
The Vanguard Cyborg Takeover - carlosgg
http://www.bloomberg.com/news/articles/2016-03-24/the-vanguard-cyborg-takeover
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chollida1
I think the article makes a good point. What is the value proposition of
companies like Betterment and Wealthfront when a person can go to Vanguard or
Charles Swab?

I'd be pretty worried if I was one of the new "robo advisor" startups, quoted
only because I can't think of a better name for them.

1) By definition you're a passive investor so you don't provide any service
that can't be replicated by the big players in a very quick manner.

2) you don't have any where near the economies of scale as the big players so
when this becomes a fight to the bottom to lower management fees you'll be the
first to lose.

3) Your going to put your clients money into funds run by the big players so
even if you pull money from the big players you are helping your biggest
competitors by investing back into them.

I can't see anyway this isn't head Wealthfront loses tails vanguard wins.

Couple that with the possibility of VC money starting to dry up and you've got
to ask, if Wealthfront and Betterment receive no more VC money from today
onward are they ready to fight head on with companies 2-3 orders of magnitude
larger than themselves who can afford to keep lowering fees for years to come.

Can someone here make the case why anyone would chose to invest with these new
companies rather that Vanguard or Charles Schwab?

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cushychicken
Betterment's tax harvesting software got me about $3500 in realized losses
which I was able to claim for my FY2015 taxes. That ended up getting me about
$1500 in deductions on my tax return, while holding nominally the same
securities (albeit from a different financial service supplier). Well worth
the ~$250 in fees I paid them this year.

I'll probably switch over to a strictly Vanguard portfolio when that
harvesting isn't saving me money any longer, but until then, I think I'll
stick with Betterment.

~~~
chollida1
I think that tax loss harvesting illustrates my point. I don't know if
Vanguard's service currently supports tax loss harvesting but its a feature
that takes about 1 man week of work to implement.

Tax loss harvesting isn't a feature that you can differentiate yourself with.

I've implemented it several times over for the hedge funds I've worked at. Its
a well understood tool that's been in use by funds for as far back as I
remember.

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gohrt
Why doesn't Vanguard do tax-loss harvesting yet?

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cushychicken
I'd imagine it would be illegal for Vanguard to implement in the way that
Betterment does. Betterment buys exchange traded securities to allow their
customers to participate in the underlying mutual fund. They can basically
jump from a Vanguard ETF to a Schwab or iShares ETF of a similar market. I'm
reasonably certain it would be illegal for Vanguard to purchase a competing
fund's ETF as it would be directly affecting the business of a competitor.

In fact, I'm not even sure how Vanguard could do this in any manner that would
be customer facing.

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ac29
> I'm reasonably certain it would be illegal for Vanguard to purchase a
> competing fund's ETF as it would be directly affecting the business of a
> competitor.

I can buy whatever companies ETF I want with my Vanguard account. Why would it
be illegal?

~~~
cushychicken
I'm referring to their mutual fund, not purchases you make on their trading
platform.

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ASinclair
I look at Vanguard's Target Retirement Date funds as the predecessors to these
automated/partially-automated advising services. I'm not convinced the robo-
advising can do any better than one of these funds since the fees for the
Target Retirement funds are half of Vanguard's advising fee.

The vast majority of retirement investors don't need unique advice. They
really just need to be saved from themselves. If putting all the decision
making in the hands of some software achieves that then I suppose they do
provide some value.

~~~
jcomis
Have to agree. I'm guessing most of the "roboadvice" will essential be to use
target date funds, or a mix that replicates them closely?

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ffumarola
I think that there are 2 things that will likely continue to help robo
advisors:

1) Vanguard or Charles Schwab products that do automated investing likely take
an opinionated approach towards only owning their own assets. This means that
the amount of the investable market I can actually buy into at any point is
much smaller, and possibly less optimal. I imagine this also has an impact on
how effective the robo advisor can tax loss harvest.

2) Betterment has shown their cards (in my opinion) once they started allowing
users to link external accounts. Initially it has been exposed as a way to
track networth and investment progress towards your goals. However, I'm not
convinced it will stop there. The obvious next step is that Betterment will
manage your asset allocation, monitor wash sales, etc across all of your
investment accounts, regardless of whether they actually have the money
invested through them directly. In this way, they are an ambivalent service
that you pay for.

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saryant
#1 doesn't make sense because Vanguard and Schwab products own the entire
market, unless you're talking asset classes beyond typical equities and bonds.

