Wealthfront: Silicon Valley Tech at Wall Street Prices
medium.com
medium.com
one of my favorite quotes:
"Here it is: If you open a retirement account, and you invest some of your paycheck each month into a Vanguard Target Retirement Fund, and you just…leave it…you just leave it right there until retirement…
…you don’t do anything when the folks on CNBC announce that the sky is falling; you don’t do anything when Cousin Eddy calls from a secure underground bunker in the badlands and says that the fed is printing money and it’s time to liquidate and ammo up; you don’t think it’s a sign that your parrot said “fuhgeddaboutit” but you thought she said “get a nugget” and surely that must mean a gold nugget? and you looked online and noticed that the price of shiny yellow metal was crashing and wait your parrot is also yellow and I’ll be damned if that isn’t a sign to buy…
… no, if you just leave it there to compound over decades…"
Do they? I always saw them as an alternative to a traditional advisor which can be 1%+ of assets. Even Vanguard can be overwhelming for some people who have to make choices on allocation[1]. For someone who wants auto-rebalancing and a set it and forget it manager, .25% isn't all that much. Obviously if you want to manage the money yourself you can always open a TD account where most of the ETFs used by Wealthfront/Betterment can be purchased commission free. But then the user is left doing buys, rebalancing, etc...
[1] For a complete no-brainer solution open a Vanguard account and dump everything into one of their target funds. Some people want something between the target fund and managing their own though.
What's wrong with their Target Retirement 20?? funds if you don't want to choose your own allocation?
I inherited an actively managed Morgan Stanley portfolio which has fees around 2-3% annually. I initially looked at managing everything myself, but didn't want to have to worry about all the finer points of managing one's own account. I may be losing the additional half of a percent, but in my mind, I am gaining far more.
I work at a successful asset management fund, one that looks after Vanguard money. The vast majority of our staff's pension investments take exactly this strategy.
Yes, I realize they take fees (although I get a special deal for reasons despite having a smaller account). Yes, all things being equal, leaving my money in a Vanguard Target Fund would probably result in higher gains (heck, my 401k is still in a Vanguard Target Fund since it's set-and-forget).
But the Betterment UI makes putting in more money as simple as typing in a number and clicking two buttons -- so I feel compelled to save more ($50 here, $100 there). And that, to me, is worth the 0.15% fee that they charge.
So I guess they just compete purely for growth and that's it - like the commercials for popular drugs on TV, it's an industry 99% about advertising?
SV tech + extremely risk averse, mature, competitive space = doesn't seem to be a good fit.
There seems to be a strong belief in Silicon Valley that software is going to eat the fat margins in financial services and that there's all this potential for disruption.
The problem is that software's been eating financial services for the past 30 years and the fat margins aren't always as fat as they seem once you factor in things like compliance costs (or the demand curve is far steeper than you expect it to be).
A lot of that margin goes to the front line troops (whatever you want to call them-- brokers, advisers, planners, etc.) These are and have traditionally been charismatic people who were relatively high touch. If you think of them as providing a service to customers than they look like a massive cost center and the businesses that employ them ripe for disruption. But if you look at them as a sales force the picture becomes much clearer. Morgan Stanley wealth management has Bob who plays pickup basketball on the weekend with a bunch of doctors. What does Wealthfront have -- an ad on Yahoo finance?
My guess is that at some point these companies will pivot to trying to be the backend to a bunch of independents or small shops out there hitting the pavement. The customers will still end up with the 1-2% wrap, the robo-advisers will still end up with their .25% cut, but at least the customers won't be being put in high fee actively managed funds. So they'll be some improvement over the status quo.
I'm pretty sure the cost per conversion for your ad on Yahoo Finance is going to be a lot cheaper than Bob's 20k.
It is already happening. See: Betterment Institutional, Schwab Institutional Intelligent Portfolios, and Motif Advisor
>But again and again, Wealthfront tries without blinking to draw a straight line between tax alpha and cold hard cash. For example, they offer a chart titled “After-tax Price Return of VTI vs. Direct Indexing” that appears to show that if you had merely flipped on Direct Indexing in 2000, you would have earned ~2% compared to losing 9% with Vanguard’s ancient index fund technology! They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.
