What caused me to leave?
- They aren't global portfolio aware. Bonds belong in tax advantaged accounts, then taxable. If you've maxed out your 401k/IRAs in Bonds that $ as an absolute percentage should be accounted for in your taxable portfolio construction.
- They don't let you opt out of asset classes. Aka I don't want additional REITs because I have RE exposure already.
- They overly hype tax loss harvesting. It's good to have, but a byproduct of portfolio management not the goal.
- They launched and pushed risky products as a way to increase their fees.
Once you understand what's going on under the hood this isn't complicated to manage yourself with a few ETFs/MFs.
(The direct indexing is awesome and would love to have that back)
Equity indexes have no maturity date and can limit any taxable income to dividend only which get preferential treatment in terms of taxes.
That's true when say taxable bonds are yielding 8% and municipal bonds 6%. But when taxable bonds are yielding 2% (about the current 10-year U.S. Treasury yield), the tax hit from owning them in a taxable account is small, and maybe the growth assets such as stocks belong in a Roth IRA.
If you need to invest a small/decent amount of money into stocks, Robos work wonderfully. It's a mass production angle -- good quality service at lower cost to many people; the Ford Model T of investing. Early robot just had a couple of investment options, and now there are more options but the same concept of limited choice at scale (Mustangs, Minvans, Trucks in my example)
Once you have estate planning and complicated tax issues, human advisors provide a lot of guidance to people that is hyper specific to you and your location / niche, which Robos just don't cover. Wealthfront, for example, won't arbitrate a dispute between beneficiaries of a family trust.
I think lawyers are a good comparison here. If you need some standard cookie-cutter incorporation docs, there's a bunch of websites where you can get some core documents for free or a few hundred dollars. But if you're afraid of making the wrong choice, or if you're in a situation that goes beyond the common scenarios (like M&A), then you hire a lawyer to provide you personalized advice.
I'm interested to see if UBS can add value in those ways you mentioned, while still using sophisticated automated strategies for cost savings purposes.
Also note that Vanguard, JPM, Schwab, Fidelity etc. are getting in the robo-advising/direct indexing game.
Also, human advisors can manage, or at least access, investments across brokerages; that is, you don’t have to worry as much about wash sale rules and can do tax loss harvesting because they can see your sales elsewhere. I have to have TLH turned off on Wealthfront because it has no way of knowing about what things I’ve sold elsewhere.
Not financial advice, YMMV, etc.
I agree fully that estate planning/making a trust is something most people would benefit from a human advisor, but this is something you can target with an estate lawyer. I don't think this is something you would need advice on regular basis.
For taxes, I am guessing vast majority of people, even wealthy people, never need human advice nowadays. Anything that is just combination of W2+1099DIV+1099B+1099INT+1099NEC is handled well with robo tools. Tax loss harvesting is pretty simple (even without robo advising!) as long as you know wash sale rules and distinction between long/short term capital gains.
* Edward Jones will do it for you for ~ 2%/yr, which is ridiculously high.
* Any of the big banks or brokerages will do it for less than Edward Jones.
* Almost any financial advisor will do it for about 1%/yr in fees(not ridiculously high, but not remotely cheap) or fee-based for a few hundred an hour with a 1st time setup of $4-10k, more than $10k is unreasonable.
* The robo advisors(of which their are dozens with basically identical products, generally charge 0.3%/yr, some like Vanguard include Financial Advisor services.
* At least one firm will do it for $200 first year and $100/yr after that, regardless of the balance of your accounts, and provide financial & tax planning/advice/etc included. They do require a little work on your part. I'm actively looking for more subscription based advisors like this, please PM me!
* Bogleheads.org will do it for free as long as you follow their template.phpBB with a custom "web1" frontend reminiscent of Craigslist. That's something I haven't seen in a long time.
My first impression was honestly to trust it more.
Thanks for sharing!
Can you share that one? PM me if preferred. I'm on a similar quest and so far I've found pretty much everything else you've found. My wife is a high income earner too and she's happy with the 1%/yr people that she likes, but I think we can get similar results for noticeably less.
