Make Investing Complicated Again

Maybe diversification is too easy. Wall Street’s new pitch is risk parity

- Julie Verhage and Dani Burger

Wealthfront Inc., an online money manager, attracted a following in Silicon Valley and expanded its assets under management to $10 billion by offering a simple proposition. Instead of telling clients which stocks to buy or which supposedly brilliant money manager to pick, Wealthfront charges a low fee to help people spread their assets among exchange-traded funds that passively track the market. It adjusts that allocation to stocks, bonds, and other assets according to a client’s tolerance for risk.

Customers loved Wealthfront’s passive investments. In February, however, the company added something new. The Wealthfront Risk Parity Fund is automatically included in accounts with more than $100,000 in taxable assets unless the client opts out. The fund is supposed to follow an approach taken by hedge fund manager Ray Dalio of Bridgewater Associates. Only a portion of clients’ money would be invested in it, the rest going into more traditional fare such as low-cost Vanguard funds. Rather than cheering at the opportunity to invest like an exclusive hedge fund, some Wealthfront clients expressed puzzlement about an unusual strategy with added expenses. “I’m not bailing on Wealthfront yet, but I am opting out of Risk Parity until someone can better explain to me why I should have it over passive investing,” tweeted Austin Johnsen, head of corporate development at the game streaming site Twitch Interactive Inc.