What Wealthfront did not talk about is - with S&P500 component stocks changing, so will the portfolio. It would need to rebalanced and constituted causing brokerage and other charges. While in hindsight it looks great, the actual trades during live environment could have been different.
Even if they took 0.25% from the $1b they've got under management and they took 0.25% across all of it (which they don't), that's $2.5m. At $10b under management, they're making $25m - not exactly blowing the roof off from a VC point of view.
Now, the argument they make is "we will sell them other products and services" - but that, to me, is wishful thinking. Especially with the big boys like Vanguard and Schwab coming in in a big way.
I'd much rather not have 30%+ of my life savings wiped out in a single recession with the rest of the market.
In my humble opinion, thoroughly backtested trading algorithms based on hard statistics is the only rational way to participate in the market. The market is fundamentally an irrational entity, and investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.
Check out Quantopian:
https://www.quantopian.com/home
Even a trivial moving average crossover algorithm like the one I currently have deployed can give you surprisingly robust protection against severe downswings, and outperform the overall market significantly over the long term despite the small losses caused by false positives.
You do realize those two statements contradict each other?
During a recession event the 30% loss isn't real until you close your position, with trading algorithms the time to hold is so low that any losses are very quickly realized.
Your algorithm can predict the past.
Congratulations.
Or buy annuities, setup a bond ladder, or hold dividend stocks, but these have their own, related issues.
Early in the accumulation phase, however, I completely agree with you -- you're making the central argument for a long-term buy-and-hold strategy.
I recommend reading "The Evaluation and Optimization of Trading Strategies" by Robert Pardo.
Really surprising how so few amateur traders understand this fundamental principal. Scientists too.
That's a truism. I could say the same thing about algorithmic trading.
The fact of the matter is that the median hedge fund manager has negative alpha. It is extremely difficult to pick winners via any strategy. In fact, it's so difficult that for people who can do it, the resulting lifestyle and compensation is so great that the asset management shops that they work out have almost zero attrition.
Moreover, the whole point of passive investment is that the odds of that kind of a market-wide crash affecting your money over a 30-year timespan are infinitesimal. If the market actually were to devolve like that, nobody would make money in the market, regardless of strategy.
> Investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.
Yes, it's called diversification.
I won't harp on the backtesting point, but what I will say is this: I'm sure that you understand the risk-reward tradeoff. It would be impossible to participate in any sort of finance and not know this concept. Quite frankly, the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low. You eat some return at the expense of lower volatility, but we're talking about a 401(k) here. We want that kind of expected stability.
The crash of 69 : 36%
The crash of 73: 48%
The crash of 87: 33%
The dotcom crash 2000: 50%
Housing Bubble 2007: 56%
[ source : http://traderhq.com/illustrated-history-every-s-p-500-bear-m... ]
The odds that at some point a portfolio of S&P 500 stocks will be 30% off a recent high is actually very high.
Wars. Panics. Depressions. Plagues. Recessions. Revolutions.
They still happen.
I repeat, if the market were bad enough that these crashes actually wiped out your account over a 30 year period, nobody would make money in the market at all. Index funds are a low-risk, low-return investment with low management fees. They're a much better investment choice for a retirement account than algorithmically trading that money. And if you were good enough at algo trading to make solid returns over time, you might as well quit your day job and open a hedge fund or asset management shop.
I guess what I mean is, for an "index fund", crashes don't seem to be... permanent?
Perhaps that's small comfort for someone who's set to retire the month after one of these 30% crashes, but I guess that's what the whole "invest more conservatively as you get older" thing is supposed to help with?
The big index and mutual fund companies offer different allocations between stocks and bonds. You might start out with 80% of your account in an index fund (or other diversified basket of stocks) and 20% in a hedged basket of investment-grade, low-risk bonds. This percentage allocation would change over time as you got closer to retirement.
