Post last updated Jan 4th, 2016 also Wealthfront dropped their account minimum to only $500 in 2015 (it used to be $5,000 to open an account).
Over the last nearly half decade I’ve been a full time business owner, I’ve been fortunate enough to continually grow my business and earn more money each and every year.
A large portion of the money I earn gets reinvested back into my business in the form of software development expenses, buying websites, running websites and developing new websites etc but some of the money is invested into my SEP IRA – in this case through Wealthfront* (which I’ll get to in a moment).
Wealthfront Video Review
I filmed a brief review to explain why I invested $51,000 with Wealthfront for the 2014 tax year here:
I cover some more examples not mentioned in the video review below, but if you’re a self employed individual and own your own business you’ll find out why I decided to go with Wealthfront.
Why I Went With A SEP IRA For My Business
There are a few different retirement options for self employed people that you can read about here, but ultimately the primary reason why I went with a SEP IRA is because it has huge contribution limits (and would allow me to contribute to future employees I hire vs an individual 401k which would not).
For the 2013 tax year the SEP IRA contribution limit is up to 25% of the employee’s compensation or 20% of your net earnings from self employment with a cap for the 2013 tax year at $51,000.
I’m not disclosing my total earnings for 2013 (I shared some stats from October and November before), but with some basic math you could determine that if I’m investing the $51,000 cap for the 2013 tax year that I did pretty well for the year.
I want to briefly cover what I did before and why I changed.
Why I’m Not Investing With American Funds Anymore
In the past I invested money in a SEP IRA with American Funds, but after spending a sizable chunk of time researching all of the alternatives available I’m not going to work with American Funds anymore.
Why should I have to pay a financial adviser at American Funds a high front end commission on Class A shares along with other fees (like I did in the previous year based on my advisers recommendation)?
The argument would probably be that “our managed funds perform better” but I don’t agree and for about half a decade millions of other investors also moved away from American Funds, Fidelity and other high fee mutual fund companies.
You can see this shift away from higher fee to the lowest fee company Vanguard here:
Market Share Of Mutual Fund Companies 2013:
Again with further research I later learned that I should have probably went to a fee only financial advisor (“fee only” is key there) if I wanted help with my investments.
With a fee only financial adviser they get paid the same regardless of what investments you make. They typically charge by the hour or if you’re a higher net worth individual they offer management of the portfolio (I spoke with one fee only financial adviser before deciding to go with Wealthfront).
Besides, what incentive is there for an American Funds adviser to tell you to buy actual real estate for example when they can recommend an American Funds real estate focused mutual fund they would get paid a commission on?
So what is the alternative?
Why I went with Wealthfront for my SEP IRA
Wealthfront is the largest and fastest growing software based financial advisor and at the time of publishing this post in April 2014 they have over $700,000 million under management. May update: $800 MM under management now
I’m a firm believer in the idea that “software is eating the world” as Marc Andreessen once wrote and that the financial industry is one such area that needs to be disrupted.
Wealthfront was an attractive option for me at only .25% in yearly fees on my assets over $15,000. I got my first $10,000 + extra $5,000 managed for free because I joined via a referral link – here’s my referral link (if you sign up with mine you get an extra $5,000 managed for free and so do I).
Even Warren Buffet suggests low fee investments are the way to go. He specifically suggests index funds, but WealthFront deals with ETF’s (largely because they can be traded via API which helps to enable all of the wonderful software wizardry they can do now to automate trades etc).
Wealthfront automatically invests based on your risk profile (they ask you a series of questions to determine this number). Because what I do for the bulk of my business income is pretty risky I want to be less risky when it comes to my backup plan.
Update: May 7th, 2014 I updated my risk tolerance to 7/10. I’m young. Plenty of time to make more money if my retirement portfolio underperforms.
You can change your risk profile once every 30 days. I will probably increase my risk a little bit though because I’m young.
I consider the success of the businesses I’m building and my focus on living well within my means will help me achieve financial independence at a young age (certainly before I’m 40, but possibly before I’m 35) whereas investing into my retirement account is something I’m doing more out of a desire for a sizable backup plan.
