Automated portfolio managers like Wealthfront will set you up with a diversified mix of index funds and manage it for you for a small fee. I’m an investing geek, so I always lean towards keeping the small fee and manage things myself. But an important variable to this equation is tax-loss harvesting. Tax-loss harvesting tries to improve your returns by minimizing your tax bill, but it is also tedious work that is ideally suited to handing over to a computer.
If the management fee they charge is say 0.25%, as long as the benefit from tax-loss harvesting is at least 0.25%, then you’re already ahead of the game. The problem is that predicting the actual benefit of TLH is difficult. Wealthfront claims that based on past data, their tax-loss harvesting implementation could add 1.55% annually to your after-tax returns. Here is their whitepaper showing the assumptions they used to get that number.
Up until recently, you also needed $100k in your portfolio. But Wealthfront has recently announced that as of April 2015, their daily tax-loss harvesting service will be available to all taxable accounts with no minimum balance requirement:
We’re proud to announce that our daily tax-loss harvesting service will be made available to all Wealthfront taxable accounts, starting in April. At Wealthfront, we believe everyone deserves sophisticated financial advice, and this brings us one step closer to that goal.
I would not have predicted this a few years ago: automated tax-loss harvesting for any account size and at such a low cost. A customer with just $500 would be getting TLH and portfolio management for free. (As of February 2017, the minimum needed to open a Wealthfront account is only $500.)
I would say that I am confident the benefit of TLH over the long-run will be greater than zero. However, I would not count on 1%. But even if we split the difference and assume it is 0.5%, then using such a service still has to be considered as it is greater that their management fee of 0.25%.
Current sign-up promotions. The standard fee schedule for Wealthfront is that your first $10,000 is managed for free. Assets above that are charged a flat 0.25% fee annually. With a special invite link, you can get your first $15,000 managed for free, forever (an additional $5k). You can then invite your own friends (they get another $5k managed for free, and you get another $5k managed for free.)
(Note: Competitor Betterment also has a similar tax-loss harvesting service. The post structure is similar, but I wanted to make sure any readers that may see only one post get the full context.)
The Best Credit Card Bonus Offers – November 2024
Big List of Free Stocks from Brokerage Apps
Best Interest Rates on Cash - November 2024
Free Credit Scores x 3 + Free Credit Monitoring
Best No Fee 0% APR Balance Transfer Offers
Little-Known Cellular Data Plans That Can Save Big Money
How To Haggle Your Cable or Direct TV Bill
Big List of Free Consumer Data Reports (Credit, Rent, Work)
The other consideration is that you might beat the management fee with TLH but you need to do better than that since you’re just lowering your cost basis and will owe greater taxes later.
That being said, I might throw 10k-15k in for fun.
-Justin
I get that there are benefits to tax loss harvesting. Depending on your tax bracket I can even see it being as high as 1%.
What I don’t get is how they intend to do the harvesting and avoid wash sales. Are they saying that they will sell your losing position in VTI (Vanguard Total Market ETF) to immediately buy SCHB (Schwab Broad US Market ETF)? Would that satisfy the IRS guidelines for wash sales?
My thinking is, even IF the above mentioned ETFs are not considered “substantially identical” TODAY by the IRS, once this becomes mainstream, how much longer before the IRS puts a stop to it? It would probably be worth the IRS’s time to put a stop to it just to avoid the extra processing at tax time.
I would say every implementation that I have seen uses primary and secondary ETFs like you outline to avoid wash sale rules.
I agree with Troy. I thought of that too. It is hard to see a benefit in this. I am going to stick with accumulating VTI and selling covered calls.
Is this for certain customers only? My account still shows the 100k min for this to be turned on…how did you get access to it?
The link is to the Wealthfront official blog and website and the announcement says for everyone, but it does also say “in April 2015” so perhaps it won’t go live until the end of April.
Jonathan
I have a question. I do own Vanguard Total stock market Index Fund and automatically invest a little in it every month. If I do select Wealthfront TLH if and if they sell VTI ETF but on my own personal AC, the automatic monthly investment into index fund is in less then 30 days. Will this cause any issues?
Sunny,
The scenario that you seem to be describing would cause the loss to be disallowed under the wash sale rule.
Jonathan,
which one do you have or recommend, wealthfront or bettwerment?