Wealthfront Roth IRA review

About Wealthfront

Wealthfront is a digital investment platform and robo-advisor. Like most robo-advisors, Wealthfront charges a fee that’s a percentage of your investments, also known as assets under management (AUM) for managing your investments on its platform. Wealthfront offers different investment accounts, including individual retirement accounts (IRAs) and non-retirement brokerage accounts. Among its retirement offerings are Roth IRAs.

Wealthfront is both a registered investment advisor and a broker-dealer (aka brokerage) that buys and sells securities.

What are the benefits of Wealthfront?

Pre-selected investments portfolios

Wealthfront provides pre-selected investment portfolios that it’s curated, meaning that you if you don’t want to figure out the specifics of what to invest in, you don’t have to. This also means that if you want to have greater control of what you want to invest in, Wealthfront might not be right for you.

Automated investment management with rebalancing

Wealthfront provides automated management of your Roth IRA so that you don’t have to do much management of your own. So, Wealthfront might be a good fit for those that want to be more hands-off with managing their Roth IRAs. One of the key automated investment management features that Wealthfront provides is automatic rebalancing. Wealthfront’s technology monitors its clients’ portfolios and rebalances their portfolios when its software detects that its clients’ investments are no longer aligned with reaching their retirement goals.

Retirement planning in one place

Wealthfront provides online financial planning tools that let its clients see potential future scenarios, including retirement and recommendations for reaching their retirement goals. Wealthfront’s clients can link their external financial accounts, including bank, brokerage, retirement, college savings, loan and credit card accounts and mortgages that will help feed into the retirement planning tool and the recommendations that Wealthfront makes, including which investment portfolio might be suitable for a Roth IRA. If you’re only interested in the retirement planning tool, you can use the tool for free, without opening a Wealthfront account.

Who are Wealthfront Roth IRAs good for?

• Hands-off investors that are comfortable with investing in pre-selected portfolios
• Investors that are comfortable with online interfaces and technology-driven investment management
• Investors that want to see all of their retirement accounts, including their non-Wealthfront accounts in one place

Who is Wealthfront not for?

• Investors that want to pick their own investments or invest in specific stocks
• Investors that are looking for offline human support; Wealthfront is a digital platform and its services are meant to be used without human support
• Investors that don’t want to pay a management fee or a one based on AUM
• Investors that cannot afford or does not want to start with a $500 investment

Drilling into Wealthfront’s fees

Advisory fees

Wealtfront charges an annual advisory fee of 0.25% on all assets under management deducted monthly. For example, if you have a Roth IRA with a balance of $10,000 for the month of June, Wealthfront charges a fee of $2.05 for that month ($10,000 x 0.25% advisory fee ÷ 365 days of a year x 30 days in the month).

When you refer someone to fund a Wealthfront account, Wealthfront waives its advisory fee on the first $5,000 for both you and the person you refer.

Fund fees

The only other fee you incur is the expense ratio embedded in the ETFs in its portfolios. average asset-weighted expense ratios is 0.09%

Trade or transaction fees

Wealthfront doesn’t charge a fee for trades or transactions. You won’t pay any commissions on trades made on your behalf by Wealthfront.

Withdrawal fees

Wealthfront doesn’t charge a withdrawal fee. See additional details about withdrawals below. Note: withdrawing from a Roth IRA could have tax implications, such as a penalty for when you take money out of your Roth IRA early. See IRS distribution rules and consult a tax advisor if you have questions.

Rollover or transfer fees

Wealthfront doesn’t charge a fee when you roll over or transfer into or out of a Wealthfront Roth IRA account.

What goes into a Wealthfront portfolio?

Wealthfront portfolios are curated by its Investment team and the portfolios recommended to its clients are based on each client’s financial goals and risk tolerance. Like most online investment platforms or robo-advisors, Wealthfront’s portfolios are made up of funds called exchange traded funds (ETFs). You cannot hold specific securities or individual stocks with Wealthfront.

What’s in the ETFs in Wealthfront’s portfolios?

The ETFs includes equities (stocks) in global, emerging and developing markets, bonds in governments, agencies, and corporations around the world, and inflation assets (assets that are aimed at protecting investors from inflation) that include Treasury Inflation-Protected Securities (TIPS)—inflation-indexed bonds issued by the U.S. federal government, real estate through U.S real estate investment funds (REITs), and natural resources. Note: these are everything that Wealthfront considers and might not necessarily be included in your recommended portfolio. Be sure to check your actual recommended portfolio.

What about asset allocation?

Wealthfront determines the mix of assets that’ll go into your portfolio based on a method called Mean-Variance Optimization and your risk tolerance. Mean-Variance Optimization is the process of weighing how much risk someone is willing to take against different levels of expected returns to find investments with the greatest level of returns for that individual based on his/her risk level.

