Wealthfronts tax loss harvesting 1% justifies their .25% aum

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arsenebould
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Wealthfronts tax loss harvesting 1% justifies their .25% aum

Post by arsenebould » Fri Nov 15, 2013 8:51 pm

Hi guys

I was wondering if the 1% additional tax loss harvesting return justifies their .25% fee.
They mention on their website that on an average 1% can be gain by continuously doing tax loss harvesting as needed.

I wanted the bogle head opinion on this as I have never done tax loss harvesting and if the 1% gain is true.

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leonidas
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by leonidas » Fri Nov 15, 2013 9:04 pm

I remember reading a while back that the tax loss harvesting was only available for accouts at 100k and above. Is that still true?

Retread
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by Retread » Fri Nov 15, 2013 9:13 pm

Perhaps they excel at generating losses? :(
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by LadyGeek » Fri Nov 15, 2013 9:25 pm

The IRS trumps investment management practices; you can only offset 3K of losses ordinary income (see CyberBob's correction below) in any one year. The wiki has some background info: Tax loss harvesting

Their website refers you to the IRS for guidelines: Automated Tax-Loss Harvesting You're responsible for filing taxes.

Their White Paper claims they take advantage of tax loss harvesting by avoiding Wash sales. The important points are in the Discussion summary:

- Tax loss harvesting is a tactical move (market timing) that needs to be done in a way that doesn't interfere with asset allocation and low-cost indexing. IOW, you can't do both.
- Tax loss harvesting has no effect in tax-deferred accounts - it only applies to taxable accounts.

Update: See Cyberbob's correction below.
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chead
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by chead » Fri Nov 15, 2013 9:34 pm

I'm very skeptical of the claim that they can get you 1%. The effectiveness of THL depends heavily on your individual circumstances. First of all, your tax bracket is going to have a huge effect on how beneficial THL is. Both your tax bracket this year and in the future years should be taken into account. Secondly, one consequences of of THL is that you are effectively lowering your cost basis. This essentially pushes your tax liability out into the future which is a good thing. However, if you are in or close to your decumulation phase, you might not be pushing out your tax bill far enough into the future for it to be worth the transaction cost of THL. Thirdly, given that Wealthfront's recommended AA is in relatively tax efficient Vanguard index funds to begin with, you shouldn't have too much of annual tax bill regardless of THL until start to spend your nest egg.

Since I've never actually used Wealthfront, I don't know exactly how their algorithm preforms THL. If I had to bet, I would bet that any low cost, automated THL system that needs to make assumptions about your individual situation would not stack up favorable against you doing a bi-annual review of your positions.

Maybe someone else has more first had experience with Wealthfront can offer their input, but I wouldn't choose them solely based up THL.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by charles_shaw » Fri Nov 15, 2013 9:38 pm

Retread wrote:Perhaps they excel at generating losses? :(
Bruce
They don't generate loss more than the (usually Vanguard) index funds they put your money in. Their continues tax-loss harvesting is simply reaping some of the benefits of TLH over the normal fluctuations of the market.

Wealthfront is very transparent about how they allocate your money, including which funds they put you in based on your risk profile and which funds they TLH between. I put $10,000 in there several months ago to see how the service worked (they manage $10k for free) -- the automatic TLH service is only available to larger accounts though.

Unfortunately I can't speak to OP's question about the validity of a 1% gain from continuous TLH.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by steve_14 » Fri Nov 15, 2013 9:57 pm

Question 1: Can you generate a consistent net 1% TLH bonus over the next 30 years?

Answer: Only in extreme cases (large amount of new taxable funds invested, extreme volatility, just the right market movements). Remember, TLH is no free lunch, since your cost basis is now lower. And you can't do it in your retirement accounts.

Question 2: Can you just spend 10 minutes per year TLHing yourself and get the same benefit (given that due to transaction costs you don't want to TLH small amounts anyway)?

Answer: Having done it for 20 years, my answer is Yes.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by LadyGeek » Fri Nov 15, 2013 10:11 pm

arsenebould wrote:I wanted the bogle head opinion on this as I have never done tax loss harvesting and if the 1% gain is true.
Tax loss harvesting only comes into play if you are buying and selling funds in a taxable account (you pay taxes in the year that you buy/sell the funds). If it's more than 3K of losses, then what's left carries over to next year. This is standard IRS procedure when you have a loss. Investors just give it a fancy name - "harvesting" your losses.

If you only have a retirement account (IRA, 401(k)), it doesn't apply.
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by umfundi » Fri Nov 15, 2013 11:46 pm

On their home page, you will see that they offer an itemized list totaling +4.6% in returns over what you might do yourself. What a deal!

https://www.wealthfront.com/

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by CyberBob » Sat Nov 16, 2013 12:08 am

LadyGeek wrote:...you can only offset 3K of losses in any one year.
That's 3k against ordinary income, and it only comes into play after you offset capital gains with losses dollar for dollar.

As a simple example (ignoring short or long categorization of gains/losses), if you have $50,000 in gains and $54,000 in losses, $50,000 of the gain/loss cancel each other out, leaving $3,000 in loss which you can take against ordinary income and $1,000 capital loss carryover for next year. So your losses offset $53,000 total in one year ($50,000 in capital gain and $3,000 ordinary income).

Bob
Last edited by CyberBob on Sat Nov 16, 2013 12:33 am, edited 1 time in total.

arsenebould
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by arsenebould » Sat Nov 16, 2013 12:24 am

My whole point of asking was whether this service is worth it?

I am looking for a hands off approach, and wealthfront offers that.