~~~
ffumarola
There are many funds that own the entire market (or subsets of the market like
small cap, mid cap, etc). And if I want to TLH, I need a similar asset to buy
when I sell the asset that is losing money. Unless Vanguard has a lot of funds
that serve similar purposes but are slightly different, you won't be able to
do that using only Vanguard funds AFAIK.

~~~
chollida1
Well whether or not Vanguard has a similar ETF is irrelevant as the IRS is
very clear that if you sell an asset to do tax loss harvesting you can't buy
it or any similar product back over the next 30 days if you want to collect
the tax loss.

I mean you can buy a similar product to the one you sold within the 30 days,
you just don't qualify for the tax loss in that instance:)

The below link discusses this pretty well and I've got way more experience wit
this than I really care for.

[http://www.investopedia.com/articles/taxes/08/tax-loss-
harve...](http://www.investopedia.com/articles/taxes/08/tax-loss-
harvesting.asp)

~~~
ffumarola
Not necessarily. The rules don't say "similar" they say "substantially
identical."

It isn't clear how they treat two index funds from different issuers (e.g.,
Vanguard and Schwab) that track the same index. While the IRS has not issued
any guidance to suggest that such two funds are “substantially identical,” a
more conservative approach when dealing with an index fund portfolio would be
to repurchase a fund whose performance correlates closely with that of the
harvested fund, but tracks a different index.

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tryitnow
Betterment and Wealthfront are just showing Vanguard and Schwab how to do
business in the future. Their UI/UX is easily copied.

The startups are betting on that the big guys will continue to be incompetent
in UI/UX.

Maybe that bet will pay off, but it's not a bet I would make.

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asymmetric
For more info on index funds, and Vanguard in particular, there's a great
podcast by planet money (with transcript) at
[http://www.npr.org/2016/03/10/469897691/armed-with-an-
index-...](http://www.npr.org/2016/03/10/469897691/armed-with-an-index-fund-
warren-buffett-is-on-track-to-win-hedge-fund-bet)

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louprado
I recognize my question has little to do with the OP. But I can't get past
this investment dilemma. Let's say I have $100k in two different accounts.
Assume both accounts only hold one stock, an index tracker, that grows
annually at 6%.

Example 1) A retail E-Trade account

Example 2) A Roth-IRA account.

With the first account, I paid commission upfront when I purchased and again
when I sold.

In scenario 2, I probably paid commissions AND I pay 1% fees on assets
annually.

30 years later account 1 will have ~$575K and account 2 will have ~$432K. So
even if you consider tax advantages you are better off with the retail E-Trade
account.

If I don't need an advisor AND I do want the tax advantages of a ROTH IRA,
what do I do ? Right now I am paying 1% annual fees to a guy who I met once 10
years ago who was just lucky enough to fax in my paperwork. Thanks in advance.

~~~
mcguire
One of us is confused. A Roth is a tax-advantaged container; you should be
able to get such an account at E-trade. Most places do have a fee for
retirement accounts, but it is often waived for small investors and for
Vanguard I think it is a relatively nominal fixed annual fee.

It's possible to have a 1% annual fee on an asset in either account, such as a
mutual fund. That's ridiculously high, though. The point of index funds is to
reduce those.

If I am interpreting you right, your two examples boil down to:

1\. An E-trade IRA, containing something like SPDRs: $10 commission to buy and
sell, plus 0.18% (last time I looked) annual fee to the folks who issue the
SPDRs.

2\. A Vanguard IRA containing a Vanguard index fund: no commission to buy or
sell, possible fixed annual custodial fee, and 0.2% annual fee from the index
fund.

Or, you can have either in a non-retirement account, in which case you pay
income tax on dividends and capital gains. Or you can put a Vanguard index
fund in an E-trade account; I'm not sure about commissions then.

In any case,

TL;DR: if someone tries to sell you something with a 1% annual fee, scream
loudly in their ears and use the distraction to run away.

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ansible
I saw the mention of 0.30% annual fee for the robo-advisor... Isn't that still
quite high? I know that Vanguard is happy with making that money, I just don't
think their costs are anywhere near that.

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mcguire
That's roughly the fees for most index funds, IIRC.

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brightsize
The last time I talked to my rep at VG, he told me the .3% robo-fee was in
addition to any of the usual fund fees. The fee seems high to me too, I don't
see the logic (apart from VG profits) for the fee being tied to AUM given that
the "work" the robot has to do is essentially the same for a $1K or $10M
portfolio. If you have a sizable portfolio with VG you'll get a meatware
advisor as part of the deal but it's hard for me to believe this person will
be doing any substantial amount of custom and ongoing portfolio tweaking --
actual management -- for the money. I'd expect she'd be configuring and
occasionally monitoring her robot alter-ego, something they could probably get
an intern to do. That said, if you hate to think about money management and
tend to neglect your portfolio then it might be worth it to pay the fee and,
maybe, just maybe, avoid some potentially very expensive mistakes. I'm
tempted, but have yet to take the VG robo-bait mainly because of the magnitude
of the fee.

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mcguire
I have a Vanguard account with several of the index funds. Since the point is
to put money in and forget about it, I don't figure I need an advisor.