You're not going to get insanely rich off of this, but it is a decent replacement for the fact that savings account interest rates are effectively 0% these days.
As you know, backtested results with carefully tuned magic numbers can potentially mean nothing.
joking aside, i've played with quantopian way back, and think its a fun/cool concept
It is, on the other hand, entirely possible for an average investor to learn basic technical analysis concepts and apply them visually to charts. At a minimum, for instance, if you can draw a trend line on a price chart and identify when price breaks important trend lines, you can easily avoid losses from major declines without having to write a single line of code or spend more than 5-10 minutes a day checking on your portfolio.
A decent book in this vein is The Visual Investor[1].
[1] http://www.amazon.com/The-Visual-Investor-Market-Trends/dp/0...
Long-term value investing performs best, low cost index funds perform well, Wealthfront will underperform due to fees, and technical analysis will turn even a billionaire into a millionaire.
Instead of creating a straw man argument, let's discuss something simple: trend lines. And let's discuss the most fundamental truth about trend lines: it is absolutely impossible for the current trend to reverse without key trend lines being broken.
Don't take my word for it. Pull up a chart of the S&P 500. The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well. Just by use of trend lines alone (and no other technical indicators) you could have identified key turning points in the market.
How you act upon this information, if at all, is your choice. But that has nothing to do with technical analysis. That's investment/trading strategy.
Trends are broken in periods surrounding major market corrections, indeed. How many false positives are there in between, in which you're turning over your portfolio for no reason?
Depending on where you are in a trend, the breaking of a short-term trend line, for instance, could set up an opportunity to add to an existing position when the trend resumes.
Also, forgetusername's point on false positives remains critical. Breaking trend lines is only a useful if it's right most of the time.
My advice to anyone who wants to be an enterprising investor (i.e. put more time into investing and try to achieve higher returns) is to read Ben Graham's The Intelligent Investor. Instead of trading based on the emotions in the market, invest by choosing great companies that are bargains.
As for false positives, nobody reasonable will tell you that they don't exist. But again, there's a difference between short, intermediate and long-term trend lines. Even under the most unfavorable scenarios, anybody with a modicum of knowledge of trend lines would have been out of the market before the 2008 crash and back in the market by early 2010 because major trend lines were broken. Incidentally, I was one of those people.
As for your advice: there's nothing wrong with fundamental analysis. Although many people fail to make money using it (just like technical analysis), it's worth noting that quite a few savvy professionals use fundamental and technical analysis together.
Support: a price which a significant number of market players have decided is probably the least amount the stock could be worth. That is, if the price drops to that point, they will buy. They might be wrong, but it will require an even larger number of people who think the stock is definitely worth less to make them wrong.
Resistance: the flip side of support: a price at which a significant number of market players will sell.
Momentum: the tendency of price to continue in the direction that it's going until it encounters support or resistance. Many traders attempt to profit from the short-term price swings caused by momentum. By doing so, they tend to cause the price to continue to go in that direction.
Trending: what happens when changes in the economy are reflected in the prices of stocks. Such changes don't happen instantaneously; they take time.
Momentum and trending are obviously similar, but I distinguish them in this way: momentum is mostly caused by the flow of information within the markets; trending is caused by changes in the fundamentals.
If you understand these concepts, you can see everything a long-term investor needs to see when looking at a chart.
Actually, it's not uncommon for a food vendor to drop its prices at the end of the day, e.g. https://www.itsu.com/about/sale
That doesn't invalidate your point, though.
I'd also suggest that the risk associated with a transaction should also be factored in. The cost of processing small (e.g. $100) and large ($100,000) transactions may be the same but the potential cost to me if I drop the ball is several orders of magnitude larger.
Additionally, Vanguard is making money through securities lending which is also proportional and can offset much or all of the expense ratio.
"In 2012 securities lending enhanced annual fund returns by more than 1 basis point for over 60% of Vanguard's participating funds, by more than 5 basis points for nearly a third of funds, and by more than 10 basis points for over 15% of funds."