Even 0.5% would be reasonable. As you know, from $1m to $2m that 1% fee goes from $10k to $20k and they're not doing anything more for that extra $10k/yr so the value proposition starts to break down for me. $10k in one year isn't a big deal, but over 20 years that's $200k, which might affect my retirement activities and definitely impacts how much is left for my kids (which they're going to really appreciate as life is so much more expensive for their generation).
When you are in the $1m+ AUM, it is pretty easy to explain. You are going to be paying for your kids to go to college and one of theirs as well. Make sure you really like them.
It's true. My mom only has about $1 million saved for her retirement, which sounds big to anyone who hasn't done retirement planning, but it's really not enough. Growth aside, that's $50k/yr for 20 years. She's paying her advisor 2%/yr. That's $20k/yr, which is a big percentage of her annual income, and he does almost nothing. It makes me sick.
Once you get to 30M+ invested NW, you can seriously think about a multi-family office and > 100M+ a family office just for you starts making sense.
Most people will have a hard time getting over 1M before retirement, so I left the other options off my original post.
Many Robo advisors throw an RIA in for free, and they are in the 0.3% ER range. It's hard to get cheaper than that.
The only subscription based one I'm aware of right now is: https://planvisionmn.com/ They give you Fidelity's eMoney platform and you manage that part of it. They just help you with the planning part.
Thanks!
Thats the 100$B question right? Because fear. Because unfamiliarity. Also because 1% seems small, but its really more like 14% (if the average return is 7%, you're giving up 1/7 of your return!)
What's funny is... whenever you call an FA (financial advisor) in a moment of panic... they answer always is "don't act emotionally and stick to the plan". Maybe a real "robo-advisor" should just be a chatbot that responds to any message it gets with "HODL".
>> Because unfamiliarity.
This one is going to be interesting to watch evolve and I see it becoming less of an edge for financial advisors. More and more, we are seeing retail investors gain familiarity (not saying knowledge... but at least familiarity) with financial markets through blogs, social media, etc. I think we are moving to a world of more self-directed investors than advised investors.
Some interesting articles to that effect:
https://www.wsj.com/articles/rich-millennials-to-financial-a...
https://www.wsj.com/articles/fidelity-once-stodgy-and-adrift...
https://www.m1finance.com/blog/the-rise-of-financial-influen...
My robo-advisor did, during the giant tumble the markets took during the beginning of this pandemic, put up a message on the site & send a pro-active communication saying, essentially, to HODL. (In more eloquent terms, of course.) I presume a human had a hand in it, ofc., as they likely understood the fear most people would feel looking at the graph.
(My mistake, really, was not buying more at the bottom.)
For example, during the onboarding they direct you to set up recurring investments and they show you in real time what that small investment might become by retirement age. That simple mechanic, which nobody else seems to do in that way during onboarding, makes it really obvious that you need to set that recurring deposit to be as high as you can possibly afford.
By Year 40:
* >$500K &
* ALMOST a quarter of the portfolio
When I was starting out, someone in my company's 401k forum mentioned this # (at that time the # was almost 40%, fees have gone down a lot since the early 2000's). And I am glad I paid attention.
I try and pass on this wisdom everytime I can. Now, you can too.
Here is a NerdWallet article on this topic: https://www.nerdwallet.com/blog/investing/millennial-retirem...
AND
My attempt at recreating their math (TL;DR: It matches, almost): https://docs.google.com/spreadsheets/d/1QTa4XBIUgnLCt_lo6x0n...
edit: for formatting
All the discussion on this thread of "oh just go with a mutual fund" is insane to me. Even if funds have dropped in price from 1.5% to 1% to .7%, that is a huge number over the course of your life. The only realistic approach is super-low-cost ETFs, but those arent friendly to use or make a portfolio from. So the WealthFront layer is pretty critical IMHO.
say you have $100k invested
the 1% fee for that will be $1k
the earnings will be $7k
1. people who don't want to think about it - they pay for everything to be taken care of properly
2. people who want to be wined and dined - they end up paying to be taken out to dinner a few times a year and hear about what the firm is doing to survive bear markets and how they're taking advantage of bull markets
3. people who think they're smarter than everyone and want to direct everything - these people are probably moving to more self serve options, but plenty still want to tell a human what trades to make
Also at a certain net worth, tax and estate planning is a huge part of the work.
