Socially responsible investing has become the talk of the investment world as more investors now seek to invest in funds and companies that exhibit socially responsible practices. In September 2021, Wealthfront launched its socially responsible portfolio, enabling investors to put their money in ethical stocks.
But the main question here is, does Wealthfront have what it takes? With all the other robo-advisors available in the market, is this the best platform to entrust with your money?
Even as we invest in socially responsible portfolios, we still want to make profits. Therefore, we need a platform that is not one-sided but rather focuses on the two issues that matter most—social responsibility and performance.
This Wealthfront socially responsible investing review intends to dissect the Wealthfront investment platform to determine whether it is ideal for you.
Let’s dive right in!
What is Wealthfront?
Sometimes, you just want to make things easier, so you think of automating your investments. Wealthfront is one platform that helps you do just that.
Wealthfront is a famous robo-advisor whose main focus involves strategies that minimize taxes on capital gains. Since its launch in 2008, the platform has become one of the market’s favorite robo-advisors.
It has become the tool for most investors seeking automated financial or investment guidance. In fact, Forbes Advisors gives Wealthfront a 4-star rating on its list of the best robo-advisors, alongside Personal Capital and Axos Invest.
The company is based in Palo Alto, California, and has, over the years, introduced several financial tools and services that aim to make investing effortless.
How Wealthfront Works
As mentioned above, Wealthfront is a robo-advisor that helps you automate your investments and financial advice based on your risk tolerance and investment goals.
Its cutting-edge technology seamlessly allows you to use your money to make more money. While it’s mainly known for its tax-minimizing strategies, its sustainable portfolio is also doing significantly well.
Once you sign up for this platform, the first step is determining how you would love your money to make more for yourself. For instance, you can open an account with Wealthfront for:
- Long-term Investing – This allows you to open a taxable investment account
- Retirement Plan – Here, you open an IRA (individual retirement) account, either the traditional one, SEP IRA, or Roth IRA.
- College Saving Plan – Wealthfront offers investors the 529 college savings plan.
- Bank Account – You can open a Wealthfront Cash account, paying a 0.35% APY.
All these help the platform decide on the best portfolio to offer you. If you choose the first option (long-term investing), you’ll need to answer more questions to help Wealthfront better tailor your portfolio. These include your age, priorities, and the likelihood of selling stocks out of fear when the market plunges).
The platform recommends a portfolio of funds tailored to match your priorities and risk tolerance based on your answers.
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How to Use Wealthfront
Before you start investing or saving with Wealthfront, you need to sign up for the platform. Luckily, the sign-up process is incredibly easy. In fact, the platform estimates a sign-up time of four minutes.
Within those four minutes, you’ll have opened your investment account and are ready to start making money. The sign-up process will go as highlighted above.
You answer several questions regarding your priorities, the type of investment you wish to make, and how you can handle or approach risk. Your tolerance level is calculated on a 0 to 10 scale before the platform recommends the portfolio that suits you best.
To sign up for Wealthfront, simply click this link.
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Wealthfront Investment Options
Generally, Wealthfront offers investors three portfolio options to choose from:
- Classic portfolio
- Socially responsible portfolio
- Direct Indexing
The classic portfolio is the original portfolio on this platform, while the socially responsible one is the newcomer that’s taking the market by storm. On the other hand, direct indexing is a portfolio designed to generate tax savings for investors with accounts funded by over $100,000.
Generally, all you need to start investing with Wealthfront is $500. This is one of the most pocket-friendly minimum balances in the market – although there are a few other robo-advisors with slightly lower minimums.
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Investment Fees
Wealthfront usually has no account opening, closing, withdrawal, transfer, or commission fees. This makes it one of the cheapest platforms to operate or invest in.
The only charges you’ll incur in Wealthfront for investment accounts include:
- The 0.25% annual advisory fees, are charged on the total assets the platform manages for you.
- An expense ratio of between 0.25% for the mutual funds and ETFs in your SRI portfolio.
When you invest more than $100,000, you’ll note that these fees represent some of the lowest in the market. For this reason, the platform becomes an excellent option for new investors and startups.
For example, if your account maintains an average monthly balance of $100k, your monthly advisory fee will be $20.55. The calculations here have assumed a 30-day month and a 365-day year.
This will be $100,000*0.0025* (30/365) = $20.55.
Wealthfront charges an expense ratio for the Wealthfront Risk Parity Mutual Fund, which can represent up to 20% of the portfolio.
As for the 529 college savings accounts, fees differ slightly. Get more information on this here.
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Wealthfront Socially Responsible Investing
Is Wealthfront socially responsible?