"Thus, the recent era not only has failed to erode, but has nicely enhanced the lifetime record of the world’s first index fund—now known as Vanguard 500 Index Fund. Let me be specific: at a dinner on September 20, 2006, celebrating the 30th anniversary of the fund’s initial public offering, the counsel for the fund’s underwriters reported that he had purchased 1,000 shares at the original offering price of $15.00 per share—a $15,000 investment. He proudly announced that the value of his holding that evening (including shares acquired through reinvesting the fund’s dividends and distributions over the years) was $461,771. "
It has been a somewhat expensive lesson that I have absolutely no clue what's going on, but every once in a while I just can't help but try. I keep a little fun money in individual equities, and the rest now sits safely in funds. My aggregate individual funds always lose out to what has been relatively steady fund performance.
But certainly not something you can rely on. For comparison, with a 5% annual return, you get $64k. With an 8% annual return, you get $150k.
A book, written in 1930s, based on this quip still remains one of my favourite books about Wall street. Link: http://www.amazon.com/Where-Are-Customers-Yachts-Street/dp/0...
For most folks, though, something that makes saving simple is something that will lead to HUGE gains over not having that thing in the first place.
Without Wealthfront, most people would simply let that money sit in a checking account or in a user-made nondiversified portfolio (most people don't understand the incredible benefits of diversification, including myself most days, which is why we work at startups :) ).
Therefore, I still believe the value of Wealthfront is positive, and likewise, I believe the value of most financial planners is positive.
Do you feel that this is universally true or situation-dependent? I consider myself reasonably informed and Wealthfront appears to be a strong, if not the strongest, option for my financial situation (young, most of my net worth is in a taxable account, direct indexing, regular expected capital gains to pair with tax losses).
Second, you can do substantially better than Wealthfront with even an extremely lazy portfolio. Heck, put all of your funds into a Vanguard target-date fund (the laziest of the laziest) and you will do better than Wealthfront, with only 15 min of effort per year to rebalance.
The kind of tax loss harvesting Wealthfront does is usually a pseudo-benefit. You're usually in a better position just holding until you need distributions for retirement. On paper it sometimes works out, but only when you make assumptions that generally involve timing the market to harvest without loss while avoiding wash sale rules.
That said, if you can't be trusted or can't trust yourself to buy a simple lazy portfolio and hold for decades, then by all means pay the 0.25% annual fee to have someone else take the management keys away from you. As one of my coworkers said, Wealthfront is lazy advice -- telling someone to use Wealthfront is easy to do and usually gets that person into a better position than they otherwise would be, and requires minimal effort from me in advising them. But it is not the optimal solution out there and anyone can easily do better if they are willing to learn and capable of exerting self control.
it's a metaphor, imagining Wealthfront's fees as though it were the subscription fee for an app.
"Should he beat the odds, he’ll then take your 70 cents and plow them into another app on his phone. This app will not only charge him every day for the rest of his life, but it also increased his fee last year by over a dollar a month."
Many provide hourly consulting, just like you'd pay an attorney or accountant.
By far the biggest risk of doing this is not having a constant presence during bear markets to coach you to stay the course. If you're actually comfortable enough in the amount of risk you've taken, this is less of an issue.
The best doc I found on where or how wealth managers can add value was written for wealth managers (by Vanguard, which provides custodial services): http://www.vanguard.com/pdf/ISGQVAA.pdf
Page 4 has the table. The biggest benefit - in their analysis, up to 1.5% of possible value added - is coaching. Deciding what's right for you depends on understanding what parts of planning and executing you're actually comfortable taking primary responsibility for.
If you put everything in a Vanguard target retirement fund, your expense ratio is something like 0.18%. [1]
So as long as tax loss harvesting adds a tiny fraction of a percent (~0.07%) to your returns, it seems optimal to use Wealthfront, no?
[1] https://personal.vanguard.com/us/funds/snapshot?FundId=0699&...
