
SEC Charges Two Robo-Advisers with False Disclosures (2018) - obi1kenobi
https://www.sec.gov/news/press-release/2018-300?inf_contact_key=d21407a633db7c9f342f566128528732680f8914173f9191b1c0223e68310bb1
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dangero
This fine of $250,000 to Wealthfront means that their violations were 100%
worth it. Their fund is 11 billion+ and they got an advantage over competitors
by posting testimonials. SEC rules are very clear on this point and at the
time other robo compliance officers were lamenting, “I don’t understand how
they are able to do that legally.”

Well, guess what? They weren’t, but they took it as a calculated risk and the
SEC announced they made the right choice when this fine was announced years
later.

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randomacct3847
I think you’re overestimating the revenue an asset manager makes with $11b
assets under management (AUM).

They aren’t a hedge fund (no profit sharing) and take .25% in fees a year.
$11b *.25% is only $27.5m. Hardly a unicorn scale business IMO unless they are
pitching investors they’ll get to Blackrock scale (trillion in AUM).
Personally I don’t see it. Switching cost is big for existing clients but new
clients have a bunch of Robo options now including free ones offered by
Schwab, big banks, etc.

For some perspective, after college I worked for an investment fund with
around $3b AUM with around 7-8 full time staff with a similar fee
structure...it was basically a nice lifestyle company for the two founders.

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dangero
[https://www.bloomberg.com/news/articles/2018-03-23/wealthfro...](https://www.bloomberg.com/news/articles/2018-03-23/wealthfront-
valuation-said-to-drop-about-a-third-in-new-funding)

This article says 500 Million valuation last year, so halfway to a unicorn.

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randomacct3847
I’m saying I don’t believe whatever private valuation they have. Wealth
management is a lifestyle biz at best unless you get to Blackrock scale. I
believe that is what they are pitching investors to get whatever valuation
they have now but I am extremely bearish on these companies. Robo investing
has been largely commoditized and AUM will inevitably tank with the next
recession.

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danielecook
What is a lifestyle business?

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derp_dee_derp
"lifestyle business" is a phrase made up by silicon valley wannabes to
describe businesses that "only" generate a large enough profit for the owners
to be millionaires instead of billionaires.

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Animats
Nothing to do with them being automated advisers. Just ordinary marketing
deception.

 _" Wealthfront improperly re-tweeted prohibited client testimonials, paid
bloggers for client referrals without the required disclosure and
documentation, and failed to maintain a compliance program reasonably designed
to prevent violations of the securities laws."_

 _" The performance comparisons were misleading because Hedgeable included
less than 4 percent of its client accounts, which had higher-than-average
returns."_

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strstr
“Wealthfront disclosed to clients employing its tax-loss harvesting strategy
that it would monitor all client accounts for any transactions that might
trigger a wash sale – which can diminish the benefits of the harvesting
strategy – but failed to do so. Over a period of more than three years during
which it made this disclosure, wash sales occurred in at least 31 percent of
accounts enrolled in Wealthfront’s tax loss harvesting strategy.”

This seems like an actual error related to being a roboadviser.

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pmart123
Not really. This has more to do with the fact that whatever you state you do
as part of your service, you should comply with actually doing. If Wealthfront
said “from time to time...we monitor...” it may have been ok. Wealthfront’s
testimonials were second to none, and largely against what would typically be
allowed so it seems like Wealthfront escaped pretty lightly versus alternative
punishments the SEC has used in other cases.

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loeg
Well, sure, that's broadly true. But the specifics are relevant and the actual
false statement made is related to the business of being a robo-advisor (TLH &
monitoring for wash sales).

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anonu
The robo advisor business isn't a great one. ETFs will provide the majority of
the benefits you can get from robos. And you don't need to move your money

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mabbo
I agree, yet still I use one. It's the convenience factor. For the small fees
they pay, they implement the ETF strategy I would otherwise use. When I'm
adding money, there's zero work or thinking.

Now, if I had $250k or more I might change my mind- there's a certain point
where yes, it's worth my time to do this myself. But I'm not there yet.

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toast0
If you setup a spreadsheet with your asset allocation, and blanks for your
relevant accounts (30-60 minutes), it should take about 5-10 minutes to plug
in current numbers when it's time to add money, or every once in a while if
you want to rebalance. If you're just starting accumulation, rebalancing with
contributions might make the most sense.

It doesn't make sense to me to pay AUM % for sometime that takes an hour to
setup, and minutes a quarter. If they wanted to charge $10 per deposit, maybe.
(I also don't see much value in the automated tax loss harvesting, especially
if they're not doing a great job avoiding wash sales, wtf?)

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peterbraden
Do you have a spreadsheet template? Finding the efficient frontier and the
relevant numbers seems hard?

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toast0
It sounds like you're having trouble with asset allocation, more than figuring
out how to implement your allocation. Nevertheless, here's a description of my
spreadsheet.

I'm using a variant of the three fund portfolio. So I've crafted a target
percentage for stocks and bonds, and the target percentages for each of the
funds I'm using for that. Then you add things like your traditional 401k
balance (which I've put in bonds), your roth 401k balance (in stocks for me),
and maybe you've got a couple of those, it's easier to have one line for each,
so you can run through the online accounts and put it in.

Anyway, so on the left side of the sheet, I've got the list of all those
funds, the target %, the current balance, and then the target balance. On the
right side, I have my new contribution -- most of my contributions are coming
from equity based compensation, so I have a bunch of stuff over there to help
me set aside the right amount for taxes (I could have a side rant on that).

Target balance is computed for taxable stocks and bonds overall by doing
(total balance + contribution) times allocation% - amount of that in tax
advantaged.

Then, for each fund in taxable, I take the overall balance for stocks or bonds
and use the ratio of allocations within that class to compute the target for
that fund (if I have 30% for bonds, and 21% is for fund A, and 9% for fund B;
whatever I got for taxable bonds times 21 divided by 30 is the target for A.

Things to note: a) depending on the size of your taxable and tax advantaged
balances and your overall asset allocation, tax efficient fund placement may
dictate what goes where. For me, my tax advantaged has clear choices, so each
type (tax deferred, roth) gets fully allocated to one type of fund. Also, you
want to avoid using "substantially identical" funds in taxable and non-
taxable, to avoid potential wash sale issues that are hard to track and have
unfortunate consequences (if you do a wash sale in taxable, it's fine, you
don't get the loss booked, but your cost basis is preserved; if you sell for a
loss in taxable and buy substantially identical in tax advantaged, the loss is
disallowed but the basis is not transferred, so you just lose that forever).

If this isn't very helpful, I can probably make a clean copy of my spreadsheet
as a template; I would share mine directly, but it's hard to know what hidden
data is in there.

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po
I'm confused, were they not monitoring for wash sales even within Wealthfront
controlled accounts? I can see it happening if you had external accounts (and
I think usually these kinds of services warn you against that) but within
Wealthfront itself is pretty weird.

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emit_time
Tim Ferriss used to advertise for them... a lot...

Ooof

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zeckalpha
(2018)

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sctb
Thanks! Updated.

