Many people find it difficult to invest for retirement, but there are many financial providers seeking to make the process of long-term investing as simple as possible. Index fund pioneer Vanguard Group has developed a huge number of low-cost alternatives for those seeking to invest for retirement, including target date funds that automatically adjust their asset allocations as investors get close to the time at which they plan to retire.
More recently, though, so-called robo-advisors like Wealthfront have taken a different approach toward serving investors, offering automated management that allows investors to take a similar low-maintenance approach to their money while gaining benefits from relatively low fees and efforts to keep taxes low. For would-be retirement investors seeking easy ways to invest but who value portfolio advisory services that offer aspects of a personal review, the big question is which service meets more of their needs.
Let's take a closer look at Vanguard and Wealthfront to see what each company offers clients.
The Wealthfront story
Wealthfront takes a three-step approach in helping its customers with their money management needs. First, the company prides itself on its automated software, which manages your investments constantly and takes care of many of the tasks that other providers make you do manually. For instance, Wealthfront's automated account rebalancing, tax-loss harvesting, and dividend reinvesting save you the trouble of having to worry about doing those important things yourself. The program also comes up with an initial personalized asset allocation based on your ability to handle risk and whether you're using a taxable or tax-favored account.
Second, Wealthfront prides itself on having much lower fees than most of its investment-management peers. Even though typical wealth management fees exceed 1%, Wealthfront charges just 0.25% on an annual basis. Moreover, it waives fees for the first $10,000 you invest, making the service free for many investors who are just getting started with a retirement saving strategy. The only other fees you incur are the costs of any ETFs the service uses, which it says average 0.12% annually.
Finally, Wealthfront offers an opportunity to maximize tax savings by harvesting tax losses. Because Wealthfront allows investors with $100,000 or more in assets to invest directly in index stocks rather than using an index-tracking exchange-traded fund, it can sell certain individual stocks to generate tax losses that investors can use to offset gains elsewhere. According to Wealthfront, that leads to average annual return advantages of as much as two percentage points over index ETF investing. It's unclear to what extent that analysis includes the offsetting negative effect of having a lower tax basis when you sell your investments, but there's at least some benefit to having the service available.
A different type of automation
Vanguard has always prided itself on low-cost offerings, but it also recognized the value of the robo-advisor model in launching its Personal Advisor Services platform. Interestingly, Vanguard hasn't tried to undercut Wealthfront in its fees, charging 0.30% annually on the assets it manages, not including the expenses of the Vanguard ETFs and mutual funds available to the service.
What Vanguard is counting on is that investors will place value on having human advisors involved in the process of building client portfolios. In addition, having advisors available for consultation can be useful in times of market turbulence. Indeed, the name that Vanguard has chosen for its robo-offering largely hides the automated element of the service, instead accentuating the fact that a personal advisor can provide assistance as needed.
Still, the service provides some useful features you'd expect. Rebalancing happens automatically, and you can even have your recommendations take into account assets held outside the managed account.
However, there are shortcomings as well. The service is only available with a $50,000 minimum investment, closing the door on most people just starting out. Also, tax-loss harvesting doesn't happen as smoothly as it does with Wealthfront, happening on more of an ad hoc basis rather than as part of a daily automated process.
Which service makes more sense?
In many ways, looking at Wealthfront versus Vanguard Personal Advisor Services isn't a fair comparison, because the personal element is so important to many people. If you truly want set-and-forget investing, then just investing in a fund like Vanguard's Target Retirement Fund series can give you a one-stop retirement solution at an even cheaper 0.15% expense ratio.
If you have enough assets to get Wealthfront's tax-loss harvesting service, however, then the potential tax benefit can provide an extra incentive to use it over a Vanguard fund. Many will still want to pay up for the hand-holding that Vanguard provides in its hybrid robo- and human advisor service. For those who are comfortable without the human-provided advice of Vanguard Personal Advisor Services, however, Wealthfront offers an interesting set of features that can provide value for investors even if they have relatively little to invest upfront.