Not to commit an ad hominem, but I don't see tech-driven founders and/or a very strong engineering culture.
I don't know much about the day-to-day culture of Wealthfront itself, but if it's anything like the teams these folks ran while I was around with them, they have a pretty rigorous mindset that applies all aspects of the product – product, design, and engineering.
My impression, just from looking at that page and knowing the four whom I know, is that it's a pretty legit blend of folks who really know finance led by strong technical product management.
Betterment is utterly awesome. Truly a product I'd expect to see from an innovative fintech startup.
Wealthfront is... not.
Betterment seems utterly awesome. Truly a product I'd expect to see from an innovative fintech startup. Wealthfront did not.
It was clear that Betterment cared about making a beautiful consumer-driven product. It was also clear that they've spent some time reimagining how personal finance works. Simplifying it.
I also can't help but note that the fact that Betterment made me so excited (it really did) so quickly probably speaks very well of it. But then again, I'm a sample of 1.
(Incidentally, I read your HN profile and rather liked the story in your 'about')
If Wealthfront really wants to prove that it's tech-driven, it should stop sharing technical knowledge[1] and organize more hackathons. Preferably hackathons in which the beer and laptop stickers flow freely.
I think this phrase should be singled out and praised for introducing the word "lumbersexual" to our tech discourse.
My plan was to invest it with Betterment, because I felt like that was the easiest and cheapest "set and forget" solution. But would there be substantial upside in going directly with a Vanguard fund instead? I'm really new to this and the convenience of a dedicated interface like Wealthfront/Betterment feels valuable to me, but if I'm leaving substantial money on the table doing that I'd rather go to the extra effort of figuring something else out.
I'd be tempted to put it into REITs. The main thing you want to avoid is having your investment move in the opposite direction to house prices. If the REIT goes down then it's likely that the house you were going to buy has also gone down in price.
Go ahead and compare charts of VTSAX (Total Stock) vs VBILX (Intermediate Bond) vs VGSLX (REITs) from 2000 through today. If you need the money in 5 years you don't want that much risk.
Also it's entirely possible that average real estate values will decline while the housing market in the area the poster is looking to buy goes up.
To defend REITs, yes REITs lost money in 2008 but but you could also buy property cheaper in 2008/2009.
If you're going to cherry pick data then take the case where property prices double in 2016. You would expect REITs to double too (not taking into account the rent that you'd be receiving in the mean time), and you'd still be able to buy your property in five years time.
The same can't be said for uncorrelated assets like bonds/CDs/etc. They suck in highly-inflationary environments.
Also thanks for assuming I was talking about leveraged products. I wasn't.
The most important part of investing is knowing your time horizon--stocks or stocks and bonds are just too risky for any time.hirozion less than 5 years.
On the other hand, if you have no specific plans for that money, and you would just like as much money as possible in 5 years' time, on average you are likely (on past performance) to have more in 5 years if you put it into the stock market than if you put it into a savings account.
(And if you know that in 5 years' time you will desperately need about 100k and have no other way of getting that money, go to a casino or something. Fortunately, that's a rather uncommon situation.)
Finance is complex because there exists a product for any need.
Even if you start index investing at a market top, you’ll probably do well over longer timeframes, but may do poorly in short intervals.
Personally I tend to encourage people to read Bogleheads' Guide to Investing first. That should equip you with everything you need in order to get your feet wet.
Then, while you're checking your investments every day (exactly the way the book tells you not to do), start to read as much as you can about Permanent Portfolio. The reason I recommend this is because it allows you to learn the theory of (and indeed watch, if you decide to build your own Permanent Portfolio) different asset classes, and how they move depending on various macroeconomic factors.
Finally, if you want to start stock picking I'd recommend getting started with Peter Lynch's books.
Intelligent Investor is good too as per other commenter but I find that it's quite hard reading for a beginner.
"The four pillars of investing" "The intelligent asset allocator" - more technical
The Boglehead wiki is also fantastic.
