Wealthfront’s New Investment Mix
At Wealthfront, we’re always looking for ways to increase our clients’ net-of-fees, after-tax returns without exposing them to more risk. We’re excited to announce two major enhancements to our investment management service, driven by Chief Investment Officer Burt Malkiel:
- Differentiated Asset Location: We now offer different asset allocations for taxable and retirement accounts. Tax-efficient asset classes are weighted more in taxable accounts to minimize your taxes.
- Improved Bond Diversification: We’ve added five new income-producing asset classes to help increase returns (for the same level of risk).
We estimate these changes will increase our clients’ annual net-of-fees, after-tax return by an average of 0.5% per year. Assuming you invest $100,000 over 20 years, the changes could add approximately $28,000 to your account’s value.
Our fees remain 0.25% of assets. Unlike traditional financial advisors, we don’t raise our fees when we offer a new feature. We aim to continually deliver more bang for the buck.
Differentiated asset location: Taxes matter
Many of our clients have told us they’re worried about the impact of rising taxes. To minimize taxes on your investment portfolio, we have implemented differentiated asset location. That means we employ different mixes of asset classes for your taxable and retirement accounts.
Previously, we used the same asset classes and mixes for both taxable and retirement accounts. By placing tax-efficient asset classes – including stocks and a newly added asset class, municipal bonds – in our taxable accounts, we aim to minimize your tax bills and increase your after-tax returns. We continue to use low-cost ETFs to represent all of the asset classes across your portfolio.
You can see the differences in the asset allocations for taxable and retirement accounts by toggling between the two new account type tabs on the investment recommendation page.
The charts below display the before and after asset allocations for each account type for every level of risk:
Improved bond diversification: Higher returns
Wealthfront has added five income-producing asset classes to increase your portfolio returns without exposing you to more risk. The new asset classes are:
- Municipal Bonds
- Corporate Bonds
- Treasury Inflation Protected Securities (TIPS)
- Emerging Market Bonds
- Dividend Growth Stocks
Each asset class has a different set of risk, return and tax characteristics, so adding them gives us more ability to customize portfolios. Not every account will include all of the 11 asset classes we now use; a different subset of the asset classes will be used depending on account type and each client’s tolerance for risk. To read more about the rationale behind our changes please see our blog post, Burt Malkiel On Wealthfront’s Promise.
New allocations available immediately
As of today, all new clients will be offered portfolios that include the enhancements. If you’re already a client, you’ll see a popup when you log in that offers an opportunity to upgrade. Start the process by clicking the “I want this now!” button.
Rest assured we will migrate portfolios to the new allocations in a tax-sensitive manner. Please see our FAQ for specific details on how we accomplish this goal.
The advantages of a software solution
Our investment methodology, based on Modern Portfolio Theory, hasn’t changed. Our low fee hasn’t changed, either: It remains 0.25% of assets. Most importantly, we remain committed to our mission of bringing high-quality financial advice to everyone.
Our software-based approach means we are able to continually improve the financial advice we offer. We will be relentless in this pursuit. You can expect us to make additional improvements that:
- Offer new capabilities traditionally only available through private wealth managers
- Take advantage of the latest research on investing and
- Address changes in the economic environment
Please read our white paper if you would like to learn more about how software enables us to maximize our net-of-fee, after-tax returns while we keep our fees low.
Thanks for entrusting us with your investments.
Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.
We simulated the potential after-tax benefit of our updated, more diversified asset allocation in a taxable account using historical results averaged across different risk levels and found that it added an average of 0.5% annually. 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 as they are hypothetical only.
These results are based on an analysis Wealthfront conducted where the parameters included long term expected return, correlation and standard deviation for 11 asset classes. We assumed a Wealthfront account with an initial deposit of $100,000, with no subsequent deposits, and no tax-loss harvesting. Dividends, interest and advisory fees were considered.
We assume the 0.5% annual additional return from our simulation is reinvested back into the Wealthfront portfolio with the updated, more diversified asset allocation over a 20-year period. We compared this portfolio to the original Wealthfront asset allocation, both starting with $100,000, compounded over 20 years using the assumptions described above. The estimated difference between the two portfolios at the end of the 20 years was approximately $28,000.A different methodology would result in different outcomes. Hypothetical performance is not an indicator of future actual results. Hypothetical results are calculated by the retroactive application of a model constructed on the basis of historical data and based on assumptions integral to the model which may or may not be testable and are subject to losses.
Wealthfront assumed we would have been able to purchase the securities recommended by the model and the markets were sufficiently liquid to permit all trading. Hypothetical performance is developed with the benefit of hindsight and has inherent limitations. Specifically, hypothetical results do not reflect actual trading or the effect of material economic and market factors on the decision-making process. Actual performance may differ significantly from hypothetical performance. There is a potential for loss as well as gain that is not reflected in the hypothetical information portrayed. Investors evaluating this information should carefully consider the processes, data, and assumptions used by Wealthfront in creating its historical simulations.
While the data used in this simulation combine several sources that Wealthfront believes are reliable, the results represent Wealthfront’s opinion only. The analysis uses information from third-party sources, including independent market quotations and index information. Wealthfront believes the third-party information is reliable, but Wealthfront does not guarantee the accuracy of the information. Unless otherwise indicated, the information has been prepared by Wealthfront and has not been reviewed, compiled or audited by any independent third party or public accountant.