Yes, it definitely is. However, as you will realize, Wealthfront entered the socially responsible investing game quite late. The platform finally rolled out its SRI portfolio in September 2021.
You can now use your favorite robo-advisor to make socially responsible investments. Wealthfront’s simple SRI portfolio includes thoroughly screened funds for ESG (environmental, social, and governance) issues.
It invests money in companies that promote socially and environmentally sustainable practices. While the platform was initially founded as a mutual fund analysis firm, it has changed course over the years to become one of the best robo-advisors, offering the best independent financial advice.
Today, this robo-advisor has made that big step into socially responsible investing, which might be a core driver of future investments.
Once you are signed in to Wealthfront and pick the socially responsible portfolio, your portfolio will include some of the following funds:
- US Stocks: iShares ESG Aware MSCI USA ETF
- US Bonds: iShares ESG Aware US Aggregate Bond ETF
- Emerging Markets: iShares ESG Aware MSCI EAFE ETF
- Corporate Bonds: iShares ESG Aware US Corporate Bond ETF
The platform does extensive research to ensure you have the best socially responsible ETFs for any asset class you choose.
However, you should note that not every asset class has socially responsible ETFs. In some of these cases, Wealthfront removes such assets entirely.
Some of these unrepresented asset classes include Divided Stocks, Real Estate, Emerging Bonds, etc. In other cases, instead of entirely removing the asset class, the platform uses similar ETFs found in the Classic portfolios.
Examples of such asset classes include the TIPS (Treasury Inflation-Protected Securities) and the Municipal Bonds.
See related: What is Sustainable Investing? How to Get Started
Choosing your Portfolio
When you aim to invest in a socially responsible portfolio, choosing the right funds gives you significant peace of mind. Wealthfront helps you do just that, allowing you to include only funds in your portfolio that support your values.
The biggest advantage of Wealthfront is that the investing process is automated. This includes buying and selling the stocks. This means you can have peace of mind as the platform handles your trades and makes you money.
Additionally, with Wealthfront, you get to enjoy the platform’s automated tax-efficient rebalancing feature, as well as its Tax-Loss Harvesting service. These two incredible platform features ensure your portfolio makes you money with minimal effort.
With Wealthfront, you can choose to include funds in your portfolio based on what you consider socially responsible. The platform does not make that choice.
This means that although the platform recommends the funds that best suit your needs, the ultimate decision is yours. Now, this is investing in freedom. Another advantage of Wealthfront is that you can shift portfolios. That’s right!
If you have already invested in the Classic Portfolio, you can easily convert your investments into socially responsible ones. Making the switch is incredibly easy.
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Wealthfront ESG Quality Score
As you might have already noted, Wealthfront does more than screen for ESG issues when helping you build a portfolio. The platform also considers funds that will bring favorable returns, even as they focus on social responsibility. This way, your values get to help you make money.
Some platforms or funds concentrate too much on achieving the socially responsible investing goal, forgetting that the investors still need to see returns for their money.
Consequently, some platforms will offer minimal investment returns, which will not be very attractive to investors in the long run. Wealthfront chooses funds and ETFs that can track indices favoring companies and funds with higher ESG ratings while ensuring a low tracking error.
However, you should note that ESG screens and ratings might not always be the perfect indicators of how socially responsible a stock is. Nevertheless, companies with higher scores tend to do better in maintaining our planet than those with lower scores.
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How does Wealthfront Make Money?
As mentioned above, Wealthfront doesn’t charge fees for account opening, transfer, closing, withdrawals, or commissions.
So, how does the platform make money? Wealthfront is designed to offer retailers fund management services and investment products. In this light, the company charges advisory fees on its investment products, receives interest on loans, and charges fees on debit cards. Additionally, Wealthfront receives compensation from Green Dot Bank, its partnering bank.
Let us take a closer look at each:
Advisory Fee on Investments
The platform charges a 0.25% advisory fee on an investor’s account balance every month.
Therefore, if an account maintains a monthly balance of $100,000, the advisory fee will amount to $100,000* (0.25/100) * (30/365) = $20.55.
Generally, Wealthfront claims that it charges less than a quarter of what most other platforms in the industry charge. This would mean that many platforms will charge a monthly advisory fee of about 1%.
529 College Savings Plan
For investors who want to stack some money somewhere for their child’s college education, the 529 college savings plan works best. It is a tax-advantaged method of saving money.
Wealthfront charges an advisory fee of 0.25% on these savings accounts, which is charged only on savings exceeding $25,000.
Additionally, the platform gets some money from administration fees ranging between 0.01% and 0.05%. Still, account holders must incur annual 0.11% to 0.15% underlying ETF expenses, which all add to the platform’s income.