The reddit personal finance sub forum, read the sidebar
Boglheads.org
A random walk down wall street by Malkiel
Those three resources will be sufficient to put you ahead for retirement investing without being ripped off.
Calm, mature advice for investing that has stayed true for over 50 years.
* the smartest investment book you'll ever read
* the four pillars of investing
* The Millionaire Next Door
* If You Can
FFFHX 2050 Actively Managed @ 0.75%: https://fundresearch.fidelity.com/mutual-funds/summary/31579...
FIPFX 2050 Index Fund @ 0.24/0.16: https://fundresearch.fidelity.com/mutual-funds/summary/31579...
I use FIPFX in an IRA, though I had previously used the managed one before realizing it… so perhaps there's some deviousness to them being harder to find, but I ultimately don't think you can go wrong with either Fidelity or Vanguard. My 401k was w/ Fido so I stayed there, and the mobile apps and website are generally nice than what I've seen of VG but again, they are both good options if VG probably being slightly better fund wise (though not without some worse aspects either, like customer support or physical locations)
As for WF/Betterments etc, I've thought about it, but I think that I will just keep my toes in Fidelity's waters rather than spread all my financial information around. It's probably unfounded, but I'd rather stick with something more proven with my savings… as in something already financially stable and managing orders of magnitude more money than the upstarts, not that I don't root on their attempts to innovate.
FSTMX .10% http://financials.morningstar.com/fund/expense.html?t=FSTMX&...
VTSMX .17% http://financials.morningstar.com/fund/expense.html?t=VTSMX&...
Schwab has one with a .04%. http://etfdb.com/etf/SCHB/
Instead of your gifting being limited to the average appreciation of all stocks within a given index (as is the case with an ETF), you can pick out the stocks with the largest gains to give to charities. Unlike tax-loss harvesting, this type of tax strategy does not ratchet down your basis (thus deferring larger capital gains for the future) or create any wash sale issues (so you don't need to take the risk of not holding a particular security for a period of time).
Seriously, though, it seems like it wouldn't be too difficult to market a "lesser of x% or $50" type of product?
> Another issue, it is proportionally harder to execute a larger portfolio than a smaller one.
Is this really true, on the individual scale? Especially for something like Wealthfront where all the investors as basically "lumped in" together anyway?
Otherwise, the screed was a little nasty (a bit nastier than the Wealthfront post).
var gain = 1.08; var fee = 0.0025; var feeSum = 0; var s = 100000;
for (var i = 0; i < 35; i++) { s *= (gain - fee); feeSum *= gain; feeSum += s * fee; if ((i + 1) % 5 == 0) console.log('year: ' + (i + 1) + ', saved: ' + s + ', fees: ' + feeSum);};
year: 5, saved: 145240.0514760841, fees: 1823.9448097195082
year: 10, saved: 210946.72552775557, fees: 5329.071699986484
year: 15, saved: 306379.13274362596, fees: 11677.706523607205
year: 20, saved: 444985.2101088223, fees: 22746.568357507604
year: 25, saved: 646296.7482230144, fees: 41538.4561823357
year: 30, saved: 938681.7298073637, fees: 72821.71593023202
year: 35, saved: 1363341.8275688116, fees: 124120.0285076505WealthFront and Vanguard and others who do passive fund management: they do get about market average. Not newsworthy, except that it is better than every other alternative on average.
This compares to 14.4% for VFIAX (Vanguard 500) in the same time period.
In addition to the lower return, it's 0.37% in fees compared to 0.05%.
The time-weighted rate of return on my betterment allocation of 80% stocks/ 20% bonds is -0.9% in the past 12 months and 12.6% total since May 2013 when I opened it.
By comparison the Vanguard 500 fund VFINX is up 3.8% in the past 12 months and 22.6% since May 2013 and looks like it has a 0.17% fee. So, it definitely does seem better than Betterment in every way. Meanwhile the S&P is up 4.6% in the past 12 months and up 23.8% since May 2013. Betterment and Wealthfront are very exposed to foreign markets, which somewhat ironically have been doing worse than the S&P for basically the whole time these services have existed yet they seem to be growing fast.
