Wealthfront slams Schwab’s robo for sub-standard tax harvesting
Robo-advisory pioneer Wealthfront claims rival Schwab’s offering is inferior when it comes to tax harvesting. Wealthfront comments were based on a test it conducted investing $100,000 in each platforms taxable accounts with comparable risk tolerances. Schwab responded saying its digital platform engages in tax-loss harvesting when appropriate; adding any suggestion to the contrary is false. Spat’s of this nature are expected to increase in the sector as robo-advisory platforms are forced to make head-on performance comparisons as they seek to differentiate themselves in an already crowded market.

The latest jab in Wealthfront's rivalry with Schwab Intelligent Portfolios came from the Silicon Valley platform claiming the custodian's robo offering is inferior when it comes to harvesting tax losses.

Schwab countered by saying its digital platform engages in tax-loss harvesting for clients "when appropriate based on our algorithm -- any suggestion that we are not is false."

This isn't just a one-off dust-up. Observers say that as digital wealth management proliferates, more firms will be forced to make head-on performance comparisons in an attempt to stand out in an already crowded market.

"We wouldn’t be surprised if we start to see more aggressive messaging out there," says Sean McDermott, senior analyst at Corporate Insight. "Most services check the same boxes. How do they then differentiate themselves?"

'CLONE PRODUCT'

Wealthfront released in a company blog post the results of what it says was an experiment it conducted to see how its platform would match up against Schwab's in tax-loss harvesting.

"Not all software is created equal," writes Andy Rachleff, Wealthfront co-founder and executive chairman, in the post. "We believe our software is simply better than our competitors."

Rachleff writes the digital firm invested $100,000 each in Wealthfront and Schwab Intelligent Portfolios taxable accounts with comparable risk tolerances on April 1. By the end of September, he writes, the Wealthfront account harvested over $2,000 in losses while the Schwab account had none.

"Not one dollar in a period that had tremendous volatility including the huge downdraft from the Brexit results," he writes.

"Competitors who attempt to clone your product can only copy what they can see. We are now on the fourth generation of our tax-loss harvesting service while most of our competitors are still on their first generation service, and as you see from our results, it shows."

Schwab dismissed the critique.

"They've artfully cherry-picked one short time period and one feature to create confusion that isn't fair to investors who deserve to understand the full picture of how automated portfolios work," says Schwab spokeswoman Alison Wertheim.

Schwab Intelligent Portfolios has conducted nearly 70,000 tax loss harvest sells in its accounts year-to-date through September, she says, adding that 90% of eligible accounts enrolled by Jan. 1 have had tax losses harvested through the end of September.

"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," Wertheim says.

"Strategic tax loss harvesting isn't just about quantity. It requires a balance between capturing losses that clients can use to offset potential gains versus constantly churning the portfolio, which can be costly in terms of bid-ask spread."

CUSTOMER ACQUISITION

Wealthfront said Schwab was not addressing its claim.

"Why wasn't Schwab's algorithm able to harvest a single loss during a time period where there was significant volatility?" says firm spokeswoman Kate Wauck. "The market after Brexit provided ample opportunity to harvest losses that ultimately add great value to clients."

Wealthfront sent its experiment to industry analysts for review and confirmation. Most were limited in their response.

"Wealthfront does have a great product," says Rich Repettto, equity researcher and analyst at Sandler O'Neil.

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Corporate Insight's McDermott also reviewed the Wealthfront release.

He noted the differing approaches -- Wealthfront is upfront about its tax-loss harvesting ability, even putting a dollar amount on how much it can save on a hypothetical $100,000 account, whereas Schwab details its tax-loss harvesting approach in a dense white paper.

But McDermott, like other analysts, reserved comment on Wealthfront's report.

"Wealthfront can be more aggressive and bolder with their marketing," he says. "It's part of their ethos. They also don't have to worry about playing nice with others. They are sticking to their independence, whereas other [digital advice firms] are trying to sell their services to other financial institutions."

McDermott wondered about the impact such comparisons would have on a potential client.

"You can make improvements to algorithms, but it's tough to see how that translates to actual customer acquisition," he says.

Schwab Intelligent Portfolios currently manages over $10 billion, Wertheim says. According to its latest SEC filing, Wealthfront manages $4 billion.

NO GUARANTEE

The two platforms have a history of heated dialogue. Wealthfront CEO Adam Nash has said previously that it was "disheartening" that Schwab is not the firm he once looked up to.

At Schwab's annual conference in San Diego on Tuesday, Schwab CEO Walt Bettinger dwelled only for a moment on digital challengers. "The idea that robo startups would take over is one of those fantasies of past we can now bury," he told the audience.

Bill Winterberg, adviser technology consultant and founder of Fppad.com, agrees with Wealthfront that not all software is created equal, but adds such analyses do little for a client and are short-term.

"The data is currently favorable to Wealthfront, but we don’t know if that will remain the same," he says. "There is no guarantee they will outperform any automated investment solution in the future."

Winterberg says other measurements could have been more potent.

"I would have given them more credit if they said, our algorithm identified anomalies in the market, such as price discrepancies, and capitalized on them instantly," he says.

Critiquing an algorithm is really critiquing the humans who designed it, Winterberg adds, and flaws can be addressed. "Then, that minor advantage in tax loss harvesting is engineered away."