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:

Wealthfront's Tax-Efficient, Diversified Investment Asset Location

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.

 

Disclosure

Projected returns do not represent actual accounts and may not reflect the effect of material economic and market factors. The results shown are a representation of Wealthfront’s opinion only and do not represent the results of actual trading using client assets, but were achieved by means of forward-looking analysis. Projected returns are not a guarantee of actual performance.

The projected returns of Wealthfront portfolios do not take into consideration the effect of tax policy changes, changing risk profiles, or future investment decisions.

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. For example, we assume that an investor’s risk profile and target allocation mix would not have changed during the time period and that any material economic and market factors that might have occurred during the time period would not impact client decision-making. However, actual investors may have experienced changes to their allocation mix in response to changing suitability profiles and investment objectives. Actual investors on Wealthfront will experience different results from the results shown. There is a potential for loss as well as gain that is not reflected in the hypothetical information presented.

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.

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7 Responses to “Wealthfront’s New Investment Mix”

  1. Zach March 5, 2013 at 9:48 am #

    How long after a client opts-in do the necessary trades get executed?

  2. Jeff Zwelling March 5, 2013 at 3:28 pm #

    Since my assets span both taxable accounts and non-taxable accounts, do you diversify across both types of accounts? For instance, I currently have all the bonds in the tax-deferred or tax-free accounts while I have the equities in the taxable account. However, in maintaining my asset diversification targets, I look across both types of accounts. I can’t tell from your post if this is the feature or that a user can select whether a single account is optimized either taxable or non-taxable.

    • Andy Rachleff March 5, 2013 at 5:36 pm #

      Excellent question. Here’s how we answer it in our FAQ:

      “To minimize the taxes you incur on your investments we implemented a form of Asset Location known as differentiated asset location. By differentiated asset location we mean that we use different mixes of asset classes for your taxable and retirement accounts. Differentiated asset location should not be confused with segregated asset location, which segregates asset classes entirely into one type of account or another. We chose not to implement segregated asset location because it is only beneficial to people whose retirement accounts represent a large percentage of their net worth which is atypical for our clients.”

      We agree segregated asset allocation is the better way to go for clients whose retirement accounts represent a large percentage of their liquid net worth. Our product is initially optimized for young people. Retirement accounts typically represent a small percentage of their net worth thus the decision to initially focus on differentiated asset allocation. We plan on offering segregated asset allocation later in the year.

      • Jason L March 6, 2013 at 10:43 am #

        What do you consider to be a “large percentage” in this context?

        • Andy Rachleff March 19, 2013 at 7:44 pm #

          To what are you referring?

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