Comment by anonu | Hacker News Reader

Comment by anonu | Hacker News Reader

Wow - first time I see some decent writing on the stock broker business, HFT, internalization. Good article...

What I would add to the article:

> Roboadvisors are a bad business below scale.

I would say that roboadvisors are just a bad business. Theyve been around for a decade+ and we haven't really seen any large robos created from the concept. I think this is because ETFs effectively capture or can capture what Robos do. And we will continue trending towards that. In that way, you can encapsulate the benefits of Robo (div reinvestment, tax gains, target date strategies) within an ETF without having to move your money out of your current brokerage account.

Also note that roboadvisors cant just do "robo". Today they are branching off into a dozen different services - so they look more and more like the traditional platforms.

> And then there’s Robinhood, which is a discount brokerage whose marketing and product decisions probably do not assist their users in achieving successful outcomes.

Yes - Robinhood is a gambling platform. Shameful IMHO but creates a field day for the owners and for internalizers/HFT folks.

>I think this is because ETFs effectively capture or can capture what Robos do

I think the one "real" source of alpha that a robo offers the everyday user is automated tax loss harvesting, which is a pain in the ass to do otherwise.

Two important notes about tax loss harvesting:

1) For any given dollar you put into a robo-advisor any tax lost harvesting gains to be made based on that dollar will generally happen in the first 1-3 years. After that gains will generally approach zero. However, the fees you pay the robo-advisor will last as long as you keep your money there.

2) Once you make the decision to use a robo-advisor which purchases hundreds of stocks on your behalf, there is a lot of lock in. Automation becomes essentially required to continue to maintain the account.

You do have the option of selling everything and going back to an ETF based approach but at that point you'll incur capital gains completely negating any positive impact you got up from by loss harvesting.

These points were not clear to me when I began using one of the popular robo-advisors some years ago. I kind of wish they had been.

Is it possible to transfer your holdings from within a robo advisor to a service like Vanguard?

I think it probably is, but then you have to manage those holdings manually going forward which can be a real challenge when you own so many different securities.

I don't quite follow what the challenge is to take your money elsewhere. If we're talking about post-tax investments, you can easily liquidate and buy in to whatever else you want.

If you liquidate, you have to pay capital gains taxes.

Your ETF fund manager can buy and sell within an ETF structure, tax free. This beats any high turnover tax loss strategy.

You have it backwards. If you directly replicate an ETF by buying stocks directly, you can capture the loss as soon as one stock goes down (and buying a share of something equivalent to stay approximately indexed). In the ETF, you only get a tax loss if the whole ETF has gone down. If no stock goes down, you don't have to sell, same with an ETF. For tax efficiency, direct indexing is superior than an ETF. This means you have to keep injecting money into the fund to keep the portfolio properly allocated (ie, you must avoid selling stocks that have gone up).

> buying a share of something equivalent

Wouldn't that be a wash sale, and thus fraud to claim the loss as a tax deduction?

I believe you and the prior posters are using different meanings for the word equivalent.

Buying the same asset under a different name (say, packaged under a different ticker on another exchange) would be a wash share.

Buying a truly different underlying asset in the same sector/region which has 99.9% correlation with the original asset you held would not be a wash sale.

> 99.9% correlation

I think that's either an exaggeration or exceedingly rare.

What you're saying is correct. But you're misunderstanding what I'm saying above. Within the ETF, a fund manager can trade (if they use the creation and redeem mechanism correctly), and there is no tax consequence to the fund or the investor.

I am suggesting that that benefit is far superior than any tax harvesting if you are directly indexed, etc...

What ETFs do this?

How do you do tax optimization, loss harvesting, etc, with an ETF?

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