Disclaimer: I am not a financial adviser nor am I licensed to give financial advice.
The below is for informational purposes only, and is not investment, tax, legal, or financial advice. These are my personal opinions regarding these services, and I might be completely wrong.
Everyone’s financial situation is different, and you should consult a certified professional before making any decisions with your money, especially large ones.
I wanted to look into robo-advisors to see if I could automate/optimize my tax-loss harvesting strategy, as that’s the one part of my portfolio that’s not “set and forget”. My thoughts on each brokerage I looked at are below.
In short: I don’t want to pay the fees, and I’m just going to keep Bogling it up with my two-fund portfolio
Personal Capital
I’d been ignoring Personal Capital’s calls for years, but accidentally answered recently thinking it was a call regarding my mortgage refinance. I thought “what do I have to lose” and scheduled two sessions with their advisor.
Fees and minimums
Minimum investment $100k.
Very steep expense ratio of 0.89%, dropping to 0.79% when you hold over $1MM with them. Honestly, you can stop reading here and scroll to the next section.
Automation
At the time of my call, I was in the middle of shuffling some money around and had $10k in cash, plus some RSUs I hadn’t yet sold and indexed, and they spent a while saying that one of the benefits of using their service is handling that sort of thing automatically. I can’t imagine an extra couple weeks of “time in the market” would beat their ongoing expense ratio.
Allocations
All of the below is for my risk level, a lower risk portfolio will be different.
They suggested 70/30 US/International, I currently have 67/33. I rebalance via my contributions, but they’d be rebalancing in the traditional sense, which of course becomes more important when you’re out of the accumulation stage.
Instead of tracking the total market, they target an even split between Value/Core/Growth, with 40% allocation to mid and small caps. They pick about 90 stocks, and it seems that they use index ETFs for the small cap portion.
I’m not sure the small cap premium still exists, and this seems like a lot of extra work to diversify. They didn’t send over any backtesting showing this beating the market.
They recommended 10% to various alternatives.
This would be buying some REITs, allocating 1.5% of my portfolio to gold, some other metals, etc. I’m a big gold skeptic, but I can’t imagine 1.5% would make or break anything. I might take a second look at REITs in my tax advantaged accounts, but I likely won’t purchase any, as I get enough exposure to real estate via VTI and through simply owning my house.
Performance
They say your annual return can be enhanced by up to 4.89%, but 1.5% is behavioral coaching, 0.2% is disciplined rebalancing, 1% is tax optimization, and 0.39% is smart weighting. If you’re an inexperienced investor in need of a bit of behavioral coaching that’s one thing, but for the average person reading this, these numbers are less attractive.
Smart Weighting
Instead of tracking the total market, they target equally allocating 10% each to ten different sectors (tech, energy, healthcare, etc). They show the “periodic table of US sector returns” showing how different sectors over/underperform the market in different years, and how rebalancing to maintain an equal weighting between sectors captures gains and buys stocks when they’re low. They show some backtesting showing a 0.7% increase in annual returns, with a 0.8% decrease in standard deviation since 1990.
Their reasoning for rebalancing makes sense, but obviously doesn’t overcome their 0.89% fee.
However, it makes me consider funds like the Russell 1000 equal weight ETF (EQAL) which has a 0.20% ER. Since it’s inception in 2015, however, EQAL has had less than half the inflation-adjusted return of VTI.
I’m wondering what the problems with this methodology are in theory. Too many realized gains when rebalancing? The additional bookkeeping needed to keep track and the fees associated with that? Or just that sectors naturally aren’t equal, and we shouldn’t expect the same growth from each one? Comments certainly welcome.
Ultimately, I think I’ll stay the course with good old VTI/VXUS.
Tax management
Tax efficient asset allocation, not picking mutual funds with high turnover, and performing tax loss harvesting. Already doing my best to do all of these. I’m rather concerned about taxes with the frequent rebalancing, so I’m not sure I think I’d get much alpha here from the automated TLH.
Other
They have one of the highest average balances when you look at their AUM divided by number of users, around a half million per user, meaning the average user is paying around $4k a year for this service. No wonder their budgeting software is free.
Schwab Intelligent Portfolios Premium
I’ve been a Schwab client for a long time, originally due to their no-fee bank account, and now the simplicity of having my bank account and brokerage under one roof. They offer low (but not zero) fee index funds. I currently do not subscribe to their paid service
Fees/Minimums
Free, but premium version has a fee fee of $300, plus $30/month.
Beats Personal Capital at $40k invested, Wealthfront at $144k, so definitely a cheaper option for people who have a bit of savings. Of course, you pay the ETF fees as well.
