A dog, a homework and a reader question about Robo Advisors

There is a first time for everything. A first time in about two years! I didn’t get today’s designated blog post up and running in time! The dog ate my homework! Well not literally but only figuratively. Things are busy at work and last weekend we had to move (again). After a month and half of couch-surfing with friends and relatives and some vacation time in between, we finally moved into a slightly more permanent place, an AirBnB in Oakland. Hopefully, our last place in the Bay Area before I finish my job in mid-June. Right as we settled in at the new place and I wanted to get working on my blog post my laptop gave up its ghost! The new one I wanted was not available at Costco and needs to be shipped. ETA TBA! What to do now? Well, I could just skip this week’s post, right? I figure once we go on our long trip to Europe, Asia, Australia and New Zealand in the second half of 2018 I will likely reduce the blog post frequency to 1-2 per month anyway. Vacations are a lot of work! But as long as we’re here I’ll try to keep up with the weekly posts on Wednesdays.

So, what about today’s post? Simply repurpose something I had already done! I receive a lot of emails with personal finance questions from readers. I can’t answer them all because I don’t have an army of Macedonian content writers working for me! But a few weeks ago I got an interesting question via email that I couldn’t help but answer! It’s about Robo advisors! And why two Robo advisors are worse than one! That’s something I have to share on the blog as well! Let’s take a look…

So, here’s Steve’s email (not his actual name). I shortened and edited the message to remove identifying information:

Hi Big Ern,

I read your articles about Robo advisors. Unfortunately, too late; I have over $130,000 at Betterment and about $60,000 at Wealthfront, both in taxable accounts. Both charge a 0.25% annual fee, quite a bit higher than the expense ratio of most Vanguard Funds. Should I get out? What are the tax consequences? I am also afraid that if I were to close the accounts it may take a few days to get the money out. Who knows, by the time I get the money into Vanguard or Fidelity the stock market rallies and miss the party. Should I just leave everything as is? Is it worth the hassle?


And here is my answer, slightly more detailed than my initial email to Steve:

Hi Steve, I got good news and bad news for you:

The good news first: You should not worry about the tax consequences of a portfolio move. Simply request an in-kind transfer from your Robo advisor(s) to your preferred broker. In other words, instead of liquidating the ETFs and transferring the money, simply transfer the positions without selling. It’s also called ACATS (Automated Customer Account Transfer Service) and both Betterment and Wealthfront should participate in this service. A lot of the ETFs employed the Robo advisors are Vanguard ETFs and you can trade them commission-free at their home base, so a transfer to Vanguard wouldn’t be a bad idea. Some of the iShares ETFs trade commission-free at Fidelity, so that’s not a bad choice for the new domicile of your portfolio either.

The account transfer kills two birds with one stone: 1) you don’t realize any taxable gains, 2) you never exit the market and never miss the next rally. But you might also lose money if the market goes down, of course. But please do make sure that you retrieve all the tax lot and cost basis information from the Robos before closing the accounts there! Or ideally, that information should be forwarded to your new broker!

Now the bad news. While diversification is great in most instances, it’s a really bad idea when it comes to spreading your money over multiple Robo-Advisors! You have to move at least account. Do it today, not tomorrow! The reason is that both companies employ tax loss harvesting and they both do a really great job of avoiding wash sales that would disallow the tax write-offs. But only within the confines of that one broker. Your Betterment robot doesn’t talk to its Wealthfront counterpart and might inadvertently create tax losses that the IRS could eventually disallow. For example, take a look at the considerable overlap in index ETFs employed by the two firms, especially in the volatile equity buckets where most of the tax loss harvesting action happens. Betterment rotates between three funds and Wealthfront uses two ETFs in the equity categories. This could create the unpleasant scenario where a tax loss sale at one broker is invalidated by an offsetting buy transaction of the same ETF at the other broker within a 30-day window.

Robo ETF List
ETF list of two popular Robo Advisors. The ETF overlap could create wash sales and invalidate the tax loss harvesting alpha!

One other minor detail. In your email, it sounded like you were comparing the Robo management fee to the Vanguard fund expense ratios. Keep in mind that both Wealthfront and Betterment now charge 0.25% in fees but that’s in addition to the expense ratios of the underlying ETFs. Those 25 basis points can add up. If we assume that your portfolio returns about 7% (after expense ratio but before Robo Advisor fees)

  • After 10 years and 7% return: 190,000×1.07^10=$373,759
  • After 10 years and 6.75% return: $190,000×1.0675^10=$365,117

A difference of over $8,000!

So, if you want my honest opinion, pull the plug on both (!) Robo Advisors, replicate the tax loss harvesting yourself (see my how-to guide here), save the 0.25% fees every year and avoid the potential tax hassles with the IRS!

Good luck!

ERN (Karsten)

We hope you enjoyed today’s post! Please leave your comments below!

19 thoughts on “A dog, a homework and a reader question about Robo Advisors

  1. Simple and sweet. Glad you got to writing and congrats on the semi-permanent spot in Oakland. I have always liked it there when visiting….

    As for me, I have steered clear of roboadvisors thus far and your point of 1 being better than 2 is well taken.

      1. thanks for your insight. would appreciate suggestions for source with reasonable robo-like allocations ” out there “. keep up the good work.

        1. I would just take a target date fund and replicate that with ETFs/MutFunds. I’m also considering M1 Finance as a cheap way of trading ETFs stocks. Will open an account and report back here on the blog! 🙂

  2. I helped a friend move money recently too. He was worried about the taxes from the move and had decided not to move the money. I informed him of the in-kind transfer. He was excited about it and made the transfer. It’s nice when your able to help a friend out.

  3. You know I’ve always wondered how any of the robo advisor tax loss harvesting works with 401k accounts seperate. There seems to be a million ways to create a wash sale when someone is looking at only one part of your portfolio.

    1. If you keep all accounts with the Robo then they will make sure there are no wash sales. But if you keep only the taxable with Betterment and the IRAs with Vanguard you run the risk of wash sales. Ouch!

  4. Thats very interesting. Ive never heard of ACATS. I recently had to move 401k money from one brokerage to another because my employer wanted to change providers. My money was in a pcra and had to be liquidated for the old brokerage to pull it out and transfer it to my new brokerage. Not sure if i could of used ACATS in this instance. My money sat for exactly one month in cash. Very frustrating!

    1. 401k money might be different. It’s common to cash out and send a check. As long as you deposit it again within a certain time window there is no taxable event. But for taxable accounts this ACATS system was invented to make it easier to move positions. 🙂

  5. you are very informative about investing information do you recommended a outside consultant, or if you should move your money from a managed ira to a group like betterment. this would be a big decision for myself or anyone without money management skills.

    1. I wouldn’t use a consultant. If you need help with moving the assets from Betterment to Vanguard, I’m pretty sure the Vanguard customer service can help you. Asset allocation: refer to Bogleheads or Jim Collins. No need to hire an expensive consultant! Good luck!

  6. I recently had to move 401k money from one brokerage to another because my employer wanted to change providers. My money was in a pcra and had to be liquidated for the old brokerage to pull it out and transfer it to my new brokerage. Not sure if i could of used ACATS in this instance.

    1. 401k moves are likely different. ACATS is for taxable accounts where you have to keep track of tax lots. I also heard that the 401k transfers sometimes require liquidation and you get a check (!) that’s supposed to be deposited at the new provider. Now, that’s old-school!

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