Wealthfront has
criticized its digital advice competitors for selling proprietary investment products, but now it has created its own mutual fund.
The fund is aimed at helping Wealthfront implement a risk parity strategy for taxable accounts that have at least $100,000. Risk parity strategies are based on allocations of risk inside a portfolio, as opposed to the the more common practice of allocating based on risk-adjusted return expectations.
In
a blog post announcing the strategy, Wealthfront said risk parity will help deliver "higher risk-adjusted returns in a wide range of market environments."
The company, which touts itself as a low-cost and transparent provider, said it created its own mutual fund in order to preserve the value of its tax-loss harvesting and
portfolio line of credit programs.
Wealthfront said its mutual fund's 0.50% expense ratio is identical to Bridgewater's All-Weather fund and half of AQR Capital Management's Risk Parity fund, while having a fraction of the investment minimum. The company said risk parity will increase an investor's weighted average annual expense ratio by 0.08 percent.
"It's important to us to be transparent about what we charge to invest your money," the company blog stated. Wealthfront did not respond to a request for comment.
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Some questioned exactly how transparent Wealthfront is being, and wondered why the robo-adviser is inviting the same conflict-of-interest questions it has traditionally avoided.
Micah Hauptman, financial services counsel at Consumer Federation of America, a consumer research, education and advocacy organization, said Wealthfront's stated cost to investors doesn't include the cost of a total return swap. By taking assumptions from Wealthfront's white paper, costs could be as high as 1.25%, which Mr. Hauptman said could increase as interest rates rise.
"I'm pretty surprised and frankly baffled by what they are doing," he said.
Mr. Hauptman focuses on investment products for retail investors and how they get financial advice, typically regarding fiduciary issues, and the CFA has supported the digital advice business model of offering low-cost, market-tracking funds.
"In the vast majority of instances, most retail investors just need very simple, efficient, low-cost portfolios," Mr. Hauptman said. "I'm not bashing risk parity or any other type of strategy, but why in this case? Of all the strategies and all the products that are available on the market, why this strategy?"
The CFA isn't opposed to offering
in-house funds, but it is concerned if Wealthfront's mutual fund is more expensive than other products if offers just to generate more revenue, he said.
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"By offering their own proprietary fund, they're effectively increasing their cost to investors but also the fees they bring in," Mr. Hauptman said. "If they are looking to add a revenue stream, why not just add it to their advisory fee?"
The biggest question is why Wealthfront has only implemented risk parity into its taxable accounts, he said. Not only will the process of converting accounts over to this mutual fund be a taxable event, but according to his reading of the white paper, the strategy isn't very tax-efficient.
The cynic could say that Wealthfront isn't adding risk parity to retirement accounts because it won't pass muster with the Department of Labor's fiduciary rule.
A more innocuous viewpoint could be that Wealthfront is just looking for new ways to differentiate itself by telling consumers that it can offer low-cost access to hedge funds, Mr. Hauptman said.
Meb Faber, chief investment officer of
Cambria Investment Management, said in a note on Twitter that the fund is "probably a fine product" with fees that are in line with separate accounts and cheaper than most mutual funds.
However, the Wealthfront fund uses total return swaps that are not included in the fee, and could add about .25% in extra costs, he estimated.
