Should I Use Wealthfront Or Vanguard To Build My Investment Portfolio?

Some people have asked, “Why pay an ongoing 0.25% annual fee to Wealthfront for building a Vanguard portfolio, when I can just build my own Vanguard portfolio for free?” This post will discuss Wealthfront or Vanguard to build your investment portfolio.

It's a good question that's worth exploring in this post. Wealthfront is a leading robo-advisor / digital wealth manager today with over $15 billion in assets under management as of 2021. When comparing Wealthfront or Vanguard, let's first look at some Wealthfront benefits.

Wealthfront Or Vanguard: Wealthfront Benefits

  1. Tax loss harvesting that should make you more than 0.25% a year. Wealthfront claims to be able to save roughly 1.55% a year for their typical client.
  2. Automatic portfolio rebalancing so your exposure remains consistent with your risk-tolerance. During a bull or bear market, your asset allocation can quickly shift to undesirable levels if you don't stay on top of your portfolio.
  3. Keeping you disciplined so that you'll invest consistently over the long term. It's easy to skip a month of investing because life gets in the way. With an automatic deposit feature, your money will be methodically invested based on your asset allocation.

Let's go over the three key benefits that you get for 0.25% a year in more detail.

Wealthfront Tax-Loss Harvesting

Tax-loss harvesting is a way of reducing your taxes by taking advantage of investments that have declined in value. These holdings are sold, and replaced with highly-correlated, but not identical, investments, allowing you to maintain the risk and return characteristics of your portfolio while generating a loss that can be applied to lower your taxes.

Wealthfront's research shows that daily harvesting can save up to 1.55% of your portfolio value per year, compared to just 0.6% when done annually. To manually tax-loss harvest daily, weekly, or even monthly is a very cumbersome process that no human can fully get right. By using an algorithm developed by Wealthfront, the process is much more efficient.

TaxLossHarvesting - Wealthfront Or Vanguard

Wealthfront Continuous Portfolio Rebalancing

Rebalancing is the process of maintaining the risk profile of your portfolio by selling asset classes that have performed relatively well and buying ones that performed relatively poorly. Every portfolio should be rebalanced on a periodic basis, whether it be monthly, quarterly, semi-annually, or yearly. My recommendation is for a portfolio to be thoroughly reviewed at least once a quarter, and rebalanced at least twice a year.

Not only does Wealthfront continuously and automatically rebalance your portfolio, it does so in a much more tax-efficient way than simply buying and selling securities. Specifically, Wealthfront uses the dividends generated by each of your index based ETFs to buy more of your under-allocated asset classes. That cuts down on the sale of over-allocated assets. Fewer sales means fewer gains, which means lower taxes.

Wealthfront's research found dividend based rebalancing could save up to 0.11% of your portfolio value per year in taxes versus classic rebalancing.

TaxableInvestmentMix10 - Wealthfront Or Vanguard

Related: The Proper Asset Allocation Of Stocks And Bonds By Age

Wealthfront Direct Indexing

Wealthfront’s direct indexing service allows you to own all the stocks in a major index (like the S&P 500), while also harvesting losses they might generate. That means you can take advantage of the times individual stocks trade down, even when the overall index rises. Index funds and ETFs, like the ones you can buy from Vanguard, cannot provide this service, because investments that are structured as funds are prohibited by the Internal Revenue Code applicable to funds registered under Investment Company Act of 1940 from distributing tax losses to their shareholders.

Depending on your portfolio size, tax rate and amount of annual short term capital losses, direct indexing could add an additional 0.20% to 0.48% to your annual after-tax return. That’s over and above the benefit you could receive from daily tax-loss harvesting on ETFs only.

The table below compares the after-tax benefits of the three value-added services for a $100,000 account at Wealthfront, with the same portfolio invested with Vanguard:

Wealthfront comparison table

For a $225 annual advisory fee, Wealthfront could deliver an additional $1,635 of net-of-fee, after-tax value per year. Even if our tax savings on tax-loss harvesting and direct indexing could only be applied to your annual $3,000 ordinary income limit, as is the case with some taxpayers, your annual net benefit would be $1,166.

Of course, this situation is hypothetical, and all cases will differ. However, the point of this chart is to make people not be a penny wise and a pound foolish. I personally invest in a couple private equity and venture debt funds that charge a 2% assets under management fee and earn a 20% carry on all profits as well. But if the private fund can generate a 10% return after fees, I'm more than happy to pay.

Managing For Retirement Retirement

Finally, Wealthfront recently launched Path, a new free automated financial planning experience for all clients to better plan for their financial future in February 2017.

Many clients don’t know what their financial goals should be, and even more don’t realize that the goals they’ve set with their current spending and saving patterns are actually unattainable.

Wealthfront built something more personal, connected and instant than any financial advisor could ever be. Path takes advantage of their team of PhDs to analyze your past behavior from connecting to your financial accounts, showing you what’s possible for your future.

Path let's you:

  • Financially plan for your future
  • Explore “what if” scenarios
  • Highlight how much you need to save to reach your goal by a certain date
  • Highlight how much you can spend to still be on track
  • Model your investment forecasts

Below is an example of a what if scenario you can perform based on the amount of savings, spending, and life expectancy. You can adjust the amounts to create a realistic assessment of your retirement future.

Wealthfront Path Feature
Wealthfront Path feature

Always Focus On The Original

If you're looking for a low cost way to invest your money using the same sophisticated algorithms based on Modern Portfolio Theory used by the expensive money managers like Raymond James, BoA Merrill, Goldman Sachs, and Morgan Stanley, you should sign up with a roboadvisor. It's free to sign up and they'll produce a model portfolio for you to review.

Wealthfront is the creator of the digital wealth advisory space back in 2008. Their DNA is in using technology to help individuals invest their retirement savings better.

Vanguard is great. It's hard to go wrong with the pioneer of low-cost ETFs and index funds. Another great selection is Betterment, the largest pure-play roboadvisor today. I hope you enjoyed my Wealthfront Or Vanguard comparison.

About the Author:

Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.

In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income (50% from real estate). He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.

About Financial Samurai: Based in San Francisco, was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal. Check out my Top Financial Products page for more.