Introducing Wealthfront, The Online Financial Advisor

Today we’re unveiling our Online Financial Advisor service, which for the first time makes sophisticated investment advice accessible and inexpensive.

Six months ago, we started hearing complaints from our Silicon Valley-based customers about the wealth managers lined up in their lobbies. These “suits” were taking advantage of the new wealth being created by the surge in IPOs. But our friends in technology companies didn’t trust the financial advisors, because of their high fees and biased advice. They started asking us if we could manage their entire portfolios in a quality way, but without all the costs.

When we heard this, we realized that our local customers wanted exactly what we wanted for ourselves. As software engineers, we wanted good, rigorous investing advice, wrapped in a low-cost, convenient package. We also wanted an interface that was, in the words of our CTO David Fortunato, “clean, pretty and fun to use.”

Judge for yourself what we created: www.wealthfront.com.

(Also check out our engineering blog where we talk about how we built the service. We use Ruby-on-Rails, HTML5, SVG, and jQuery on the frontend, Java and R on the backend, all using Continuous Deployment in a highly-regulated environment.)

Our Online Financial Advisor service delivers on everything you’d expect from a Silicon Valley company:

Implements best practices

Our service is built on the foundation of Modern Portfolio Theory (MPT), the approach favored by most every academic and investment professional to optimize a portfolio’s expected returns for any given level of risk. Historically, rigorous MPT-based financial advice has been available only through high-end financial advisors.

We design a portfolio for you that is diversified across asset classes, to lower your risk without sacrificing your returns. Through our service, your money is invested in low-cost, index-oriented ETFs, often from The Vanguard Group.

Costs less

We’ve turned the financial advisor business model on its head by requiring only a $5,000 minimum and not charging an advisory fee on your first $25,000 under management. Then we only charge 0.25% on the amount over $25,000. That’s at least 75% less than what traditional advisors charge. We do not accept compensation from anyone other than you, so you can be assured we will not steer you into a higher-priced investment because we get a kickback.

Offers convenience

Unlike traditional Wall Street firms that focus solely on lining their pockets, we aim to delight our customers, with an efficient and simple-to-use service. We know you don’t want to be bothered with a lot of investment decisions, so we use advanced algorithms and comprehensive research to limit the number of questions we need to ask to provide you a compelling, personalized plan.  We continuously monitor your portfolio and periodically rebalance it to maximize your expected returns without exceeding your risk tolerance.

Provides transparency

As software engineers, we believe information wants to be free and that you should pay only for convenience. That’s why we provide your investment recommendation before you even give us your email address. We only charge if you want us to manage your portfolio for you.  We also explain why we made our investment recommendations; something that we believe has never before been done.

We’re building our business with an open-source approach. If you want to become a customer, great. If not, we’re happy to help you do it yourself using our website, our online tools and the information on our blog.

If you’ve been a regular reader of these pages, you know we are no fan of most financial services companies. They win business by inspiring fear and make profits with hidden fees. We want to be part of the social movement toward better, transparent investing. We believe that’ll benefit us in the end, and, more importantly, you.

Please let us know what you think.

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2 Responses to “Introducing Wealthfront, The Online Financial Advisor”

  1. Paul Scheurer August 12, 2012 at 1:26 pm #

    Why not invest directly with
    Vanguard? And then follow
    the rule of 60% equities,
    40% fixed income. Isn’t the
    new middleman Weathfront?

    • Elizabeth MacBride August 12, 2012 at 2:44 pm #

      That’s an excellent question. We are a new middleman, but one that is finally cost effective. There are three primary benefits to using Wealthfront rather than doing it yourself on Vanguard:

      1. Wealthfront’s six asset classes will add significant returns over using your proposed two asset class solution. In our whitepaper that describes our service (https://www.wealthfront.com/whitepapers/investment_methodology) we explain that Wealthfront’s 6 asset class portfolio will add approximately 0.45% to your return each year for the same amount of risk vs a 3 asset class portfolio. It should add more relative to a 2 asset class portfolio.

      2. Our optimal rebalancing should add approximately 0.40% per year to a portfolio that is not appropriately rebalanced. Very few people who manage it themselves appropriately rebalance their portfolios.

      3. What is your time worth? We think the convenience of offloading it from you is worth something.

      If you just look at the aggregate benefits from points one and two, we will annually add 0.85% to your returns for the same level of risk. We think that is a pretty good value relative to charging $0 for your first $25,000 under management and then only 0.25% thereafter.

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