Also, comparing returns on different portfolios in different services is meaningless. You could have had a bond-weighted portfolio in one service and a stock-weighted portfolio in the other; saying that one service is better than the other because it had better returns makes no sense. The service you use can't possibly influence the performance of its underlying funds.
You should compare them on factors like features offered, ease of use, fees, customer service, etc.
I don't think the number includes tax deferrals from loss harvesting. For example in 2014 I "lost" (harvested) about $40k -- note that my account ended in the black in 2014 -- that I paired with a short-term capital gain (read: high-tax gain), deferring those taxes and letting them compound until the far future when I am hopefully in a lower tax bracket.
The video also advocate either Vanguard mutual funds or ETF.
It's silly to focus entirely on the fee aspect: the point of using Wealthfront is not because it's lower-cost, it's because you expect it to be better-performing from a total-return perspective. They may oversell themselves, and that's a valid criticism, but the OP fails to really analyze the raison d'etre of Wealthfront as a service. Comparing it to a single Vanguard ETF is not a proper comparison.
The Vanguard target retirement fund for 2035, for example, includes four underlying ETFs (US stock, international stock, US bonds, international bonds), whereas Wealthfront portfolios typically have more like six or seven asset classes (differentiating between developed and emerging international markets, and adding in natural resources and real estate). Left to my own devices, I don't have the time or inclination to do the research necessary to do that sort of additional asset diversification myself, determining the ideal allocation and then avoiding too much drift while not incurring too much tax. I also don't have the time to deal with tax loss harvesting, which might not matter for retirement accounts, but does make a difference for taxable accounts: you're likely incurring some taxation issues when it comes to portfolio rebalances, for example, since that necessarily involves asset sales. If you have $100k in wealthfront, you're paying $250/year in fees. If tax loss harvesting can only harvest $1k in losses during the year that offset (or at least avoid) $1k in capital gains, that still pays for the wealthfront fees by itself (if you assume 15% federal and 10% CA state tax on long-term capital gains). So, sure, the fees you pay wealthfront compound over time, but so does the money you pay in taxes. (You do eventually pay the taxes on that gain, of course, but the money you save now compounds over time, so you still come out significantly ahead).
So the question is: does additional asset class diversification plus tax optimization yield at least a 0.25% increase in your total return (net of taxes and fees) in an average year? I believe it does in my case, hence why I have my money with them. It's not because I'm some idiot taken in by slick marketing who can't do math and doesn't know about Vanguard ETFs: Wealthfront's core market is really people who can do math and understand what they're getting for their 0.25%.
Similarly, you can quibble over asset-based fees over fixed fees, but that also misses the point: as long as they make me more money than I pay them, I come out ahead. If I come out ahead, why would I be complaining? If I don't come out ahead, then there's still no point in complaining: just don't use the service. Capitalism at its finest.
Again, it's sad that the OP and most of the comments in this thread don't even attempt to tackle the real value proposition here. Just saying "Stick it in a Vanguard ETF and you'll pay less in fees" is not at all addressing whether or not the core value proposition is valid.
Why does increasing the number of asset classes guarantee a higher overall return? Is there any proof or intuition? Will increasing the number to 10 asset classes guarantee that you will consistently outperform VOO or VTI or VUG?
For a simplified model, check out Kelly gambling
So with that logic, shouldn't Betterment with its 12 asset classes and 0.15% fees for >$100k invested be more optimal?
Re. this question, it is addressed in the Wealthfront FAQ: https://pages.wealthfront.com/faq/
> What’s to keep me from investing $10,000 with you and then mimicking trades for my $250,000 portfolio at a discount broker?
> Nothing. But that kind of sounds like a pain in the neck when we only charge you an annual advisory fee of 0.25% (on assets over $10,000) to take care of all the trades in your account, as well as the periodic rebalancing and daily tax-loss harvesting. That being said, you are welcome to copy anything we do if you would rather do it yourself.