Ultimately I believe it’s incredibly difficult (if not impossible) to accurately time and predict the market 100% of the time when it comes to investing so a more passive investing approach makes a lot more sense to me than fiddling around with individual stocks.
I’d rather instead focus my time and efforts on growing my business and let my backup retirement plan work automatically for me and with the lowest fees possible.
Wealthfront isn’t just for retirement accounts of course and if you’re only putting in a low single digit percentage into your retirement via your company managed 401k in my opinion that’s not enough.
It’s worth investing in addition to what you are already doing for retirement which you can do with Wealthfront.
If you were to open a separate non retirement account (taxable income account) Wealthfront also offers automatic tax loss harvesting which in theory should help you earn more from your portfolio. This is best explained by their video here.
What are my results so far?
Obviously it’s far too early to tell but I plan to update this post after my first year to share my results.
If you want to try out Wealthfront it’s $5,000 to open an account at this time (perhaps that will change in the future) and like I mentioned before if you use my link you get $5,000 extra in fee free management and so do I.
Clearly they’re using a similar growth strategy like Dropbox does by offering more free space when referring others.
You can sign up for WealthFront here
(There are no account set up fees, deposit fees or any crap like that.)
What are some other software style alternatives to Wealthfront?
Betterment was the other primary company that cropped in my research as the best alternative to Wealthfront but they don’t support SEP IRA’s yet (lame) which is what I was looking for.
11/26/2014 Update: I’m testing out Betterment now as well
Their annual fees can be even lower than Wealthfront: .35% with a minimum $100 monthly deposit, .25% with a $10,000 minimum balance and .15% with a $100,000 minimum balance (As of April 2014 – see fees here)
You can read the differences between Wealthfront and Betterment via this Quora question as well. It was useful for me but again without a SEP IRA option the decision was easy.
Most of the other software options I researched out there didn’t interest me (primarily because they were much higher fees) but if others come up I’ll probably try them as well. Personal Capital was one of the only other options that I was interested in, but they have higher fees. Along with the higher fees they give you one on one attention though. At the very least they have a cool net worth calculator that’s worth signing up for it’s similar to Mint.com but for tracking net worth. Check out Personal Capital here.
Overall, retirement and investing isn’t something I normally write about but for self employed folks as well as those of you with jobs it’s important to be investing your money into something. My current opinion is to do so with Wealthfront:
You can sign up for Wealthfront here
(Again, there are no account set up fees, deposit fees or any crap like that)
Note: I’m not an accountant or a professional investor, what I shared above is my opinion based on my own research and what I’ve decided to do for my business. As always you should consult a professional.
*If you sign up for Wealthfront using my referral link you get $15,000 managed for free (instead of the usual $10,000 managed for free). I will also get an extra $5,000 in funds managed for free as well (thanks).
May 9th Portfolio Update:
I’ve surprisingly only had four people sign up for WealthFront via my referral link but only one has deposited funds into their account. Thanks kind friend for the extra $5,000 in fee free management and you’re welcome for your extra $5,000 in fee free management as well.
Obviously we need to see performance over a longer period of time than just ~60 days but I updated this post because as I said in my review I thought I would go more risky and so I did. I went from 4 / 10 to 7 / 10 on May 7th which mainly upped my emerging markets position and reduced my corporate bonds.
How Much Money Have I Made With WealthFront? August 1st, 2014 Update
I’m still using WealthFront in 2016 – Jan 4th, 2016 Update
I didn’t cap my SEP IRA in 2014 because I didn’t make a final deposit in time (whoops), but I capped my SEP IRA in 2015 with another $53,000 invested.
In the second half of 2015 there was a bit of a dive in the market so I gave up a fair chunk of my gains, but again this is a retirement account. A small blip now won’t matter much ~30 years from now when I start to take this money out. I expect before I’m 40 that unless there is a major market change and that I can continue putting $50,000+ into a SEP IRA that I’ll have close to $1 million in my SEP IRA by then.
Closing Comments (most important part of this review):
My best returns have always come from investing in myself through improving my marketing skills, investing in hiring employees or contractors for my businesses etc. I simply invest in retirement to lower my tax burden for the year otherwise I’m going to give away 39.6% of the $50,000+ I put in to taxes anyway (and I’m sure we haven’t seen the last of the tax raises).