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Look up tax loss harvesting. For most people the money Wealthfront/Betterment save you via tax deductions will be more than their fees.

loeg 9y ago
I'm familiar with tax loss harvesting. I don't think you need a robo adviser to do it, and I don't think the benefit overcomes the robo advisers' fees. The benefit from TLH caps out at a $3,000 deduction annually (and the loss rolls over to future tax years). For someone in the 35% bracket (fairly high) that's a $1050 annual value. Not huge. Meanwhile, the fees do not have a cap. $1050 in annual value equates to $420,000 in assets under management with a 0.25% fee rate. So even in a high tax bracket (the best case for TLH), you're losing money with the robo adviser at that level of assets. (In the 22% tax bracket, that's $660 in annual benefit or a break-even point of only $264,000 in assets before you're losing money. Both of these figures generously assume the robo-adviser can hit that $3,000 of losses every year consistently.) I think the robo advisors like to advertise the case where clients have about $100,000 under management because it's one of the few points on the curve where their TLH is a value-add after fees.
- hendzen 9y ago
  Average Wealthfront account is 44k according to their form ADV, far less than the 420k threshold you gave. It seems reasonable to guess that the account sizes follow a Pareto distribution so probably more (potentially much more) than 50% of accounts are below 44k. So for the majority, (potentially the vast majority) of their customers TLH makes their service a net positive. Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.
  - loeg 9y ago
    You can't state that authoritatively, as most customers will probably also be in lower tax brackets than 35%, which produced the $420,000 figure. And who knows if they are hitting $3k/year, every year. > Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week. Exactly -- small account sizes have fewer losses to harvest. Maybe they see a slight benefit over totally passive investment net of fees, but the magnitude will be small. And you can easily tax loss harvest without the robo-adviser anyway.

loeg 9y ago

I'm familiar with tax loss harvesting. I don't think you need a robo adviser to do it, and I don't think the benefit overcomes the robo advisers' fees. The benefit from TLH caps out at a $3,000 deduction annually (and the loss rolls over to future tax years). For someone in the 35% bracket (fairly high) that's a $1050 annual value. Not huge. Meanwhile, the fees do not have a cap. $1050 in annual value equates to $420,000 in assets under management with a 0.25% fee rate. So even in a high tax bracket (the best case for TLH), you're losing money with the robo adviser at that level of assets. (In the 22% tax bracket, that's $660 in annual benefit or a break-even point of only $264,000 in assets before you're losing money. Both of these figures generously assume the robo-adviser can hit that $3,000 of losses every year consistently.) I think the robo advisors like to advertise the case where clients have about $100,000 under management because it's one of the few points on the curve where their TLH is a value-add after fees.

hendzen 9y ago
Average Wealthfront account is 44k according to their form ADV, far less than the 420k threshold you gave. It seems reasonable to guess that the account sizes follow a Pareto distribution so probably more (potentially much more) than 50% of accounts are below 44k. So for the majority, (potentially the vast majority) of their customers TLH makes their service a net positive. Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week.
- loeg 9y ago
  You can't state that authoritatively, as most customers will probably also be in lower tax brackets than 35%, which produced the $420,000 figure. And who knows if they are hitting $3k/year, every year. > Of course that assumes users with small account sizes actually have enough losses to harvest, but that seems likely when there is a market downturn like last week. Exactly -- small account sizes have fewer losses to harvest. Maybe they see a slight benefit over totally passive investment net of fees, but the magnitude will be small. And you can easily tax loss harvest without the robo-adviser anyway.