Image for post
Image for post
Photo by Wayne Stadler

The Trap of Wealthfront’s Direct Indexing

A moat that keeps you in

Wesley Walser
Jun 30, 2017 · 3 min read

Direct Indexing?

The standard playbook for a robo-advisor is to invest customer’s money into a series of indexed funds. Based on historical data, buying and holding an index of the overall market is shown to yield reliable returns over a 15+ year period. The indexed funds that robo-advisors typically purchases are managed by larger financial players such as Vanguard or Schwab. These indexed funds are called Exchange Traded Funds, or ETFs. An ETF is a great investment vehicle and while the maintainers do charge for their trouble, the costs are generally very low.

An Expensive Move

ETFs being a “standard playbook” turns out to be important. Because many companies utilize the same underlying assets for investing, moving from one provider to another is a simple matter of moving control of those assets. This type of transaction is called an “in-kind transfer”.

Glass Half Full

The upshot of Wealthfront’s strategy with Direct Indexing is that their customers pay a slightly lower cost basis on the portion of money that’s directly managed. If you’re able to stick with Wealthfront for the long term, this could yield positive results.

  1. You’re betting that Wealthfront stays around for the long term and that the product maintains a satisfactory state for that same term.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch

Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore

Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store