Today I am happy to blog for the first time as Wealthfront’s Vice President of Product & Growth. As you may imagine, I am tremendously excited about the Wealthfront product and its potential, especially as the company enters a new phase of growth.
But this product has even greater personal relevance for me – I searched for a product like it for more than 10 years to manage my own money.
Lessons from the 1990s
It all started during the heady days of the late ‘90s – the Web 1.0 boom. With the excitement around us, some of my friends and I interrupted our careers and our college educations to take a shot at Web entrepreneurship. The experience of running a start-up was one of the most thrilling and educational of my life. We were also among the lucky ones, able to sell our company before the bubble burst.
I searched for a product like Wealthfront for 10 years to manage my own money.
The acquisition was a great outcome for our small company, but it left me with many vexing questions. I found myself suddenly a shareholder in our acquirer. So when and how do I sell those shares? And what’s more, what do I do with the cash after I sell?
Unexpectedly, there were many people who wanted to give me the answer. Private wealth managers and financial advisors started calling as soon as the paperwork was filed. In time, I had opened accounts at Merrill Lynch, Deutsche Bank Alex Brown, and several more.
Key insights on investing and financial advice
The outcome of all the resulting meetings, recommendations, and investment plans was a set of key insights about personal finance:
- The financial market can be an incredible creator of wealth. Having very little exposure to the world of finance at the time and growing up in a household where the riskiest thing we did with our money was entrusting it to a local bank, this came as quite a surprise. But the numbers can’t be denied. An investment of $100,000 in the US stock market 10 years ago, for example, would have more than doubled your money to greater than $230,000 today, as this Vanguard ETF data indicates. You could have achieved an even better result (and a less bumpy ride) with a more diversified portfolio.
- It is hard to get good financial advice without a significant amount of assets to invest. Many of the advisors I met required clients to have more than $1 million of assets. The most insightful and knowledgeable advisor I met required more than $5 million in assets and simply wasn’t willing to take me on. At advisory firms where I met the threshold, I was still among the smallest clients. I couldn’t count on getting cutting-edge financial advice. The best I could hope for was a five-minute phone conversation and an overly simplistic solution.
- Traditional financial advisors and wealth managers are very expensive. When I was first quoted the “1% of assets” fee by an advisor, it seemed pretty reasonable. After all, if the stock market is going to return 10% next year, 1% doesn’t seem that much to pay, does it? I gained a much better appreciation for this expense in the 2000-2003 bear market. When the stock market is down 10%, compounding that loss with a 1% fee withdrawal is rather painful. What’s more, I realized if I started with $100,000 and had a hypothetical 7% a year return, that after 20 years I would end up with a total of $387,000. If a financial advisor had subtracted a 1% annual fee from that, I would have ended up with about $70,000 less — a pre-tax portfolio value of close to $317,000. So a 1% fee translates to almost 20% less assets in 20 years.
In the end, these insights convinced me that I needed to invest my money in the financial markets but that I also needed to avoid traditional advisors and their high fees. So, after a few years with traditional financial advisors, I chose to invest on my own. Putting in many hours over the last decade to learn and implement the ins and outs of investment management led me to believe that there had to be a better approach.
Enter Wealthfront: A better solution
My experience made me appreciate what Wealthfront has built and where it can go in the future. Because at Wealthfront, we have a different set of beliefs from the traditional wealth management industry:
- We believe that everyone deserves sophisticated financial advice. Our account minimum is $5,000. Not $1,000,000. Not $500,000. Not even $10,000. Although some of our advanced features like tax-loss harvesting don’t make sense for accounts that are too small and thus require higher minimums, we strive to make sure that every account – no matter how large or how small – receives the best investment management it’s possible to offer.
- We don’t believe you should pay a lot for good financial advice. Our fee is 0.25% of assets – that’s 1/4th of the 1% fee I paid for many years to traditional financial advisors. We only use low-fee ETFs to construct our portfolios and we don’t push any proprietary products or receive any kickbacks, which allows us to choose the investments that minimize your overall fees. Features like our continuous tax-loss harvesting service take this even further – adding a sophisticated level of optimization to your portfolio that is challenging to accomplish on your own and by itself can make up for our fee & more by adding a potential 1% to your annual after-tax investment returns.*
Thus, Wealthfront lets you access the amazing potential for wealth creation in the markets without the high minimums and high fees of traditional financial advisors.
Mission and more
It is this vision of inexpensive and accessible sophisticated financial advice that attracted me to Wealthfront. The power of software and the Internet allows us to pursue this vision. And in the coming years, I hope to build a product that not only advises our clients but delights and rewards them as well.
This is the product that I could have used a decade ago. I’m tremendously proud to work on it now.
Elliot Shmukler lives in Palo Alto, California, only a few minutes from Wealthfront’s headquarters. He is an avid traveler, having achieved the goal of visiting all 7 continents with a trip to Antarctica last December.
This blog is not intended as tax advice, and Wealthfront does not represent in any manner that the tax consequences described herein will be obtained or that Wealthfront’s tax-loss harvesting strategy, or any of its products and/or services, will result in any particular tax consequence.
We simulated the potential after-tax benefit of our tax-loss harvesting service using historical results and found that it added an average of at least 1.03% annually, net of commissions. We used several assumptions to create one possible approximation, but did not rely on actual client trading history, and our results should not be relied upon for predicting future performance. The results are hypothetical only. These results are based on a study Wealthfront conducted for the years between January 2000 and December 2011, assuming a Wealthfront account with an initial deposit of $100,000, additional quarterly deposits of $10,000, and periodic rebalancing. Dividends and interest were not considered. Commissions were assumed to be $2 per security trade plus $0.0025 per share traded.
For more about our tax-loss harvesting service, and a complete disclosure, see our white paper.