{"id":7120,"date":"2016-12-08T09:38:43","date_gmt":"2016-12-08T17:38:43","guid":{"rendered":"http:\/\/www.wealthfront.com/blog\/?p=7120"},"modified":"2023-12-13T14:04:39","modified_gmt":"2023-12-13T22:04:39","slug":"vanguard-versus-wealthfront","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/","title":{"rendered":"If You Like Vanguard, You\u2019ll Love Wealthfront"},"content":{"rendered":"

I am often asked by people unfamiliar with our service, \u201cWhy should I use Wealthfront to buy a portfolio of Vanguard index funds, when I could buy the same funds directly from Vanguard without paying any advisory fee?\u201d<\/p>\n

It\u2019s a perfectly reasonable question, and it has a very simple answer. \u00a0Wealthfront can save you significantly more money in taxes than the 0.25% a year you\u2019ll pay us in advisory fees \u2014 in fact up to 10 times as much1<\/sup>. There\u2019s also the comfort of knowing that you can take a \u201cset it and forget it\u201d attitude towards your investment, confident that professionals will be looking after the routine housekeeping tasks that are crucial for any investing strategy. Even Vanguard\u2019s management team has told me we offer a superior service for taxable accounts.<\/p>\n

Some investors prefer to manage their portfolios themselves, just like some people like to build their own furniture. If this describes you, then we\u2019re not here to convert you. In fact, we give you our recommended portfolio allocation<\/a> for free. You\u2019re welcome to tweak it and implement it yourself, at Vanguard or anywhere else.<\/p>\n

Many of our customers, though, are attracted by simple convenience, not to mention the significant annual tax saving Wealthfront is capable of generating.<\/p>\n

How does Wealthfront provide this extra value? Through three services we pioneered: dividend-based rebalancing, Daily Tax-Loss Harvesting and Stock-level Tax-Loss Harvesting.<\/p>\n

Rebalancing<\/h3>\n

Rebalancing is the process of maintaining the risk profile of your portfolio by selling asset classes that have performed relatively well and buying ones that performed relatively poorly. Every portfolio should be rebalanced on a periodic basis to make sure it hasn\u2019t, without you realizing it, taken on more (or less) risk than you\u2019re comfortable with.<\/p>\n

Because it appears to be quite simple, many people believe they can do rebalancing themselves. In fact, since the process turns out to be far more complicated than many investors believe, investors too often have much less success than they expected to.<\/p>\n

Not only does Wealthfront rebalance your portfolio, but we do so in a much more tax-efficient way than simply buying and selling securities. Specifically, we use the dividends generated by each of your index based ETFs to buy more of your under-allocated asset classes. That cuts down on the sale of over-allocated assets. Fewer sales means fewer gains, which means lower taxes.<\/p>\n

Tax-Loss Harvesting<\/h3>\n

Tax-loss harvesting <\/a>is a way of reducing your taxes by taking advantage of investments that have declined in value. These holdings are sold, and replaced with highly-correlated, but not identical, investments, allowing you to maintain the risk and return characteristics of your portfolio while generating a loss that can be applied to lower your taxes.<\/p>\n

It is possible to do tax-loss harvesting yourself. But the enormous complexity of keeping track of all your different tax lots limits you, for all practical purposes, to doing it once a year at year-end. In contrast, Wealthfront\u2019s software looks for losses on a daily<\/em> basis.\u00a0Our research shows that daily<\/em> harvesting can save significantly more than when done annually.<\/p>\n

Many people assume that tax-loss harvesting is a generic function, like the compounding of interest, and that all investment companies do it as well as any other. But Wealthfront research has demonstrated that not all tax-loss harvesting from automated investment services are alike<\/a>.<\/p>\n

Stock-level Tax-Loss Harvesting<\/h3>\n

Wealthfront\u2019s Stock-level Tax-Loss Harvesting service<\/a> allows you to own all the stocks in a major index (like the S&P 500), while also harvesting losses they might generate. That means you can take advantage of the times individual stocks trade down, even when the overall index rises. Index funds and ETFs, like the ones you can buy from Vanguard, cannot provide this service, because investments that are structured as funds are prohibited by the Internal Revenue Code applicable to funds registered under Investment Company Act of 1940 from distributing tax losses to their shareholders.<\/p>\n

The table below compares just the after-tax benefits of daily tax-loss harvesting for a $100,000 account at Wealthfront, with the same portfolio invested with Vanguard:<\/p>\n