Wealthfront determines your risk tolerance by asking you a series of objective and subjective questions and by considering different factors in your financial picture that it gathers from the data you provide it when you sign up. Wealthfront assigns a risk score to all of its clients during the signup process.

Wealthfront’s subjective risk questions determine the level of risk you’re willing to take and the consistency among your answers. For Wealthfront, the less consistent the answers, the less risk tolerant you’re likely to be, and therefore you'd be assigned a lower risk score.

Wealthfront’s objective risk questions determine whether you’re likely to have enough money saved at retirement to afford your likely spending. For Wealthfront, if you have excess income, then you’re more risk tolerant, but if your expected retirement income is less than your likely retirement spending needs, then you cannot afford to take much risk.

You can adjust your risk score once every 30 days.

How easy will it be for you to do things at Wealthfront?

Opening a Wealthfront Roth IRA account

You can set up a Wealthfront Roth IRA by opening a Roth IRA directly and making deposits towards the account or by rolling over or transferring a 401(k) account with a former employer or an IRA account held at another institution.

You can initiate a rollover or transfer directly on the Wealthfront platform. After completing the instructions on the platform, your IRA will automatically transfer in 5-10 business days. Note: Wealthfront might sell any positions in your existing IRA account upon transfer to Wealthfront and reinvest the assets to align with your Wealthfront investment plan.

During Wealthfront’s signup process, you’ll be asked to fill out a questionnaire that asks for personal information, such as age, address, social security number, financial information like income, other financial accounts you have, and retirement goal information. All of this is standard required information for setting up investment accounts, understanding your risk tolerance, and building your recommended portfolio. Some of the information is also used for regulatory reporting and for investment qualifications.

Before you commit to opening a Wealthfront account, Wealthfront will show you an investment plan it’s customized for you that details your recommended portfolio, including what Wealthfront would buy for you, the percentages it would buy the investments in, and why it would buy those investments for you. Wealthfront will also present you with a risk score it’s determined based on the questionnaire.

Converting a Traditional IRA or SEP IRA with another provider to a Wealthfront Roth IRA

If you are interested in converting a Traditional IRA or SEP IRA to a Roth IRA with Wealthfront, you can do this through Wealthfront, but it does take a few steps. First, you’ll have to transfer your Traditional or SEP IRA with the other provider to a Wealthfront Traditional IRA. Once that’s done, you can start a conversion on the Wealthfront platform. Wealthfront doesn’t charge a fee for Roth conversions. There may be tax implications for conversions. Do consult a tax advisor if you have questions.

Withdrawing or distributing from a Wealthfront Roth IRA

You can initiate a Roth IRA distribution directly on the Wealthfront site. Withdrawals take about 3-4 business days to process. New deposits have a 5-business-day hold before the funds can be withdrawn. These restrictions are common and put in place for security reasons. Your funds will automatically be sold and sent to your linked bank account. There is no fee for withdrawals, however, there may be tax implications for withdrawals (e.g. withdrawing from your Roth IRA early has penalty implications). Do consult a tax advisor if you have questions.

How is your money protected at Wealthfront?

Asset protection

If Wealthfront must liquidate its assets, your Roth IRA investments are insured by the Securities Investor Protection Corporation (SIPC). Each “separate capacity” account is protected up to $500,000 with a limit of $250,000 for uninvested cash. For more details on what’s a “separate capacity” account, visit the SIPC site. The SIPC is a U.S. government creation but not an agency of the U.S. and insures all brokerage accounts up to $500,000. SIPC is funded by all of its member brokers/dealers. In some cases, it also protects against unauthorized trading or theft in the account. Market losses and promises of investment performance are not covered.

Other protections

Wealthfront is registered with the Securities and Exchange Commission (SEC), an independent agency of the United States federal government that enforces and proposes federal securities laws and rules and regulates the securities industry. It is also a member of the Financial Industry Regulatory Authority (FINRA), an independent non-governmental organization that writes and enforces rules that control registered brokers and broker-dealer firms in the United States.

Some kinks

In December 2018, Wealthfront settled with the SEC for a fine of $250,000 for several charges. One of the charges was for retweeting clients’ positive tweets of Wealthfront. (SEC-registered financial advisors cannot share client testimonials.) The other charges were for not properly disclosing that bloggers were getting paid for referrals and making false statements about its tax-loss harvesting strategy. According to the SEC, “Wealthfront disclosed to clients employing its tax-loss harvesting strategy that it would monitor all client accounts for any transactions that might trigger a wash sale – which can diminish the benefits of the harvesting strategy – but failed to do so.” You can read more about it here.

In September 2019, Wealthfront sent an email to its clients apologizing for errors it made on clients’ 2017 tax statements. You can read more about it here.