Is there a cheaper model than wealthfront out there?

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by steve_14 » Sat Nov 16, 2013 12:27 am

arsenebould wrote:My whole point of asking was whether this service is worth it?

I am looking for a hands off approach, and wealthfront offers that.

Is there a cheaper model than wealthfront out there?
Yes - not using Wealthfront. It takes about an hour per year to maintain a simple index fund portfolio.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by CyberBob » Sat Nov 16, 2013 12:40 am

arsenebould wrote:Is there a cheaper model than wealthfront out there?
If you don't want to go the do-it-yourself route, I've always thought that Betterment looks like a nicer choice.

Bob

arsenebould
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by arsenebould » Sat Nov 16, 2013 1:09 am

I have had a look at betterment but their funds don't look compelling.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by SGM » Sat Nov 16, 2013 5:54 am

It has been proposed that an advantage to owning individual stocks over an index is that you can harvest tax losses annually. Are the Wealthfront tax losses long or short term? ST tax losses are more valuable if you can use them for a higher tax bracket investor.

The only tax loss harvesting I can do is sell Vanguard's taxable and muni bond funds these days. I guess I should be happy.

I don't need a manager for my investments, but tax lost harvesting to offset the management fee is a benefit I suppose.
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by stan1 » Sat Nov 16, 2013 7:31 am

Remember what Wealthfront does for 25 basis points. It is a computer trading platform that sets an asset allocation based on a risk survery you take and then rebalances holdings and invests new contributions to maintain that asset allocation. They've extended the trading platform to cover tax loss harvesting.

There are a lot of details here, under tax loss harvesting:
https://www.wealthfront.com/faq
When we harvest a loss, we purchase an ETF that tracks a different index, but is highly correlated with the ETF we sold in order to maintain the same risk and return characteristics of your portfolio. By purchasing an ETF that tracks a different index we do not violate the IRS rule that forbids the purchase of a substantially identical security. We swap back to your original ETF after we have held the new ETF for 31 days, the minimum amount of time required to avoid the wash sale rule. Wealthfront monitors disclosed related accounts (IRA, spousal accounts, joint accounts, etc.) that are held with Wealthfront to ensure wash sales rules are not violated in those accounts. Finally we will not allow you to use our tax loss harvesting service if you or your spouse hold the same ETFs we employ at Wealthfront in another one of your accounts not managed by Wealthfront.
Only issue I see with that is that there is a chance you'll end up with a short term gain when they switch back to the original ETF after 31 days. Otherwise, the description could have come straight from a post on Bogleheads. If you don't want to do it yourself there are many, many worse choices than Wealthfront.

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by Wagnerjb » Sat Nov 16, 2013 10:54 am

arsenebould wrote:Hi guys

I was wondering if the 1% additional tax loss harvesting return justifies their .25% fee.
They mention on their website that on an average 1% can be gain by continuously doing tax loss harvesting as needed.

I wanted the bogle head opinion on this as I have never done tax loss harvesting and if the 1% gain is true.
I have been tax loss harvesting for almost 30 years in my taxable account, almost exclusively with individual stocks. I doubt that 1% is realistic. I am a big proponent of tax loss harvesting, and the benefits are very real but I just think 1% is exaggerated. I have seen a different study - using individual stocks - that shows an average annual benefit of 0.6%. Since individual stocks are more volatile than index ETFs, I cannot see how one can get to 0.6% with ETFs, much less the 1% level.

I suspect the 1% comes from two assumptions. First is a constant and substantial flow of "new money" into the account every year. This allows more different tax lots to be purchased, and new money is more likely to be a loss harvesting candidate. Second, they likely assumed capital gains being generated by the funds, and the TLH served to offset those gains. I believe a tax efficient portfolio will generate virtually zero in capital gains, so that assumption is also a bit questionable.

I do agree wth those who feel that 0.25% is a very modest fee for a) advice and b) loss harvesting.

Best wishes.
Andy

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by indexfundfan » Sat Nov 16, 2013 11:11 am

For a taxable account, does anybody know what ETFs are used for the bond portion? Are they using taxable bond ETFs?
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charles_shaw
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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by charles_shaw » Sat Nov 16, 2013 1:39 pm

indexfundfan wrote:For a taxable account, does anybody know what ETFs are used for the bond portion? Are they using taxable bond ETFs?
It looks like that they TLH between these funds (with MUB being the preferred for more diversification and lower expenses):

MUB (iShares S&P National AMT-Free Muni)
TFI (State Street Barclays Capital Muni)
PZA (Powershares Insured National Municipal Bond ETF)

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by stan1 » Sat Nov 16, 2013 1:58 pm

Their investing methodology is in this white paper:
https://www.wealthfront.com/whitepapers ... ethodology

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Re: Wealthfronts tax loss harvesting 1% justifies their .25%

Post by umfundi » Sat Nov 16, 2013 2:14 pm

I think what Wealthfront proposes to do is quite reasonable. Let's forget that previously they proposed to do something quite different, but that piece of mud did not stick to the wall.

0.25% is a rock-bottom AUM, but you should recognize how they get there. Don't expect personal service.

Check out their home page. There is a list of reasons why having them pay attention for you will increase your return by 4.6%. Is that a list of the reasons you'd hire them?

You can easily do this for yourself: Invest in the 3-fund portfolio, do a check-up and rebalance twice a year. Beyond that, Wealthfront's secret sauce may easily justify the AUM fee of 0.25%.

I think the biggest question is, are you with the program? If you start tinkering with what they do, it could be very bad.

In my opinion, give them all your money, or none.

Keith
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