So for wealthfront and friends, let's say a family member is closing on a property purchase. You said you'd put in $500K. Closing comes and you try to wire the money over. But wait, it doesn't work.
1) First you have to sell investments 2) Trades have to SETTLE (T+2 or more)! 3) Then and only then can you initiate an ACH transfer. 4) It can only go to your own account in some cases (T+1/T+2) 5) Then you have to go to you bank and get a wire out (retail banks often have tight cutoffs or end up delayed if going online while they "approve" this). 6) This all can be stressful on closing day (agents calling, escrow calling, bank calling, your relative calling). Now you are not days but a week late.
vs
Talking with someone. They enable margin account if you don't have one, you wire same day, done or you can give your guys name to everyone to help coordinate if needed if it will be a bit late.
That plus introductions and referrals to tax accountants, estate attorneys, etc., and access to investment vehicles I otherwise wouldn’t get (easily), definitely makes the 0.7% fee worth it for me.
[quick edit] Honestly, as someone who comes from an impoverished background, they also act largely as “financial therapists.” That is, I don’t make emotional decisions about money, but that doesn’t mean I don’t have tons of anxiety when I spend money on something large; they generate a wealth plan, allow me to see how my assets will change, allow me to (based on models) see if I’m overfunded, underfunded, etc., and I don’t have to do a thing other than send a text. That is insanely helpful to me, personally.
Could you see yourself using something like this if there was an easy way to compare different scenarios?
I'd use it and pay for it though, especially if it factored in historic market data, automatically figured out housing increase rates for my area, etc.
Also, my Wealthfront account is offering me approximately 25% "Available to borrow". I haven't tried it yet but I assume I could grab that immediately and then sell stock to pay back the loan.
I'm not challenging your claim that having a human financial advisor can be useful. I'm sure you're right; I just didn't think your points against the robo service were very strong.
If wealthfront is offering an available to borrow that is perfect (for this issue).
You do get to a point though where you are like - hey, can I transfer $x of stock to a donor advised fund on this day and are just glad it can happen.
I'm not saying the fee is worth it, just that some folks may be willing to pay it because it appears to improve quality of life, even at cost of performance.
And actually, for something like a favor of $500K to help a close, you may NOT be doing a lot of planning in advance. Sure, call me when you need it if it ends up being needed. Call comes in (days / weeks / months later) - now its a pain.
https://support.wealthfront.com/hc/en-us/articles/3600392637...
Curious why you would need to coordinate trades been taxable and retirement accounts?
Why would you want smart beta (that's active management)?
Their direct indexing portfolio also includes a whole bunch of their own in-house risk parity garbage products that carry high fees
The biggest question to me, you can trade ETFs for free now, why do you need wealthfront at all?
If you treat your retirement and taxable accounts as one big pot of money, you want to place assets to take the most advantage of the retirement account. For example, they mentioned bonds. Since yield on bonds is taxable at income tax levels every year, you want to prefer holding them in the tax exempt account.
Another reason is because of tax loss harvesting. To make that work, you have to avoid wash sales. The wash sale rule applies to you and every account you own, taxable, retirement, across brokers, etc. So to make TLH work, the broker needs to have a complete view.
>The biggest question to me, you can trade ETFs for free now, why do you need wealthfront at all?
For me, I'm on the west coast, so the market is open from 6:30 AM to 1 PM. I can't really monitor it nearly as closely as I'd really prefer. Looking at my betterment history, last year they automated 275 transactions for me. I can really only be bothered to look at the account once a month or so. Do the efficiency gains from a lower drift get me 0.25% additional value? Hard to say, but probably not. However, TLH absolutely has. I wouldn't trust myself to track that properly at all.
It doesn't really. They like saying that because it shows off their product, but the IRS doesn't know what's in your retirement account and probably no-one has ever gotten in trouble for this. There are robos that don't coordinate it, even.
