Robo advisors ~ portfolio issues

[Barefootwoman]

Conceptually, I get the idea of how these services work - they run the analysis, make recommendations and then theoretically, you move your funds under their management - where they invest per the recommended AA, but here's the question I keep coming back to:

Many of us hold a significant part of our portfolio in an employer-tied 401K, we can't move those funds out of the plan, so it would seem to me that these portfolio managers (Betterment, Wealthfront, etc.) can't really manage the overall portfolio of many people.

What am I missing?

 

[Matt]

Conceptually, I get the idea of how these services work - they run the analysis, make recommendations and then theoretically, you move your funds under their management - where they invest per the recommended AA, but here's the question I keep coming back to:

Many of us hold a significant part of our portfolio in an employer-tied 401K, we can't move those funds out of the plan, so it would seem to me that these portfolio managers (Betterment, Wealthfront, etc.) can't really manage the overall portfolio of many people.

What am I missing?

Nailed it.

 

[Barefootwoman]

I'm a low cost, broad spectrum index fund investor (in other words, boring set it and mostly forget it type) - so the only advantage I could see to some of these is the tax loss harvesting feature for the taxable portion of a portfolio. That's another thing I get conceptually and want to take more advantage of, but how to do that on a consistent basis unless you watch daily movements and (for me, drive myself a little nutty trying to time these right?) Do you know of a source for guidance on the practical applications of tax loss harvesting?

 

[Matt]

I'm a low cost, broad spectrum index fund investor (in other words, boring set it and mostly forget it type) - so the only advantage I could see to some of these is the tax loss harvesting feature for the taxable portion of a portfolio. That's another thing I get conceptually and want to take more advantage of, but how to do that on a consistent basis unless you watch daily movements and (for me, drive myself a little nutty trying to time these right?) Do you know of a source for guidance on the practical applications of tax loss harvesting?

I've written about it several times, but to be frank, you're likely better off paying for it than doing it yourself.

The key points to watch for:

• Wash Sales
• Use of Harvest
• Tax Rate

If you are washing to just offset cap gains, its a bit limited IMO, there are advantages still. I prefer to use the $3K OI deduction annually instead.

All you have to do is sell your loser, and not buy it again (in any account, including retirement) within a 61 day window (day of trade and 30 days before or after). The trick to it is making sure that when doing so, you don't push your asset allocation out of whack.

 

[Barefootwoman]

Thank you, I will also do a forum search, should have done that first.

 

[cocobird]

Regarding 401k accounts, today's employees tend to change jobs multiple times over their lives, so the 401k is no longer locked into a single employer. These can be rolled into an IRA and consolidated into an automated system. One advantage is this would alleviate the issue of multiplying accounts as one changes jobs since each employer tends to have a different set of funds available for investment. While some job changes are voluntary, many others are not.

These automated systems are becoming more popular. Witness the introduction of a mainstream brokerage (Charles Schwab), who has developed a similar vehicle as Wealthfront or Betterment.

 

[cocobird]

I'm a low cost, broad spectrum index fund investor (in other words, boring set it and mostly forget it type) - so the only advantage I could see to some of these is the tax loss harvesting feature for the taxable portion of a portfolio. That's another thing I get conceptually and want to take more advantage of, but how to do that on a consistent basis unless you watch daily movements and (for me, drive myself a little nutty trying to time these right?) Do you know of a source for guidance on the practical applications of tax loss harvesting?

You are not the type of person who needs the automated system as you are sufficiently sophisticated to take advantage of tax losses. I know many intelligent people who have no concept of financial vehicles or tax planning. Thus the use of these automated systems provides a degree of control and hand holding that is important to them.