The legit disagreement seems to be between WF's approach and the Bogleheads argument that you only need three funds. I lean toward the former but haven't been satisfied with any of the analysis around this honestly.
To this one point:
> All these cases neglect to mention that you will probably only see the maximal gain if you are maximally messing up already, by needlessly churning your account to generate capital gains. As Vanguard’s founder advises: Don’t just do something; stand there.
The author is listed as "Former Director of Product @ Facebook". If he received a portion of his compensation in Facebook stock, he needed to sell out of that position regularly to avoid being over invested. That should have had generated more in capital gains than tax loss harvesting could offset.
> To this point
>> All these cases neglect to mention that you will probably only see the maximal gain if you are maximally messing up already, by needlessly churning your account to generate capital gains. As Vanguard’s founder advises: Don’t just do something; stand there.
It talks about the comparison Wealthfront seems to make. As he says in the earlier para:
> They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.
A simple backtesting shows wealthfront shows them they would have come out ahead. What it doesn't consider is achieving it in realtime will require a lot of other trades to be done.
Example, a company being removed and new one added to S&P. This will cause a change in weightage and calculation.
In an index fund, as you have bought the component you need not bother with the churn of companies. While in "direct indexing" you will have to actively manage the portfolio and adjust it accordingly. This will cause brokerage and fees applied to your account for the trades.
only in the year he sold after the IPO.
RSU vests are taxed as ordinary income.
More cynically, it means you're cheaper when your potential clients are just starting out, and people tend to stick with the investment manager they started with.
lets say you charge X instead of Y%
now assume that on average, others are charging 2X after calculating individual percentages
if you only get 30% more clients charging X instead of 2X you're actually making less money.
Always be suspicious of lavish gifts from someone who's services you employ... often means you're overpaying. We see this in real estate all the time. A broker who just made $80k on a week's work will often send their client a $200 gift card or take them out to a fancy dinner to "celebrate" (and alleviate guilt?).
Regarding "Stop charging proportional fees": if Vanguard, who charges proportional fees, is operating "at cost" as the author claims, then what is all that extra money paying for? The implication is that technology could be a game-changer because it unlinks the size of the effort from the size of the effect, but surely that is already happening with Vanguard's 12-digit funds.
To clarify, even if you have an index, there must be enough liquidity to run a market where your index is trading. In the early days with less liquidity the company will need to pick up some of the orders. This at the end depending on the value proposition might turn out to be costly.
https://medium.com/@bluf/the-robotraders-versus-blake-ross-a...
mohel performs a bris, not a rabbi
> It’s why you’re receiving 2% cash back on your credit card while your neighbor pays 12% on his.
This is mostly because merchants pay a fee, and the CC company kicks it back to you.
> I’m not asking why Wealthfront helps itself to such margins, which is obvious and perfectly normal, but rather why the market bears it
AirBnB and Uber and real estate agents do the same thing [price-proportional fees, not cost-proportional fees or flat fees]...
Anyway, it's not as bad Blake rants about. Flat fees hurt the least-wealthy customers.
1. It's progressive. Wealthier customers pay more. That's good for sociery.
2. It's not inherently a scam, anymore than airline tickets or home sales. Ultimately, they compete in the market, and have to price competitively. Companies will lower prices to attract customers (if competition arrives), but maintain their profit to stay in business.
That's the opportunity in front of Silicon Valley with regards to wealth management.
I realized after posting the comment that the way to get a fixed price index fund (where the fee is not tied to the asset size) is just to buy stocks directly. Once you pay the one time commission, you own the stock forever with no yearly management fee.
Of course, that comes with other costs (you have to adjust yourself when the index changes, commission when you sell, etc).
What if one company in the index grows considerably while another one falls in value? Do you rebalance between those two? More commissions. Index funds hide all of this and I would guess it winds up cheaper particularly if you include effort.
The only real option that enables people, on average, to stop working is automation.