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 start putting their money in stocks they consider ethical.
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?
The truth is, even as we invest in socially responsible portfolios, we still want to make profits.
Therefore, we need a platform that will not be one-sided but rather focus 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 the ideal platform for you.
Let’s dive right in!
Table of Contents
- What is Wealthfront?
- How Wealthfront Works
- How to Use Wealthfront
- Wealthfront Investment Options
- Investment Fees
- Wealthfront Socially Responsible Investing
- Is Wealthfront socially responsible?
- Choosing your Portfolio
- Wealthfront ESG Quality Score
- How does Wealthfront Make Money?
- Advisory Fee on Investments
- 529 College Savings Plan
- Portfolio Line of Credit
- Cash Accounts
- Wealthfront Socially Responsible vs Classic: What the Difference?
- So which is better between Wealthfront Classic and the SRI option?
- Is Wealthfront the Best Platform to Invest in for SRI?
What is Wealthfront?
Sometimes you just want to make things easier, so you think of automating your investments. Wealthfront is one of those platforms that help 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 grown to become one of the market’s favorite robo-advisors.
It has become the tool for most investors seeking automated financial or investment guidance.
The company is based in Palo Alto, California, and has over the years rolled out several financial tools and services that all seek to make your investments 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.
It seamlessly allows you to use your money to make more money through its cutting-edge technology.
And, 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, its first step is to determine how you would love your money to make more money for you.
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.
In case you choose the first option (long-term investing), you’ll need to answer more questions to help Wealthfront better tailor your portfolio. These will include your age, priorities, and the likelihood of selling stocks out of fear when the market takes a plunge).
The platform recommends a portfolio of funds tailored to match your priorities and risk tolerance from the answers you give.
How to Use Wealthfront
Before you start investing or saving with Wealthfront, you need to first sign up for the platform. Luckily, Wealthfront sign-up process is incredibly easy. In fact, the platform gives a sign-up estimate 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.
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 with a blow. 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.
Wealthfront usually doesn’t have any 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 is managing 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 balance of $100k every month, your monthly advisory fee will be $20.55. The calculations here have assumed a 30-days month and a 365-days year.
This will be $100,000*0.0025* (30/365) = $20.55.
The expense ratio that Wealthfront charges are for the Wealthfront Risk Parity Mutual Fund. This can represent even up to 20% of the portfolio.
As for the 529 college savings accounts, fees differ slightly. Get more information on this here.
Wealthfront Socially Responsible Investing
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.
This means that 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.
Meaning it invests the 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 that you have the best socially responsible ETFs for any assets 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 as found in the Classic portfolios.
A Good example of such asset classes includes the TIPS (Treasury Inflation-Protected Securities) and the Municipal Bonds.
See related: What is Sustainable Investing? How to Get Started
Choosing your Portfolio
When your aim is to invest in a socially responsible portfolio, choosing the right funds gives you significant peace of mind. Wealthfront helps you to do just that, allowing you to only include funds in your portfolio that support your values.
The biggest advantage with Wealthfront is that the investing process is automated. This includes buying and selling of the stocks. This means that you can have some 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 features of the platform ensure that the portfolio you choose makes you money with minimal effort from your side.
With Wealthfront, you have a choice of including funds in your portfolio based on what you consider socially responsible. The platform does not make that choice.
Meaning, that although the platform recommends for you the funds that best suit your needs, the ultimate decision is yours.
Now, this is investing with freedom. Another advantage with 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.
Wealthfront ESG Quality Score
As you might have already noted by now, Wealthfront does more than just 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 returns on investments, which won’t be too attractive to investors in the long run.
As for Wealthfront, it 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 sometimes, ESG screens and ratings might not always be the perfect indicators of how socially responsible a stock is. Nevertheless, companies that possess higher scores tend to do better in maintaining our planet than those with lower scores.
How does Wealthfront Make Money?
As we mentioned above, Wealthfront doesn’t charge any fees for account opening, transfer, closing, withdrawals, or commissions.
So how does the platform make money?
Well, Wealthfront is designed to offer fund management services and investment products for retailers. In this light, the company charges advisory fees on its investment products, receives interest on loans, as well as fees on their debit cards. Additionally, Wealthfront receives compensations 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 an advisory fee of about 1% per month.
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, an amount that is charged only on savings exceeding $25,000.
Additionally, the platform gets some money from administration fees, which range between 0.01% and 0.05%.
Still, account holders have to 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 option. 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 get to enjoy a line of credit automatically. The interest rates on these loans range between 2.4% and 3.65% based on the account balance.
A qualified user can borrow even up to 30% of their Wealthfront account balance.
The interest charged forms part of the platform’s income.
The platform offers its users three cash account types. These include Individual accounts, Joint, and Trust accounts.
Cash accounts allow users to conduct various money transactions such as deposit paychecks, pay bills, make payments with Wealthfront debit card, and even earn interest on the account balances.
Wealthfront has two main ways to make money off these cash accounts. The first way is by investing the money left on these accounts, and the second is by collecting fees on their debit card payments.
When you put money on your Wealthfront Cash Account, the platform won’t let the money just stay there 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 money to pay you and be left 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 the traditional checking and savings accounts or a high-yield account.
Rather, it is simply a cash account operated by a brokerage firm.
Wealthfront Socially Responsible vs Classic: What the Difference?
Wealthfront offers two different options for investing, Socially Responsible and Classic. But what is the difference between them, and which one 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 between Wealthfront Classic and the SRI option?
Ultimately, the choice between these two investment options comes down to your personal 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 personal values
- Socially responsible investments have historically outperformed the market
- You can sleep well at night knowing you’re investing in companies that share your same 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 facts seen above, the platform is worth your time and money.
Not just because Wealthfront socially responsible investing option, but also because it takes care of your money to ensure you get desired returns.
Therefore, although the platform isn’t 100% perfect, just like most other investment platforms, it is certainly a platform worth trying out.
If you love what you’ve learned, use this link to start investing with Wealthfront.
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