 

[Barefootwoman]

Yes, I realize they are gaining momentum, that's why I've been looking at them to see if there is any fit for me - coming up short so far. Theoretically, each time a person moves on from one job, their balance can be rolled over to the next one, so that doesn't really give them a true advantage. Further, even if a person ends a job and rolls the balance to the robo-advisor, presumably they will still have a new 401k or 401k-like account and will accumulate funds in that account - so in essence, this means they would never have a true total portfolio snapshot and proper asset allocation. My thoughts here were actually prompted by Freequent Flyer's post about the merits (or lack thereof) of holding emergency funds separate from the rest of one's portfolio. Is this not a similar situation?

yes, many people fear the topic of finance and I question how a robo-advisor offers an advantage beyond a life strategy or target fund portfolio. The only advantage I could see so far was the automated tax loss harvesting - but as I mentioned, still learning about all these emerging managed ports.

 

[cocobird]

There is a difference between target funds and robo-funds, as I understand it, but I am no expert. Target funds give you a fixed set of funds based strictly on your planned retirement date. There is no investor discretion except choosing the target date of the fund.. The robo-advised funds provide some degree of flexibility and choice. I do not know what is a life strategy fund. Perhaps you can enlighten me.

 

[Matt]

There is a difference between target funds and robo-funds, as I understand it, but I am no expert. Target funds give you a fixed set of funds based strictly on your planned retirement date. There is no investor discretion except choosing the target date of the fund.. The robo-advised funds provide some degree of flexibility and choice. I do not know what is a life strategy fund. Perhaps you can enlighten me.

Yeah, kinda.. but really its the same idea, you'll find that most Robo funds will match one year or another of a target date fund. The big difference is that they take a granular approach, which means that the consumer can harvest losses, whereas the target date the losses are enclosed within the fund, and the consumer doesn't get to use them.

Target Date funds follow a glide path - this means that as you near the year of the fund (which theoretically should be retirement year) they become increasingly conservative, and rather than just rebalance, they rebalance plus shift from equities to fixed income.

Life Strategy funds just rebalance - there is no 'end' to which they would glide path, so your fund bought today would have the same risk profile in 2055.

These automated systems are becoming more popular. Witness the introduction of a mainstream brokerage (Charles Schwab), who has developed a similar vehicle as Wealthfront or Betterment.

Schwab has the worst robo plan of these 3 - steer clear of them.

 

[Matt]

how a robo-advisor offers an advantage beyond a life strategy or target fund portfolio. The only advantage I could see so far was the automated tax loss harvesting

That is basically it. But it is not to be sneezed at. Depending on account size, and market movement, you could benefit well from TLH. I've been carrying a 5 figure sum for years now which is saving a lot of taxes.

 

[Barefootwoman]

That's why the TLH angle appears attractive to me.

to cocobird: about LifeStrategy funds : they are lifecycle funds offered by Vanguard.

 

[Barefootwoman]

I've read reports calling Vanguard's Personal Advisory Service a robo "hybrid".
Still trying to learn more about it, reading around the interwebs lol

 

[cocobird]

Yeah
Schwab has the worst robo plan of these 3 - steer clear of them.

I'm curious as to why it is the worst.

 

[Matt]

I'm curious as to why it is the worst.

They force you to hold a cash position at all times, which means you earn nothing on that while they do..

 

[Free-quent Flyer]

It would be kind of nice if they passed along the profit they earn on your cash position. Banks are pretty profitable!

 

[Barefootwoman]

Recently, I learned that both Wealthfront and Betterment added tracking of external accounts. I expect they will proceed to use that information to implement automated wash sale avoidance. This could create interesting feedback loops if more than one account is trying to implement TLH with the same sets of securities.

Any thoughts? Thanks and Happy New Year.

 

[Matt]

Recently, I learned that both Wealthfront and Betterment added tracking of external accounts. I expect they will proceed to use that information to implement automated wash sale avoidance. This could create interesting feedback loops if more than one account is trying to implement TLH with the same sets of securities.

Any thoughts? Thanks and Happy New Year.

Doubtful. Wealthfront and Betterment have such deep overlap that allowing the positions to exist in tandem would nullify almost all TLH. Much more likely that they want to appear more comprehensive in terms of your assets, and then use that data to target transfer opportunities.