Portfolio Line of Credit
As of 2017, Wealthfront has a Portfolio Line of Credit options. Through this, users can borrow money from Wealthfront and repay it later with interest.
Luckily, with this line of credit, you don’t need to provide extra security/collateral for the loans. Your account balance acts as the collateral. The platform also uses your account balance to assess your risk of defaulting.
Account holders with over $25,000 in their accounts automatically enjoy a line of credit. The interest rates on these loans range between 2.4% and 3.65%, depending on the account balance.
A qualified user can borrow up to 30% of their Wealthfront account balance. The interest charged forms part of the platform’s income.
Cash Accounts
The platform offers its users three cash account types: Individual, Joint, and Trust accounts. Cash accounts allow users to conduct transactions such as deposit paychecks, pay bills, make payments with Wealthfront debit cards, and even earn interest on account balances.
Wealthfront has two main ways to make money from these cash accounts. The first is by investing the money left in these accounts, and the second is by collecting fees on debit card payments.
When you deposit money into your Wealthfront Cash Account, the platform doesn’t let the money sit idle. Since it will be paying you interest at the end of the year, it lends this money to various institutions, such as banks, giving them enough to pay you and leaving you with some.
This way, you, as the customer, are happy, and Wealthfront has also made some money. However, you should know that Wealthfront Cash Account doesn’t operate like traditional checking and savings accounts or high-yield accounts.
Rather, it is simply a cash account operated by a brokerage firm.
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Wealthfront Socially Responsible vs Classic: What the Difference?
Wealthfront offers two different investing options: Socially Responsible and Classic. But what is the difference, and which is right for you?
The Socially Responsible investment option at Wealthfront is designed to help investors align their portfolios with their values. This option allows you to select individual companies based on criteria including employee treatment, environmental impact, and more.
On the other hand, the Classic investment option uses objective measures of each company’s financial performance to choose which stocks to invest in.
So which is better, the Wealthfront Classic and the SRI option?
Ultimately, choosing between these two investment options comes down to your preferences and priorities. Here are some of the benefits of going with the Wealthfront Socially Responsible option:
- You’re able to invest in a way that reflects your values
- Socially responsible investments have historically outperformed the market
- You can sleep well at night knowing you’re investing in companies that share your values
Here are some of the benefits of going with the Wealthfront Classic option:
- You can focus on what you’re good at and leave the investment management to us
- Low fees: our Classic account has some of the lowest fees in the industry
- Tax optimization: we’ll help you minimize taxes on your investments so you can keep more of your money
- Diversification: with Wealthfront, you can invest in a diverse mix of assets, including stocks, bonds, and real estate
Is Wealthfront the Best Platform to Invest in for SRI?
Based on the above facts, the platform is worth your time and money. This is not just because Wealthfront is a socially responsible investing option but also because it takes care of your money to ensure you get the desired returns.
Therefore, although the platform isn’t 100% perfect, just like most other investment platforms, it is certainly worth trying out.
If you love what you’ve learned, use this link to start investing with Wealthfront.
FAQs
What is the difference between Wealthfront Portfolio classic and socially responsible?
Wealthfront portfolio classic is a traditional investment portfolio that aims to maximize returns for its investors. It is composed of low-cost index funds that track the performance of the global stock and bond markets. On the other hand, Wealthfront’s socially responsible portfolio is an investment portfolio that prioritizes companies with high environmental, social, and governance (ESG) ratings. It excludes companies involved in industries such as fossil fuels, weapons, and tobacco. It aims to make a positive impact on society and the environment while also generating returns for investors.
What are the cons of using Wealthfront?
Wealthfront is a robo-advisor that offers automated investment management services. One potential con of using Wealthfront is that it charges a management fee of 0.25% annually, which can be higher than some other robo-advisors. Another con is that Wealthfront’s investment options are limited to exchange-traded funds (ETFs), which may not be suitable for all investors. Wealthfront’s tax-loss harvesting feature may be less effective for investors with large taxable accounts.
What happens if Wealthfront goes out of business?
Wealthfront is a robo-advisor that manages clients’ investment portfolios. If Wealthfront were to go out of business, clients’ investment accounts would still be protected by the Securities Investor Protection Corporation (SIPC) up to $500,000 per account. In the event of Wealthfront’s bankruptcy, clients’ assets would be transferred to another brokerage firm chosen by the SIPC.
Is Wealthfront a fiduciary?
Wealthfront is a fiduciary, which means that it is legally required to act in its client’s best interests when providing investment advice and managing their assets. As a fiduciary, Wealthfront must avoid conflicts of interest and disclose any potential conflicts to its clients.
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