Wealthfront: Silicon Valley Tech at Wall Street Prices

https://medium.com/@blakeross/wealthfront-silicon-valley-tech-at-wall-street-prices-fdd2e5f54905

by lxm • 11 years ago

313 187 11 years ago

caseyf7• 11 years ago

Has anyone seen actual performance of Weathfront portfolios? You would think people would publish their results, but they've been hard to find.

btian• 11 years ago

Just look at the performance of underlying ETFs.

isoos• 11 years ago

Be aware that published results are heavily skewed, and are sampling bias towards the successful portfolios. Actively managed funds do outperform the market from time-to-time, and they do get published. However, not the same portfolios (year-over-year), not the same fund managers, not the same issuers...

WealthFront 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.

timcederman2• 11 years ago

Here you go - with risk level 6: http://i.imgur.com/5nchgSq.png

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%.

maaku7• 11 years ago

And the 500 index has a lower return from being top heavy. You would have gotten even better ROI with a broad market index like VTI.

dcosson• 11 years ago

As an anecdote, I've had some money in both Wealthfront and Betterment for the past 2 years. Both seem to be performing about the same, though betterment has better (but still very lacking) metrics on performance. They both show you what your money has done, but since I didn't deposit into both of them exactly the same amounts at exactly the same time every time, I can't compare them. Betterment at least shows some basic metrics about the time-weighted return over given periods in addition to your actual return, though you can't put in custom time windows. And of course, neither show you total fees you've paid in a time period.

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.

deegles• 11 years ago

You're not doing tax loss harvesting in both portfolios are you? There are tax implications to that.

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.

Yhippa• 11 years ago

10.9% since October 2013. Risk tolerance level 10.

U6Gf8WQP5• 11 years ago

17.4% since early 2013, risk level 7.5. http://i.imgur.com/I9SDElU.png

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.

Kiro• 11 years ago

I don't understand the three first paragraphs (about A/B testing). I install an app costing me 1 dollar and then the developer use this profit to install an app ruining him/her? What?

kenferry3• 11 years ago

He's noting the irony of how punishing "your" (the developer's) margins are, vs how easily you hand your hard-fought cash over to the high-margin wealthfront.

cbhl3• 11 years ago

I think the first three paragraphs are supposed to appeal to Silicon Valley engineers. The idea is that a lot of {Facebook, Google, etc.} employees spend their day doing a task with negligible world impact and then put their paycheck into Wealthfront for investment/retirement.

gohrt4• 11 years ago

install an app ruining him/her?

it's a metaphor, imagining Wealthfront's fees as though it were the subscription fee for an app.

thisisit6• 11 years ago

The second para says it all:

"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."

pbreit• 11 years ago

Key point: 99.9% of US individual investors would be wise to make a Vanguard Life Strategy or Target Retirement fund a core holding.

Otherwise, the screed was a little nasty (a bit nastier than the Wealthfront post).

kenferry3• 11 years ago

I've often wondered about precisely the author's issue – why do wealthfront, betterment, et. al. charge a percentage of assets under management? Is it just that no competitor has offered a flat rate yet, or is there intrinsically more work involved in trading larger sums?

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.

x0x0• 11 years ago

Because why not charge high prices if suckers pay them.

kenferry3• 11 years ago

There are something like 10 robo advisors. If a competitor could undercut wealthfront and get more business, why wouldn't they?

gohrt4• 11 years ago

That should have had generated more in capital gains than tax loss harvesting could offset.

only in the year he sold after the IPO.

RSU vests are taxed as ordinary income.

aoeuasdf1• 11 years ago

Yes, but employee stock purchase plans (~50% of the time) result in large capital gains.

thisisit6• 11 years ago

I think the sub heading makes it clear on author's issue - Weatherfront's real costs. While they write tons of stuff on how they are anti Wall Street and are cheaper options, they actually are misleading people with standalone numbers instead of showing them compounded ones. A trick which is prevalent in Wall Street companies.