Similarly, HSAs are taxable in California but I doubt most people know this and it hasn't caused my HSA investment account to offer tax statements you could even use to report it if you wanted to. So…
Even better, don't read this thread, since ignorance is a defense in tax law and you're not legally required to get your taxes perfectly right.
On the other hand, it is a federal crime (fine or imprisonment not longer than six months) to walk a dog in a national park with a leash longer than 6 feet.
The speculation online is that it's because they lowered the minimum for their institution class funds, many large employer retirement funds sold their holdings of the non-institution funds, leaving everyone left with large capital gains and hence large tax bills unless you held it in a 401k/IRA.
I find Wealthfront to be overkill, but this is precisely the kind of thing they'd save you from.
One step further is to hold the index funds and bonds yourself, that is not exactly rocket science.
I would also say that if you have 6 million USD that is a bit different than most wealthfront customers I think.
And fwiw, tax loss harvesting sounds complicated, but it really isn't that hard to do. If I notice stocks have gone down a lot recently, I'll hop into Vanguard, and swap anything that is underwater with another similar, but not identical fund. I have one for international and one for US stocks. Took me a few hours to get a system down, and now it's a few minutes to do the harvest once every few years.
This is true only if you invest once in your life and then hold those assets forever. But if you invest every quarter then you can do TLH on those new lots individually. And since those new lots will keep coming, your TLH will always have something to work with.
That is true, but you pay a percentage fee on all of your assets (which is growing) to be able to TLH assets you've recently added (fairly static amount over time).
How much effort do you have to put in to avoiding wash sales?
Study after study has shown that investing in a broad market fund plus occasional (once a quarter) rebalancing is going to beat managed investing on average. So where do these products fit in really?
You could definitely just buy an index fund, but it's not exactly comparable.
Exmaple: I got divorced last year. Betterment took weeks of time and many phones calls until they were able to figure out a way to divide our assets evenly, without a large difference in cost basis. Their automatic algorithm for dividing accounts just didn't know how to handle it.
If UBS figures out how to offer a higher level of service on top of robo-advising, that could be a real win.
I for one prefer to make stock selections on my own, however Wealthfront, Betterment, and Personal Capital do not allow me to manage my own investments with any of the robo-advisory features. There is a huge opportunity in the space.
It would be great to talk to you about it - I’d love to hear your thoughts - any way we can connect?
If you buy and hold, it doesn't take much work and expenses for Vanguard ETFs are ~0.10%. Also, once you move to Wealthfront, it's hard to ever leave because of how they break things up (which, I'm sure, isn't unintentional).
If your allocation percentages remain very stable, you might not need to rebalance at all at the end of a quarter. If your allocations fall way out of whack, you might want to rebalance a portion of your portfolio earlier, and robos handle that timing for you.
I'd be surprised if the better timing doesn't provide 0.25% of value, not to mention it's just one less thing to have to think about.
In addition, Wealthfront doesn't know about all of my other holdings (house, angel investments, crypto, ...), so isn't going to do as good as I can.
"The Robo Report" [1] has detailed quarterly robo reports on performance, features, comparisons etc
I'll preface by saying that I have been talking to a lot of financial planners (at top-tier institutions). They basically set you up with a good set of ETFs, hedge funds, etc. and rebalance occasionally. Sometimes they do tax-loss harvesting. They also provide a few other nice little services. But at the end of the day, their fees are over 1% unless you have an ultra high net-worth.
In comparison, Wealthfront can automate huge strategies for a fraction of the cost (0.25%). For example:
- Direct Indexing (invest in an index by buying the stocks directly instead of a fund)
- Automatic investing, rebalancing, and tax-loss harvesting (including TLHing individual stocks within an index when paired with direct indexing)
- Coordinating trades between retirement and taxable accounts for optimal tax savings
- Smart beta (a custom weighted indexing algorithm)
Yes, a financial planner can do all of this (although most don't). But when they do, they just use automated software to do it. It would be impossible to implement these strategies manually. So why even go with a financial planner when Wealthfront does the same thing, but better/cheaper?