestment
[…] We also rebalance in a much more tax-efficient manner than traditional advisors, by using software to intelligently re-invest dividends. Assuming your financial advisor uses best practices and invests your portfolio in a diversified set of index funds (or index based ETFs), those index funds are likely to pay dividends monthly. An average investor might own six or seven index funds, meaning 72 to 84 dividends to reinvest every year. Multiply that by 200 clients (the typical advisor capacity) and you’re up to 14,400 to 16,800 dividends per year. That’s an awful lot of work, so most advisors take the easy way out and simply have the dividends reinvested in the index funds that generated them (using what are known as DRIPs or Dividend Reinvestment Plans). But reinvesting dividends into over-performing asset classes only adds to their size, and thus accelerates the need to sell off some of the investments, thereby generating a tax bill. A much more useful strategy, one that keeps taxes as low as possible, would be to instead invest the dividends in under-performing asset classes. But, as you can easily imagine, figuring out how to do that 15,000 times a year is well beyond the capabilities of a human advisor. But it’s a job tailor-made for software.
Daily Tax-Loss Harvesting
Another example of a portfolio-enhancing service that isn’t possible through an advisor is tax-loss harvesting that is done on a daily basis. Tax-loss harvesting is a way of reducing your taxes by taking advantage of investments that have declined in value. These holdings are sold, and replaced with highly correlated, but not identical, investments, allowing you to maintain the risk and return characteristics of your portfolio while generating a loss that can be applied to lower your taxes.
A couple of weeks ago we introduced a fully automated financial planning experience called Path. Prior to Path’s availability, the only way to get a financial plan was to hire a financial planner. But that usually required having a net worth of at least $1 million to afford their investment minimums. And even then, what you get isn’t quite as personalized as you might be led to believe. Most financial planners rely on one of a small group of commercially available software packages that were written more than a decade ago.
Our Rating: ★★★★★.
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