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.

lmm• 11 years ago

I think the idea is that it aligns incentives. If your adviser makes more money the more money you have, it's in their interest to make you more money. Compare e.g. letting agents, recruiters, ...

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.

hooo• 11 years ago

Not entirely aligned since it's a % of assets and not the % of gain. They will make money even if they're losing you money.

digitalzombie• 11 years ago

There's a PBS video about this. It also talk about Vanguard being a very good mutual fund and every other mutual funds are making bank off of you through fees.

The video also advocate either Vanguard mutual funds or ETF.

rjst3• 11 years ago

Yes, Vanguard is way ahead in this. However, if you’re not American, it’s not always the best choice, as your returns may be lower because of tax issues.

frinxor2• 11 years ago

the short of it: Wealthfront markets itself as cheaper than vanguard etfs, but they actually charge 0.25% + ETF fees on top of that.

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…"

cmdkeen• 11 years ago

The key thing with fees is that high fees are often a sign of a poor manager or poor client service. Vanguard can charge low fees because they have huge amounts of money invested with them, as do other successful asset managers. The problem, as the article points out, is that people don't understand compounding - and have been brought up to associate paying a bit more with better products.

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.

solve4• 11 years ago

This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies. It's so extremely hard to outperform existing methods in terms of returns. For user experience, these are the kind of things that are best if totally automatic, with no interface at all.

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.

jackgavigan2• 11 years ago

This puzzled me that, for the past few years, YC has wanted so badly to invest in more or less traditional style wealth management companies.

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).

thisisit6• 11 years ago

Additional issue is how these companies come about. They seem to be dependent on backtests to see if their secret formula works. While this approach might be workable in coding, it is not so straightforward in finance. As pointed out in the blog:

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.

inthewoods2• 11 years ago

To me, the real question is to why VCs are interested in these kind of businesses at all given the scale they must achieve in order to make any money.

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.

lewisl9029• 11 years ago

Buy and hold forever is generally great advice, until it isn't.

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.

http://i.imgur.com/ZhN0QIp.png

frinxor2• 11 years ago

you should start a hedge fund, and charge 2.5%!

joking aside, i've played with quantopian way back, and think its a fun/cool concept

solve4• 11 years ago

Can you show the forward performance, starting from the date when you chose those 4 parameters - 165.12, 172.44, 164.23, 156.02?

As you know, backtested results with carefully tuned magic numbers can potentially mean nothing.

7Figures2Commas6• 11 years ago

Your overall point is not a bad one, but investors don't need "thoroughly backtested trading algorithms" to protect themselves. Frankly, many of the people who use "thoroughly backtested trading algorithms" don't do as well as they supposedly should.

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...

gaius• 11 years ago

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

You do realize those two statements contradict each other?

gdubs• 11 years ago

If you're invested in an index fund, wouldn't the only way to realize the loss during a recession be to sell? Anyone who stayed the course after 2008 would have seen record gains in the years following.

tosseraccount3• 11 years ago

"backtested trading algorithms"

Your algorithm can predict the past.

Congratulations.

brobinson• 11 years ago

Your algorithm will likely not stand up to Walk Forward Analysis/Optimization/Testing: https://en.wikipedia.org/wiki/Walk_forward_optimization

I recommend reading "The Evaluation and Optimization of Trading Strategies" by Robert Pardo.

MaxScheiber3• 11 years ago

Buy and hold forever is generally great advice, until it isn't.

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.

nicholas73• 11 years ago

The only quibble I have is that taxes would outweigh the advantages here. You either do this in a tax free account, or your trading needs to be a lot better!

matwood8• 11 years ago

Wealthfront markets itself as cheaper than vanguard etfs

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.

TheCoelacanth• 11 years ago

Even Vanguard can be overwhelming for some people who have to make choices on allocation[1].

What's wrong with their Target Retirement 20?? funds if you don't want to choose your own allocation?

BrianEatWorld• 11 years ago

This is why I switched to Wealthfront.

