America’s $13.2 Trillion Problem

Every year, millions of investors open their brokerage statements and feel a wave of anxiety as they attempt to figure out how much they are really paying in fees. The challenge is it’s almost impossible to tell. One thing we can be sure of is investors are paying way too much in fees.

State Street and Boston Consulting Group data estimates that US investors paid over $277 Billion in fees to manage their investments in 2014, and that doesn’t include advisory or maintenance fees. If this continues, investors could lose an estimated $13.2 trillion to fees alone over the next 30 years. That’s $13.2 trillion that could be used to buy new homes, pay for college educations or fund retirements.

At Wealthfront, we estimate that individual investors can avoid up to 80% of the fees they currently pay by switching to a low-cost, diversified and tax-efficient portfolio of index funds. Investors need a comprehensive and objective third party analysis of their existing investments in order to accurately tell how much they could be saving.

That is why I’m proud to announce our newest service, the Wealthfront Portfolio Review. Portfolio Review is the first comprehensive portfolio analysis tool to not only give investors detailed advice and analysis, but also fully automate the transformation of your portfolio based on those recommendations. Anyone, whether or not they are a Wealthfront client, can benefit from this service starting today.

Are You Invested the Right Way?

We reviewed thousands of portfolios that have been transferred to Wealthfront over the past four years and created metrics to analyze the fees, composition and diversification of these portfolios before they were reinvested in low-cost, globally-diversified and tax-efficient Wealthfront portfolios. What the data showed was troubling.

Fewer than one in ten of these transferred portfolios was properly built. 92% of the portfolios reviewed were challenged by some combination of high fees, cash drag (too much cash held on hand) and poor diversification. If these issues were addressed, the average investor could incrementally grow her net worth by hundreds of thousands of dollars over the course of her investing life.

Understanding if you are invested the right way using Portfolio Review is fast and free. We’ve made sure the new service supports the most common brokerages in the country, representing over 75 million accounts. All you need to do is connect your existing brokerage account and you will receive an objective, detailed evaluation that includes guidance on how to immediately address issues that may significantly impact the long term value of your investment portfolio.

Advanced Portfolio Analytics for Everyone

We designed our Portfolio Review service to analyze and recommend portfolio construction along four critical dimensions: fees, taxes, cash drag and diversification. You now only need one tool to evaluate your portfolio.

  1. Portfolio Fees. As our CIO Burt Malkiel likes to note, money paid out in fees is guaranteed not to compound and benefit your future. Unfortunately, the financial industry has become incredibly creative with both the size and the variety of fees they charge investors. While quite a few tools will evaluate simple fees like mutual fund costs, Portfolio Review takes a comprehensive look at the fees you are paying including product fees, transaction fees and advisory fees.
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  2. Tax-savings. For many investors, taxes represent the largest opportunity for improving the long term results of their portfolios. Deferring taxes into the future and recognizing gains when they are taxed at favorable rates are two ways to reduce tax drag on investment returns. Daily Tax-Loss Harvesting is designed to help you capture both of these benefits. Its potential benefit depends on your tax rates, the value of your portfolio and your investment horizon. Portfolio Review helps you estimate the potential value of tax loss harvesting for your personal investments.
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  3. Cash Drag. Everyone should have some form of emergency fund, held safely in cash, to protect against unforeseen expenses that could torpedo their long term plans. However, too many investors hold a large percentage of their non-emergency funds in cash, potentially resulting in tens of thousands of dollars in lost appreciation. Portfolio Review calculates not only an estimate of a recommended emergency fund based on your income, but it also analyzes your investment accounts to make sure you aren’t suffering from excessive cash drag.
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  4. Diversification. Good diversification starts with ensuring your portfolio is invested across a sufficiently large number of securities. It should also benefit from global economic growth and include the right mix of stocks and bonds for your risk tolerance. Portfolio Review evaluates the diversification of your investments across each of these dimensions.
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In minutes, you’ll know exactly how much your portfolio could stand to benefit. Your review will provide actionable recommendations, in addition to detailed feedback, to help you fix issues and capture this additional value.

Not Just Advice. Actionable Advice.

At Wealthfront, we believe giving advice is helpful, but automating that advice is the key to helping individual investors better achieve their goals. The Wealthfront Portfolio Review is the first comprehensive portfolio analysis tool to not only give investors detailed advice and analysis, but also fully automates the transformation of your portfolio based on those recommendations.

We are able to do this because we integrated Portfolio Review with our 2nd generation Tax-Minimized Brokerage Account Transfer service. We’ve added the following new features to minimize the effort and tax hit of transferring your portfolio to Wealthfront:

  • Move All of Your Account or Just Part of It. Wealthfront now provides a detailed transfer plan for each investment in your account based on its fees, compatibility with your Wealthfront portfolio and tax status. To the extent your transfer is expected to generate taxable gains, we’ll also provide an estimate of the taxes you’ll owe. You can transfer all or just part of your account and specify precisely which investments to include.

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  • Time-to-Payback Calculation. We’ll estimate the amount of time it takes for the benefit of lower fees to offset the tax cost that results from assets that must be sold prior to transfer. Wealthfront only recommends selling assets to transfer their value if the estimated payback period is less than three years.

These new features add to the core functionality Wealthfront launched in 2015 to automatically and tax-efficiently manage all the details of your transfer. We continue to incorporate compatible investments into your new portfolio and hold others until short-term gains become long-term. We manage sales to minimize the tax impact of transferring, and use tax-loss harvesting to offset gains and accelerate your portfolio’s transition. You can even adjust an annual limit on net taxable gains you’ll recognize.

Get a Second Opinion

Portfolio Review is one more way Wealthfront is working to make sophisticated financial advice available to everyone. Whether you are an existing Wealthfront client, or if you are one of the millions of investors who are looking for an objective assessment of your portfolio, Portfolio Review can provide you with the information and analysis to help make sure you are invested properly for the long term.

Welcome to 2016. It’s time to start investing the right way.

Disclosure

Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients. Past performance is no guarantee of future results.

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