Minimum $25k invested, tax loss harvesting starts at $50k
Comes with access to certified financial planner, automatic rebalancing, tax loss harvesting
Allocations and performance
You need a minimum 6% cash allocation, which seems insanely high to me.
They offer a few portfolios, but I’ll compare to their “global aggressive growth” since that seems the closest to my 2-fund strategy
This uses 94% stocks, 6% cash, and has had a 3.67% annualized return since inception on 3/31/15 to 6/30/2020
VT or a rebalanced 67/33 portfolio returned 6.2/7.2% over that time (4.5/5.5% after inflation)
I can’t tell if Schwab’s number is before or after inflation, but they seem to have missed out an a lot of the bull market’s growth. Past performance blah blah blah, but that’s not great for an “aggressive” 94% stock portfolio. Don’t see any data on volatility.
Tax loss harvesting
Primary and alternate ETF, rebalanced when over a certain threshold. This is what I’ve been doing manually this whole time.
Summary
While I like the flat fees, their poor performance and high cash allocation means if you’ve got $1MM with them, you’ve got a whole $60k doing nothing, and $940k in a strategy that’s underperformed the market. Not great.
Wealthfront
As a math nerd, I greatly appreciate the data Wealthfront publishes regarding their methodologies.
Fees and minimums
0.25%, plus fund fees of 0.06%-0.13%.
$500 minimum, but more to qualify for some of their services that matter.
Tax management
Stock level tax loss harvesting starts at $100k invested, but surprisingly doesn’t seem to outperform ETF-level tax loss harvesting by much. Some comments on Bogleheads mention that this makes it very difficult to untangle your portfolio when you’re selling off or moving away from Wealthfront. If you have >$1MM invested, you could have your portfolio spread across 1000 individual stocks.
It looks like you can exclude certain companies from this stock level TLH, which is useful for those of us who get stock compensation from our employers. They advertise it as a way to do socially responsible investing.
Allocations
At $500k invested, Wealthfront offers the ability to index by risk factors instead of market cap. I’ll let their whitepaper in the link above speak for itself, but it seems to have had higher returns than VTI when backtested back to 2000, but lower returns since they started this service in 2017. Looking at figure 2 in their paper, the year 2000 is right before a period where their strategy has its highest overperformance, so backtesting to different dates may show lower performance.
For those of you with a bond allocation, they offer a “risk parity” service for a fee, where leverage is used to match the standard deviation of a specific stock/bond allocation, but with volatility evenly spread between asset classes. Their explanation makes sense, but using leverage to buy bonds makes me uncomfortable for reasons I don’t have enough of a grasp on economics to explain. Not sure if there exists a Monte Carlo tool that can easily test this strategy to see if the failure rate for a certain WR changes, as I’m less concerned about average return here, and more concerned about risk of ruin. I’d be concerned that a matched standard deviation might not necessarily match kurtosis, and you might wind up a small risk of a large failure. They don’t allow you to put more than 20% into this strategy, so maybe my paranoia is justified?
I’d appreciate comments on these methodologies from someone who’s more familiar with the academic works referenced in their whitepapers.
Addendum: This tweet shows just how terribly Wealthfront's strategy performed during the pandemic.
Other
Doesn’t take outside holdings like your 401k into account like Personal Capital might, so you’ll have to keep the big picture in mind yourself.
As a millennial, the only thing I dislike more than the negative millennial stereotypes is pandering to millennials. Their site describes their service as “robo-investing for millennials” or the even-more-irritating “self-driving money™” and they’ve portrayed us as a bunch of brunch-addled shoe photographers.
Betterment
Charges the same 0.25% fee as Wealthfront or 0.40% if you want to have support from real live humans. 0.10% discount on the balance over $2MM. Offers the choice of a socially responsible portfolio and helps you donate appreciated shares to charity.
Only has half of what Wealthfront offers, and doesn’t seem writing more about. Skip the fees and handle your own donations.
Vanguard Personal Advisor Services
Nearly forgot about this one, despite being very happy with my IRA at Vanguard.
Minimum $50k, 0.30% fee on balances below $5M with lower fees at higher balances.
You can also choose a “digital advisor” for a 0.15% fee. Seems to be just a 4-fund portfolio, plus access to some online calculators/tracking tools.
Seems to be mostly advice (it’s in the name) and rebalancing. Not worth it for me.
From what I can tell, they don’t directly TLH, but you can opt-in to a “mintax” accounting method that sells lots with the biggest losses first and the largest short-term gains last, which is rather easy to do by hand. Review over for Vanguard.