Wealthfront, the Silicon Valley’s premier automated investing service, recently announced its decision to lower the minimum initial deposit requirement from $5,000 to $500, thereby giving younger individuals the ability to invest in an incredible product. For those unfamiliar with Wealthfront, it is a “robo-advisor” service that automatically allocates deposits into a diversified ETF (Exchange-Traded Fund) portfolio. Users need only fill out a “risk tolerance” questionnaire, and Wealthfront creates a personalized, weighted blend of ETFs that match your preferences. These ETFs represent six historically secure investment categories: US, Foreign, and Dividend Stocks, Emerging Markets, Bonds (Corporate, Emerging Markets, and Municipal), and Alternatives (Natural, Resources, or Real Estate). In terms of knowledge, Wealthfront is an indispensable tool for young investors: a remarkable team of investing professionals, including renowned economist Burton Malkiel, manage your funds at an incredibly low cost. Any account worth less than $10,000 is managed for free, while anything over that benchmark is subject to a miniscule 0.25% advisory fee. Now, after lowering the minimum required deposit to just $500, Wealthfront is arguably the most attractive investment opportunity in the world.
Most importantly, Wealthfront eliminates informational costs for young investors. Many Millennials often find themselves utterly perturbed by the notion of investing, as they usually lack both economic knowledge and disposable capital. Moreover, when faced with the decision of whether or not to invest, a significant majority of students and young professionals either choose to avoid it altogether, or they pay brokers outrageous managerial fees. Not surprisingly, the opportunity costs from both decisions are entirely negative. By not participating in capital markets until a later age, young individuals forego $100,000s of potential wealth creation due to ignorance and fear. Similarly, by hiring a financial advisor, as is often the case with Millennials who utilize their parents’ broker, young adults blindly subject themselves to an average advisory fee of about 2.5% (NOTE: VERY FEW ASSET MANAGERS OUTPERFORM MARKET INDICES). When compared to Wealthfront’s 0.25% advisory fee, this discrepancy is blatant and ridiculous.
In contrast to personal online brokerage services like E*Trade, Scottrade, and Schwab, Wealthfront again provides a number of advantages. With most online brokers charging commission fees of up to $10 per trade, the aggregate cost of investing in individual stocks can quickly skyrocket. Not to mention online brokerage services often fail to provide members with adequate advisory resources. Moreover, and perhaps most importantly, betting on individual stocks is a risky, and often losing, approach for amateur investors. Whether they’ll admit to it or not, a vast majority of individual investors and asset managers fail to outperform the S&P 500 on an annual basis. Even more concerning is the fact that many traders often fail to generate a positive return at all. For example, after conducting a 25-year study of individual investors who tried to pick “winning” stocks, Longboard Asset Management determined that 18.75% of “winning” stocks lost at least 75% of their value and that 39% of investors lost significant wealth.
Wealthfront addresses all of these problems and more. Its ETF portfolios are composed of low-cost, reliable ETFs from well-regarded funds such as Vanguard and iShares by BlackRock (BLK). All Wealthfront portfolios include automatic rebalancing, tax-loss harvesting, and cash-dividend reinvesting. Members can also change their risk tolerance setting each month and schedule recurring deposits from their checking account. In its entirety, Wealthfront provides young adults who don’t have adequate investment knowledge, capital, or time, a way to participate in global markets, while simultaneously building meaningful long-term wealth.