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SEC Charges Two Robo-Advisers with False Disclosures (2018) (sec.gov)
81 points by obi1kenobi 6 days ago | hide | past | web | favorite | 31 comments

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.

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.


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

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.

What is a lifestyle business?

"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.

The fine probably has more to do with paying the costs of the SEC than punishing Wealthfront.

Regulatory actions don't happen in a vacuum and they aren't forgotten. Repeat actions don't necessarily get the same fine, and additional consequences (like more scrutiny for approval, more intense audits, etc) can come from ignoring regulations.

But also remember that these are large organizations being regulated in many many different and often vague ways. Violations happen and are dealt with.

I believe you but why is wells fargo able to fuck over consumers infinite times without consequences? Where are the “additional consequences?”

Wells Fargo the bank has fucked over consumers infinite times. Thats a different regulator - CFPB. And the CFPB has been almost completely dismantled under Trump.

Wells Fargo did not start fucking over their customers in January 2017.

Heck, they probably saved more than that over the years just by failing to implement the compliance program. I can’t imagine such a program would cost less than 250k to implement over three years. So they broke even on this deal before you even factor in ill-gotten gains.

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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."

“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.

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.

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).

The failure to monitor and avoid wash sales is very much specific to being a robo-advisor.

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

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.

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?)

I tried that with robinhood, but that few minutes every month to dollar-cost average in + dealing with whole shares felt like a big distraction.

I switched to m1finance where you can set a "pie" e.g. 80% SPY, 20% bonds and then just add money. They do once-daily investing, and automatically add new money or dividends to even out the pie.

Now I once a month I just dump "extra" money in without needing to do any calculations.

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

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.

If you just select 80/20 there's no mean variance optimization going on...

If you want to do mvo, there's tons of free tools on the web. Or is very easy to build one yourself in Excel. You need the solver and at least a year of historical data for each name.IEX cloud has a fantastic free API for this.

Especially with tax loss harvesting and rebalancing, I'm suspicious of how roboadvisors do when you factor in the bid-ask spread. At least with ETFs, you can be confident someone like Blackrock isn't getting ripped off by limit orders or front-running trades.

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.

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



Thanks! Updated.

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