Why is Wealthfront so bad? Their fees don’t make them cheap, is that it?
One of the big advantages that savers have today are open platforms (there was a time when fund managers ran their own platforms), low dealing costs, low spreads, and ETFs. All that investors need to do is just work out the asset allocation themselves and they will save huge amounts. And I would guess 95% of people reading this are able to do it.
Just to be clear, we are looking for a least bad situation. Asset allocation is very complex, there is no way most investors can get an amazing result themselves but what most investors don't know is that WealthFront have zero chance too. So the aim is to equal what they do without their mad fees (I have no idea how they charge so much, marketing? I don't know, I know small advisers that were profitable charging lower fees...it makes no sense).
This doesn't matter for a retirement account, though.
[1] https://support.wealthfront.com/hc/en-us/articles/209348486-...
Wealthfront has economies of scale to write a program to perform tax loss harvesting automatically. Just because it's not worthwhile for me to do it manually myself doesn't make it not worthwhile for a program to do it automatically. Wealthfront does daily tax loss harvesting on individual stocks. That would be a tremendous amount of work for me to do manually.
That said, I don't know whether Wealthfront's benefit outweighs their 0.25% fee.
I guess what we really need is a well-regarded open source program that hooks into brokerage's API and does this advanced tax loss harvesting.
Does WealthFront do anything at the individual stock level? My understanding from looking at their landing page [1] is that they basically just allocate your money across a number of publicly traded ETFs:
> How do you choose my investments?
> We choose exchange-traded funds (ETFs) that track an index, such as the S&P 500 or emerging markets. Wealthfront chooses the ETFs with the lowest costs and proper tracking of their index.
Also, you pay the expense ratios of those ETFs in addition to the fees that WealthFront charges:
> What are the costs to invest?
> We’re glad you asked. Our annual advisory fee is 0.25%. On average, you’ll also pay a low 0.06%–0.13% expense ratio. Companies who run investment funds charge this fee, and it comes straight out of that fund’s performance (you aren’t billed directly). Everyone who invests in ETFs pays this fee.
I think would be fairly easy for any ETF investor to approximate WealthFront's tax-loss harvesting strategy in their own brokerage accounts. E.g. simply go in once a quarter and sell any lots of VOO for a loss where possible, and replace with an equivalent like SPY.
https://support.wealthfront.com/hc/en-us/articles/211005023-...
(I am a customer.)
> For example, if an investor sells the SPDR S&P 500 ETF (SPY) at a loss, they can immediately turn around and purchase the Vanguard S&P 500 ETF.
> The rationale is that the two S&P 500 ETFs have different fund managers, different expense ratios, may replicate the underlying index using a different methodology, and may have different levels of liquidity in the market. Presently, the IRS does not deem this type of transaction as involving substantially identical securities and so it is allowed, although this may be subject to change in the future as the practice becomes more widespread.
[1] https://www.investopedia.com/terms/s/substantiallyidenticals...
>There has been no IRS ruling on whether ETFs from two different companies that track the same index are considered substantially identical.
https://www.fidelity.com/learning-center/investment-products...
>Investment advisors and tax planners recommend against selling an index mutual fund from one fund company and buying another index fund tracking the same stock index from another mutual fund company.
https://finance.zacks.com/substantially-identical-mutual-fun...
>And while arguably swapping from index funds like SPY to IVV are almost certainly a wash sale abuse (or at least, a transaction that should trigger the wash sale rules)
https://www.kitces.com/blog/the-wash-sale-problem-when-tax-l...
If you look at Wealthfront's own documentation, when they do tax loss harvesting with ETFs, they find ETFs that track similar but not identical indexes:
https://research.wealthfront.com/whitepapers/tax-loss-harves...
Can someone help me understand this comment as to my knowledge WeathFront (WF) fees were the lowest in the industry. For example people talk about Vanguard fees as also being low but they're between 0.25% and 1% [1]. If it makes a difference I'm specifically coming at it from the lens of IRA retirement contributions.
Is the parent post saying the alternative is to figure out what specific stocks/ETF/index WF is purchasing and then purchase those with something like eTrade?
TIA
On the other hand, you pay that 0.25% fee that WealthFront charges every year, regardless of the performance of your portfolio, and it can pretty quickly amount to thousands of dollars per year.
Most brokerages (Vanguard, Schwab, Robinhood, etc) don't charge any sort of equivalent fee - they are free to open and maintain. And yes it is fairly easy to construct an equivalent portfolio made up of ETFs in a standard brokerage account. You would be losing out on the convenience of WealthFront's automated rebalancing and tax-lost harvesting, though.
Is the convenience of automated investment, rebalancing, and tax-lost harvesting worth paying 0.25% of your total account balance every year? For me, no. But I know some people who are really happy with services like WealthFront and Betterment. Especially for someone just getting started with investing, I would have no issues recommending those services.
Edit: also just noticed you are referring to a retirement account. In that case, WF's tax-loss harvesting feature would not be applicable (since retirement accounts are tax-free), so even less of an incentive to go with WF vs. DIY.
Would you mind just mentioning what that is?