\"\"<\/p>\n

As you can see, for a $250 annual advisory fee (0.25% of $100,000), Wealthfront could deliver an additional $1,385 of net-of-fee, after-tax value per year from just tax-loss harvesting. Your actual benefit will depend on your tax rate, risk level and ability to use the benefit from all your harvested losses. Even if the losses generated from our tax-loss harvesting could only be applied to your annual $3,000 ordinary income limit, as is the case with some taxpayers, your annual net benefit using an assumed tax rate of 42.7% would be $1,0313<\/sup>. Keep in mind the benefits calculated do not include the additional benefits that could be realized from dividend based rebalancing and Stock-level Tax-Loss Harvesting. Clearly, your small Wealthfront annual advisory fee is money well-spent, for both convenience as well as for direct, dollars-in-your-pocket savings.<\/p>\n

What about retirement accounts?<\/h3>\n

By now, I hope you\u2019re persuaded that Wealthfront\u2019s service is far superior to managing a taxable<\/em> portfolio on your own. But how about your IRA? Well, if your only investment account is an IRA, and you don\u2019t mind rebalancing yourself, then Vanguard is likely a better option than Wealthfront. But if you have taxable and<\/em> IRA accounts, then once again you will come out ahead with Wealthfront.<\/p>\n

Unless the vast majority of your money is held in your IRA accounts, the tax benefits we generate just on your taxable account(s) should still be far greater than our advisory fee on all<\/em> your accounts, not to mention how much more convenient it is to have all your investment accounts in the same place. Please keep in mind that because of the Wash Sale Rule<\/a>, which comes into play if you don\u2019t allow our software to manage all your accounts with similar securities, it is not possible to guarantee all your harvested losses can be applied to your taxes. That\u2019s why it\u2018s advisable to keep all your accounts (other than your company 401(k)) at Wealthfront.<\/p>\n

We think the evidence of Wealthfront\u2019s value is overwhelming, and we hope you give us a try. Because if you like Vanguard, you\u2019ll love Wealthfront.<\/p>\n

1. Based on our actual results for our five years offering tax-loss harvesting<\/a>, we were able to harvest average annual losses of 2.90% to 5.19% of portfolio value, depending on risk level. Assuming total state and federal tax rates of 25% to 50% the average annual after tax benefit of tax-loss harvesting ranges from 0.73% to 2.6%. That represents a multiple of three to 10 times our annual advisory fee of 0.25%.<\/span>
\n2. The average actual annual realized harvested loss over the past five years across all risk levels was 3.83%. Assuming a 42.7% combined federal plus state tax rate (equivalent to a joint income of $250-400K in California), the average annual after tax benefit would be 1.635% or $1,635 on a $100,000 portfolio. The average annual benefit will vary based on risk level of portfolio and tax rate. <\/span>
\n3. 42.7% times $3,000 minus our annual fee of $250.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Vanguard versus Wealthfront – how do the two compare? In this post, we compare the two services and explain the relative advantages of Wealthfront.<\/p>\n","protected":false},"author":4,"featured_media":7306,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1315,1282,1360],"tags":[1295,1741,1359,1324],"coauthors":[99],"class_list":["post-7120","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry-insights","category-investing","category-product-news","tag-rebalancing","tag-stock-level-tax-loss-harvesting","tag-tax-loss-harvesting","tag-vanguard"],"acf":[],"yoast_head":"\nIf You Like Vanguard, You\u2019ll Love Wealthfront | Wealthfront<\/title>\n<meta name=\"description\" content=\"Vanguard versus Wealthfront - how do the two compare? 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In this post, we compare the two services and explain why investors should choose Wealthfront.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/\" \/>\n<meta property=\"og:site_name\" content=\"Wealthfront Blog\" \/>\n<meta property=\"article:published_time\" content=\"2016-12-08T17:38:43+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-12-13T22:04:39+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.wealthfront.com/blog\/wp-content\/uploads\/2017\/01\/2016-12-08.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1472\" \/>\n\t<meta property=\"og:image:height\" content=\"530\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Andy Rachleff\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@Wealthfront\" \/>\n<meta name=\"twitter:site\" content=\"@Wealthfront\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Andy Rachleff\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/\",\"url\":\"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/\",\"name\":\"If You Like Vanguard, You\u2019ll Love Wealthfront | Wealthfront\",\"isPartOf\":{\"@id\":\"https:\/\/www.wealthfront.com/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.wealthfront.com/blog\/vanguard-versus-wealthfront\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.wealthfront.com/blog\/wp-content\/uploads\/2017\/01\/2016-12-08.png\",\"datePublished\":\"2016-12-08T17:38:43+00:00\",\"dateModified\":\"2023-12-13T22:04:39+00:00\",\"author\":{\"@id\":\"https:\/\/www.wealthfront.com/blog\/#\/schema\/person\/8f4437d81fe6ce66286d1f93856a71f4\"},\"description\":\"Vanguard versus Wealthfront - how do the two compare? 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