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.

cbhl3• 11 years ago

I started using Betterment because I thought their UI was pretty.

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.

gk1• 11 years ago

Why not just schedule recurring buys? Then there are no buttons to click.

gohrt4• 11 years ago

the kindly rabbi who performed your bris

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.

mooreds4• 11 years ago

Where are the lower prices alternatives to AirBnB and Uber? If they existed, would you be using them?

mfringel• 11 years ago

A rabbi can also be a mohel.

swang• 11 years ago

OK I don't know shit about investing/financing and would like to change that. Where do I start? I read the article and nod my head and go, "OK ETFs!" But then I go and there are tons of them. Is the one he suggested the one I'm suppose to go with regardless?

kozhevnikov• 11 years ago

A common advice that I'm yet to follow myself is to start by reading sidebars on /r/investing and /r/personalfinance specifically their wiki and FAQ.

[1] https://www.reddit.com/r/investing/wiki/faq

[2] https://www.reddit.com/r/personalfinance/wiki/index

j_lev4• 11 years ago

In typical chicken-egg fashion there is no better teacher than having skin in the game, but just make sure you know what you're doing before you jump in.

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.

mokn• 11 years ago

Read "A Random Walk Down Wall Street". Gives a great intro to the history and theory behind investing for those wanting to learn.

j_lev4• 11 years ago

Good one. Forgot about this one.

Intelligent Investor is good too as per other commenter but I find that it's quite hard reading for a beginner.

puranjay• 11 years ago

Read "The Intelligent Investor"

Calm, mature advice for investing that has stayed true for over 50 years.

blufox2• 11 years ago

And if you don't have the time to read, listen to the audiobook online https://www.youtube.com/watch?v=UoCow6DsDaA.

matwood8• 11 years ago

Great site: http://www.bogleheads.org/wiki/Lazy_Portfolios

rjst3• 11 years ago

Some good books to get you started:

* the smartest investment book you'll ever read

* the four pillars of investing

* The Millionaire Next Door

* If You Can

spacecowboy_lon2• 11 years ago

Go and read the intelligent investor by Graham (who taught Warren Buffet)

http://www.amazon.co.uk/dp/0060555661

refurb• 11 years ago

I found William Bernstein's books to be a great intro to index investing.

"The four pillars of investing" "The intelligent asset allocator" - more technical

The Boglehead wiki is also fantastic.

otterley• 11 years ago

My favorite is _A Random Walk Down Wall Street_ by Burton G. Malkiel, the cofounder of Vanguard. Dispels a tremendous number of myths; at the end of the day you'll learn to KISS.

http://amzn.com/0393340740

AreaGuy• 11 years ago

Incidentally, Malkiel is currently the Chief Investment Officer of Wealthfront.

iaw3• 11 years ago

So, others have said it, but to reiterate:

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.

RickHull• 11 years ago

https://www.bogleheads.org/

w23j• 11 years ago

Here is a shot at a back-of-the-envelope calculation of the sum of fees paid in his first example. I hope I haven't misunderstood.

  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: 124120.0285076505

throwaway3830• 11 years ago

So about a month ago I inherited just short of $30k. I don't need it right now, and don't plan on using it until either I buy a house (maybe 5 years away?) or retire.

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.

mooreds4• 11 years ago

If you plan to use the money in less than 5 years, put it in a savings account t. I like capital one 360 (formerly Ing Direct), but any one will do.

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.

gjm11• 11 years ago

If you plan to use the money in less than 5 years and know you will need about 30k then put it in a savings account or something of the kind.

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.)

Danieru• 11 years ago

Or just buy a bond etf that matches your horizon. If you super duper do not want any variance then just buy regular bond.

Finance is complex because there exists a product for any need.

srj6• 11 years ago

5 years is a bit of a cutoff point. Less than that you typically want a CD and more than that you want an intermediate term bond index. You could put 20k in CDs and 10k in bonds which would have the nice side effect of giving you experience.

poikniok• 11 years ago

Wow, for your own good don't listen to this guy. Just put it in equities.

rjst3• 11 years ago

The timing is crucial. You say “until you either buy a house or retire”. I’m not sure how long you have until you retire, but it’s 5 years if you buy the house. 5 years is not a long time.

