As an investment adviser, we have a fiduciary duty to our clients which means we’re legally required to act in your best interests. This commitment to you informs every product we build, every service we offer, and every piece of advice our software provides.
As part of this, we periodically review and update the asset allocations in our recommended Investment Account portfolios to incorporate more market data about the expected risk and return of each asset class. This should improve the expected after-tax, risk-adjusted returns for Wealthfront clients using our recommended portfolios (both in taxable accounts and IRAs) over the long term.
If you open a new Investment Account with Wealthfront moving forward, you’ll automatically get our new asset allocation (which you can, of course, edit to your liking). If you already have an Investment Account with us, you can decide whether or not you’d like to use the new allocation. Here, we’ll go over how Wealthfront determines portfolio allocations, what’s changing, and what we recommend for clients.
How we determine your portfolio allocation
Modern Portfolio Theory (or MPT) is a widely accepted framework for managing diversified portfolios. You don’t have to take our word for it: the economists who developed it, Harry Markowitz and William Sharpe, won the Nobel Prize in Economics in 1990 for their groundbreaking research. We use MPT to build Wealthfront’s recommended portfolios.
Whole books have been written about MPT, but here’s what you need to know: MPT helps us determine asset allocations that aim to maximize your expected post-tax, net-of-fee returns for your specific risk tolerance. We have always used MPT to construct Wealthfront recommended portfolios, and that’s not changing.
To learn even more about MPT and how we build portfolios, check out our Investment Methodology white paper.
At a high level, you’ll notice a few things about our new asset allocations that are different from your current allocation. Across all risk scores for both taxable accounts and IRAs, there’s now more emphasis on US stocks and less emphasis on foreign developed market stocks, reflecting the large proportion of the global equity market represented by US stocks. In our taxable portfolios with a risk score between 2 and 5, we’re adding Treasury Inflation-Protected Securities (TIPS for short), which increase diversification. And in our IRAs, we’re limiting the allocation to emerging markets bonds to 10%, primarily due to the high expense ratios of ETFs covering this asset class.
You get to decide whether you want to update to the new recommended allocations or stick with what you already have. While we’ve always allowed clients to update their allocation to the latest one if they wanted to, we’re excited to make this process easier and, for the majority of our clients, more tax-efficient than it’s been in the past. Just follow the in-app prompts to update your allocation if you’re interested.
What we recommend
If you have a Wealthfront IRA, we recommend switching to the new allocation – there won’t be any tax cost for doing so.
If you have a taxable Investment Account at Wealthfront, you may incur taxes when you update to the new allocation. For most clients, we think the improved risk-adjusted returns are well worth it. That said, if you plan to liquidate your account within the next three years, you might not want to update to the new portfolio allocation. The tax implications of selling investments to transition to the new allocation may outweigh the expected benefits of having that new allocation over a shorter time horizon.
If you decide to update the allocation for your taxable Investment Account, we’ll handle the change tax-efficiently – and that can take some time. We won’t automatically sell all of your overweight investments right away –we’ll do it over time in a way that minimizes the tax consequences. You might hold some positions from your old allocation indefinitely, particularly if they’ve increased in value. If this happens, it’s because our software has determined you’re better off keeping those positions than realizing the gains associated with selling them.
Whatever you decide, we’ll walk you through the process and make it easy to adopt the new allocation or keep your current one when you log into your Wealthfront account.
Keep in touch
We believe our new asset allocations will provide you with better expected after-tax returns for your personal level of risk, and we’re excited to offer them to you. Whether or not you choose to move forward with the new asset allocations, please review and update your Wealthfront profile each quarter as your circumstances change. The more we know about you, the better we’re able to help you grow your long-term wealth.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront Advisers assumes no responsibility for the tax consequences to any investor of any transaction.
Investment management and advisory services–which are not FDIC insured–are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and financial planning tools are provided by Wealthfront Software LLC (“Wealthfront”). Brokerage products and services are offered by Wealthfront Brokerage LLC (formerly known as Wealthfront Brokerage Corporation), member FINRA / SIPC. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Please see our Full Disclosure for important details.
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About the author(s)
The Wealthfront Team believes everyone deserves access to sophisticated financial advice. The team includes Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), a Certified Public Accountant (CPA), and individuals with Series 7 and Series 66 registrations from FINRA. Collectively, the Wealthfront Team has decades of experience helping people build secure and rewarding financial lives. View all posts by The Wealthfront Team