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Wealthfront Attacks Schwab's Robo Technology

Wealthfront says the results of its test prove that its tax-loss harvesting capabilities are superior to that of Schwab Intelligent Portfolios.

While other technology firms are dedicating resources to providing technology for advisors, or at least playing nice with the industry, Wealthfront remains the rebel, and it's on the offensive again.

This time, the Redwood City, Calif.-based robo advisor is taking aim at the technology underpinning Schwab’s automated investing service, Intelligent Portfolios. Specifically, Wealthfront is attacking Intelligent Portfolio’s ability to harvest tax losses. According to a recent test ran by Wealthfront, Schwab’s technology simply cannot match Wealthfront’s.

“Not all software is created equal,” is how Andy Rachleff, Wealthfront’s co-founder and chairman, bluntly put it on the company’s blog. “We believe our software is simply better than our competitors.’”

Rachleff said he invested $100,000 in accounts on Wealthfront and Schawb Intelligent Portfolios with similar risk tolerances on April 1 (a company spokesperson offered brokerage statements to verify the test). After six months, Wealthfront had harvested $2,142 worth of losses, while Schwab hadn’t harvested any, even during the huge market downfalls following Brexit.

Schwab did generate a higher pre-tax net of fee return, but Rachleff said the company doesn’t post after-tax net of fee returns because it’s dependent on each user’s income, state of residence and amount of realized short and long-term gains.

“Wealthfront’s after tax, net of fee return should be significantly better than Schwab’s due to Wealthfront’s superior tax-loss harvesting (even if just applied against ordinary income), its use of more tax efficient asset classes (namely tax exempt bonds rather than corporate bonds and the exclusion of real estate) and more tax efficient rebalancing,” Rachleff said.

On the surface, the results aren’t good for Schwab – which has claimed in the past that its technology is “best-in-class” and more sophisticated than the startup companies' because of its vast industry experience – but the answer is, of course, more complicated than that. Schwab could offset the difference in other areas, or it may have been blocked by its designation as a custodian.

“That’s hard to answer because Schwab never specifically details how their tax-loss harvesting service works in their whitepaper on the subject,” Rachleff adds.

Schwab's managing director of corporation communications, Michael Cianfrocca, said the problem is that Wealthfront's study used a small time period and focused on a single feature in order to confuse investors. Cianfrocca added that from January 1 through September, 90 percent of Intelligent Portfolio accounts had losses harvested.

"More than half of Schwab Intelligent Portfolios clients are long-term investors focused on saving for retirement, so cherry-picking one six month window of time isn’t particularly useful," Cianfrocca said. 

Martin Cowley, the executive vice president at LifeYield, a tech company that delivers tax optimization strategies to enterprise firms, said one of the problems with these companies is getting consumer awareness of the capabilities, knowing that they aren’t going to dive into the white paper. But he added that tax-loss harvesting is a complicated process, and without knowing all of the factors, it's hard to completely condemn Intelligent Portfolios.

Cowley added that tax-lost harvesting is just one piece of the puzzle. LifeYield focuses more on asset location strategies to mitigate the need for tax-loss harvesting. 

"The lion’s share of the benefit comes from asset location,” Cowley said, “with the ongoing incremental benefit that you get from tax-loss harvesting.”

Cianfrocca agreed that asset allocation is an important factor to consider, as well as diversification and costs. He added that the tax-loss harvesting strategy used in Intelligent Portfolios is about more than quantity. 

"First, our tax loss harvesting algorithm is designed to efficiently capture meaningful losses that clients can use to offset realized capital gains when filing taxes at year-end. This requires a balance between capturing losses and constantly churning the portfolio, which can be costly in terms of bid-ask spreads over time," Cianfrocca said. "Wealthfront also charges an advisory fee, and these costs can add up and reduce potential gains for clients." 

It should be noted that Wealthfront has previously criticized Schwab's approach to bid-ask spreads and advisory fees. 

Cianfrocca said Schwab uses more asset classes than Wealthfront to create a more diversified approach that moderates volatility and decreases the need for tax-loss harvesting. He pointed out that the methodology can in fact be found in a white paper on Schwab's website. 

LifeYield's EVP of strategic development, Jack Sharry, said a company can't really expect everyday investors to read though and understand an entire white paper. Part of the problem, Sharry says, is a lack of transparency around the methodology of robo advisors. 

“I can’t say I’m surprised. What [Wealthfront is] revealing is that the claims don’t always match what you get,” Sharry said. While no firm is expected to give away their secret sauce, Sharry expects to see direct comparisons like Wealthfront's to become more common. “Frankly, it’s across the board on fees and costs and capabilities.”

Betterment recently added asset location strategies to its robo advisor, but Wealthfront interestingly omitted Betterment (or any other of the ever-increasing number of robos) from its comparison in favor of directly attacking Schwab.

Kate Wauck, Wealthfront’s senior director of communications, said the focus on Schwab was intentional as the startup wanted to dispute the incumbent attitude that technology is a commodity that can be easily replicated. Rachleff added that despite a firm like Schwab’s vast budgets, startup companies can still develop better-quality technology.

“They’re satisfied if their software is 'good enough' to allow them to check the box that they offer a particular feature,” Rachleff wrote on the Wealthfront blog. “But as we’ve shown with tax-loss harvesting, treating software as an afterthought is very bad for the financial health of your clients.”

This isn’t the first time Wealthfront has directly attacked its competition. CEO Adam Nash wrote an incendiary blog post following the initial release of Intelligent Portfolios, and the company also attacked Betterment’s fee structure. 

It seems the company has no plans to change its reputation as aggressive insurgents any time soon. 

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