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.

maaku7• 11 years ago

You may do well to checkout the FAQ of the personal finance subreddit:

https://www.reddit.com/r/personalfinance/wiki/commontopics

mooreds4• 11 years ago

I would love to see the proportional fee killed. Even Vanguard charges this (though their fees are smaller, they are still a percentage). But the fact is the effort required to manage $10M is not 10x the effort required to manage $1M (especially with software). So why do we pay 10x as much? Because we always have!

That's the opportunity in front of Silicon Valley with regards to wealth management.

amorphid• 11 years ago

I wonder what Wealthfront's costs are per client per year. Do their costs have a variable component, or is a flat $X/year per account?

srj6• 11 years ago

Vanguard does reduce the fee in many of its funds as the investment amount becomes larger. The tiers are Investor, Admiral, Institutional, and Institutional Plus. Some of these you can get in a 401k plan negotiated by your employer. VIIIX for example is an S&P fund with a 0.02% expense ratio.

mooreds4• 11 years ago

Yes, I know about this.

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).

jycool• 11 years ago

As much as I think the article makes great points (tax-loss harvesting seems oversold, and Vanguard is a much cheaper way to get a target date fund than Wealthfront), I gotta raise my hand here and point out the absurdity of this argument against proportional fees. Wealth management is like any business-- a combination of fixed and variable costs. And like many businesses, it amortizes those fixed costs against basically a variable fee structure because the value of the service to the customer (debatable as it may be for some investment products) is proportional to the account size. It's not an SV vs WS thing. Nobody charges according to the marginal cost of the service. Why does Airbnb charge a percentage of the rental cost? Why does Uber get a percentage of the fare? Why does the restaurant charge me the same for a burger at 10pm as a burger at 7pm (after all, the staff are already being paid for the day and ingredients already purchased)? It might sound good to say "hey, the software's not working any harder so the marginal cost is zero", but that doesn't work in almost any business.

jackgavigan2• 11 years ago

Why does the restaurant charge me the same for a burger at 10pm as a burger at 7pm (after all, the staff are already being paid for the day and ingredients already purchased)?

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.

mrgordon• 11 years ago

Yeah good points.

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."

patrickmcmanus• 11 years ago

tax-loss harvesting is particularly valuable when combined with charitable giving.. the usual harvesting dynamic is that you are trading a deduction now for a larger gain-liability later, but in the case of charitable giving of appreciated stock there is no liability down the road but you get to keep the deduction-now.

hundt• 11 years ago

The author's points about advertising and hidden fees are well-taken.

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.

vasilipupkin5• 11 years ago

Let's say we kill proportional fee and replace it with a fixed fee. Well, then people with lower balances will end up most likely paying more than they do now. Another issue, it is proportionally harder to execute a larger portfolio than a smaller one. So, proportional fee makes sense. Having said that, yes, it is true that it is not clear to me why as a Vanguard customer I should switch part of my portfolio to Wealthfront.

gphil• 11 years ago

The only thing any investor can control with any certainty is fees and taxes, so you might as well focus your effort on minimizing these. For the most part, Vanguard funds are the best at this that I know of.

matwood8• 11 years ago

Vanguard definitely led the way, but Fidelity (maybe others) has low fee funds similar to Vanguard. Last time I checked, Fidelity looked like they priced their funds by doing Vanguard price minus .01 point.

asift5• 11 years ago

Vanguard wins in the fee category, but from a tax standpoint, direct indexing wins by a wide margin.

jordan0day2• 11 years ago

[insert whynotboth.gif]

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?

asift5• 11 years ago

For the right person, there seems to be more benefits to direct indexing than are indicated in this article. Tax-loss harvesting is one potential benefit, but so are things like charitable gifting. Anyone who is in a high marginal tax bracket, maintains a substantial portfolio in a taxable account, and gives a considerable amount to charities can receive substantial benefits from direct indexing.

