I had been using Wealthfront for robo-investing for a few years, and I liked their ease of use, low minimum investment requirements, and promises of automated, “hands-off” investing. However, I closed my Wealthfront account today.
While robo-advisors such as Wealthfront or Betterment may seem like an ideal solution for novice investors or those who want a simple, automated way to manage their portfolios, there are some hidden downsides that you should consider before jumping in.
Here’s a look at why they may not be as great as they appear, hope it will help you decide whether to keep it, or to close and transfer out from Wealthfront account.
Fees: Higher Than You Think
When it comes to investing, one of the most important factors in long-term success is keeping fees low. Yet, many robo-advisors charge higher fees than you might expect, especially considering that their primary value proposition is automation.
Robo-Advisor Fees
For example, Wealthfront charges a 0.25% annual fee on assets under management (AUM), which is generally considered low compared to actively managed funds. However, this fee still adds up over time. On top of that, Wealthfront invests your money in a mix of ETFs (exchange-traded funds), many of which have their own underlying expense ratios, often around 0.05% – 0.25%.
Vanguard Funds: A Lower-Cost Option
In contrast, you could invest in Vanguard’s low-cost mutual funds or index funds, where the expense ratios typically range from 0.03% to 0.10%. Vanguard’s flagship funds, such as the Vanguard Total Stock Market Index Fund (VTSAX), offer excellent diversification and very low fees, far cheaper than robo-advisors like Wealthfront when you factor in both the management fee and the ETF expense ratios.
So, while the robo-advisor may claim that its service is “low-cost,” it’s still more expensive than a simple, well-diversified portfolio of Vanguard funds, which can provide similar (if not better) performance with lower fees in the long run.
source: https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf
Tax-Loss Harvesting: Not as Significant as It Seems
Robo-advisors often tout their tax-loss harvesting feature as one of the key advantages. This strategy involves selling investments that have lost value and using those losses to offset capital gains, reducing your tax burden. While this sounds like a great perk, the actual benefit might not be as significant as robo-advisors claim.
How Tax-Loss Harvesting Works
In theory, tax-loss harvesting can be a helpful strategy, especially for those with large portfolios or higher income brackets. However, for smaller investors or those with modest portfolios, the tax savings may not be significant enough to outweigh the additional fees.
As shown by a Vanguard research, the value of tax-loss harvesting (TLH) varies significantly across investor characteristics, investor behavior, and market environment. Moreover, due to the complex regulations around capital loss deduction and wash sale, you might actually generate a wash sale that is not tax deductible. Especially when you have two or more robo-adviser accounts and they are both trying to do tax-loss harvesting, you may not end up getting a “harvest” due to wash sale.
So, while it’s a nice feature, the real impact of tax-loss harvesting may not be as large as robo-advisors suggest, especially if you’re just getting started or investing small amounts.
The Complexity of Fund Consolidation: A Burden in the Long Term
Another issue that often gets overlooked when using robo-advisors like Wealthfront is the complexity of consolidating your investments later on, especially if you decide to switch providers or manage your portfolio manually in the future.
A Wide Range of Funds, But No Real Control
Robo-advisors typically invest your money across a wide range of ETFs—everything from U.S. stocks to international equities, bonds, and real estate. While this may sound good at first, the sheer number of different funds can make it harder to manage or consolidate your assets later.
If you decide to transfer your funds to another provider or manage your portfolio on your own, you’ll find that you’re stuck with a hodgepodge of investments spread across many different funds. Each fund may have its own management fees, tracking performance, and risk levels. Trying to consolidate all of these into a more straightforward portfolio of low-cost, broadly diversified index funds can be a burden.
Managing Complexity in the Long Run
This complexity can be especially troublesome over the long term. As your portfolio grows, you may want to simplify things. But with a robo-advisor, you could end up dealing with unnecessary complexity and higher management costs. That means more time spent monitoring a cluttered portfolio rather than focusing on more strategic goals like saving for retirement or buying a house.
Should you also close Wealthfront account?
While robo-advisors like Wealthfront can be an excellent choice for beginners or those who want a hands-off approach to investing, they’re not the magic solution they appear to be. The fees can be higher than expected, tax-loss harvesting isn’t always as beneficial as it sounds, and consolidating your investments later on can become a hassle.
If you’re comfortable managing your investments or are willing to invest some time into learning, you can likely build a low-cost, diversified portfolio using a combination of index funds or ETFs that cost less and offer similar (or better) performance without the added complexity and fees.
So, before you sign up for a robo-advisor, consider whether it’s really the best option for you. A simple, low-cost portfolio with Vanguard or other well-known, inexpensive providers might give you the same benefits—without all the extra fees, complexity, and marketing fluff.
Investing is a long-term game, and every fee, tax advantage, and investment choice adds up over time. While robo-advisors certainly have their place in the market, it’s important to understand the hidden costs and potential drawbacks. By doing some research and understanding the full picture, you can make a smarter choice that helps you grow your wealth more effectively.