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).

vasilipupkin5• 11 years ago

Wealthfront should compete not just on trying to execute the same old indices, but on creating new indices on the fly. For example, REIT Index Sans Illinois, Emerging Markets Sans Russia, etc. Infinite number of possible index portfolios. Anyone want to build that? send me a message

thisisit6• 11 years ago

While the idea is interesting, I am curious what would be the market for a newer index? This combined with creating and maintaining a market to run this index, it will be an expensive proposition.

vasilipupkin5• 11 years ago

Why does it have to be expensive ? Imagine you live in Texas and already have high exposure to Texas real estate. It's reasonable to be able to construct a index fund ex texas real estate, as an example. Better tailor your investment options to your actual risks

robbiemitchell• 11 years ago

I believe that's what Motif is doing.

vasilipupkin5• 11 years ago

Yes. But with absolutely insane commission levels. I would like a Vanguard like product that lets me do it

WalkerCodeRangr• 11 years ago

Check out https://www.folioinvesting.com They allow you to create your own "index funds" as well as select from a list of existing folios. Flat monthly fee.

inthewoods2• 11 years ago

That exists (at least if I understand your ask):

https://www.folioinvesting.com

somberi• 11 years ago

A father, who is a banker shows his son "This is our Yacht and those are our brokers''". Son asks "Dad, where are the customers' yachts?".

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...

Bostonian• 11 years ago

Has someone created a web site that uploads your portfolio and makes tax loss harvesting suggestions for a fixed fee?Competition is what brings prices down.

troydavis• 11 years ago

If you do want financial advice as an hourly service, it exists. In the US, look at the National Association of Personal Financial Advisors: https://www.napfa.org/.

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.

dataker• 11 years ago

Wealthfront markets itself as an innovative fintech startup, but I see it as nothing but an asset mgt company that hired some developers to "prop it up".

Not to commit an ad hominem, but I don't see tech-driven founders and/or a very strong engineering culture.

https://www.wealthfront.com/management

robzyb2• 11 years ago

I work in the finance industry and only today found out about both Wealthfront and Betterment.

Betterment is utterly awesome. Truly a product I'd expect to see from an innovative fintech startup.

Wealthfront is... not.

7Figures2Commas6• 11 years ago

So you just learned about Wealthfront and Betterment today and somehow you've determined that Betterment is "utterly awesome" and Wealthfront isn't? I hope that whatever your role in finance, it isn't related to due diligence.

7Figures2Commas6• 11 years ago

Yes, these days it's really difficult to credibly market yourself as an innovative company without a pair of 20-something lumbersexual founders who haxored their way into an exposed-brick office in SoMa.

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.

[1] http://eng.wealthfront.com/

CPLX• 11 years ago

a pair of 20-something lumbersexual founders who haxored their way into an exposed-brick office in SoMa

I think this phrase should be singled out and praised for introducing the word "lumbersexual" to our tech discourse.

whafro• 11 years ago

I've worked with four of the folks on that list, including the one at the top, and would disagree pretty strongly.

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.

icedchai• 11 years ago

So Wealthfront is for people who can't open their own Vanguard account and set up automated transfers/investments?

spacecowboy_lon2• 11 years ago

Not sure that 100,000k account for $20 a month is that good a deal. I have about that in my UK TD ISA and don't pay any account charges

blufox2• 11 years ago

From The little book of common sense investing by John Bogle.

"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. "

dwaltrip• 11 years ago

That comes out to about 12% per year, compounded. Makes sense given the huge multi-decade bull market that began in the early 80s (2006 - 30 years = 1976).

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.

maaku7• 11 years ago

S&P gains since inception are on the order of 11%. It is something you can rely upon (see: Trinity study on portfolio survivability https://en.wikipedia.org/wiki/Trinity_study)

sharkweek• 11 years ago

For some absolutely insane reason I sometimes get the feeling that I can outpick a fund with individual stocks, because "Hey, I follow this whole tech world really closely! Surely I can pick some big winners!"

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.

kelukelugames• 11 years ago

I too enjoy gambling with my life savings.

maaku7• 11 years ago

I suggest doing what I do: invest your time in speculative bets (startups), and invest your take-home pay in index funds.

rgbrgb2• 11 years ago

the financial advisor who treats his esteemed clients to FREE! luxury box seats at the big game (* when you pay him $10,000 a year).

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?).

akeefer• 11 years ago

This post kind of misses the main point of services like Wealthfront. You're paying 0.25% in exchange for automatic rebalancing, asset class diversification, and tax optimization. If the combination of those factors is going to increase your yearly return by 0.25% or more (say, from 6.8% to 7.2%), it's worth it. If they won't, it's not.

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.

mchusma• 11 years ago

I 100% agree and have some money with Wealthfront for the exact same reason. I did the math, ran the models, and come out ahead. Thanks for taking the time to write what I wanted to say :)

hchenji6• 11 years ago

Did you come out ahead for all possible risk numbers or was it just for a range? Isn't there some inherent "gambling" involved in choosing a risk number?

hchenji6• 11 years ago

whereas Wealthfront portfolios typically have more like six or seven asset classes

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?

domdip3• 11 years ago

Because to some extent the asset classes are uncorrelated. This is the basis of Modern Portfolio Theory, and the reason you don't just dump everything into the highest-return class (e.g., stocks).

For a simplified model, check out Kelly gambling

https://en.wikipedia.org/wiki/Kelly_criterion

U6Gf8WQP5• 11 years ago

Wealthfront has an in-depth explanation of how they use modern portfolio theory to determine their portfolio construction (including how they select asset classes): https://research.wealthfront.com/whitepapers/investment-meth...

asift5• 11 years ago

Looking only at the number of ETFs can be deceiving. Let's say that I hold a total US stock market index. This may be one ETF, but I still hold funds within all 9 Morningstar style boxes. You could break this into 9 different ETFs, (LCV, LCC, LCG, MCV, MCC, MCG, SCV, SCC, SCG), but that doesn't mean you are any better diversified. In fact, holding more underlying ETFs can create tax inefficiencies as indices reconstitute themselves (e.g., a SCG stock may grown to be a MCG stock. A total market index doesn't necessarily need to make any trades to reflect this change, but the SCG fund will need to sell the stock and the MCG fund will need to buy it).

domdip3• 11 years ago

Can't upvote enough.

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.

hchenji6• 11 years ago

Does anyone here use wisebanyan? They claim $0 fees and still do the robo advising (i.e., solving the portfolio allocation problem).

arbitrage314• 11 years ago

Wealthfront is indeed a ripoff for the well-informed.

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.

U6Gf8WQP5• 11 years ago

Wealthfront is indeed a ripoff for the well-informed.

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).

maaku7• 11 years ago

First of all, you are probably not taking full advantage of tax-efficient accounts. Are you contributing your maximums, including back door strategies?

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.

jsprogrammer• 11 years ago

There are other options available that would enable you to stop working years earlier

The only real option that enables people, on average, to stop working is automation.

rgarcia• 11 years ago

Here's my understanding: if you use Wealthfront direct indexing, you mostly hold stocks, so you pay a minimal amount in ETF fees. This means your expense ratio is pretty close to the Wealthfront fee of 0.25%.

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&...

maaku7• 11 years ago

Wealthfront fee is ON TOP OF the underlying ETFs.

asift5• 11 years ago

This is correct. Also, tax-loss harvesting isn't the only benefit of direct indexing. Charitable gifting of highly appreciated securities is a potentially huge benefit that direct indexing has over ETFs (even better given that it doesn't ratchet down your basis like TLH or create wash sale issues).

leadhacks• 11 years ago

I ran some numbers and Blake's idea could bring the cost down by 40-60%

https://medium.com/@bluf/the-robotraders-versus-blake-ross-a...

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