The nuances of tax strategy became the latest battleground in the debate over the place of computer-aided financial planning.
Michael Kitces, a blogger and researcher, published a blog post early Wednesday criticizing a paper on tax loss harvesting by Wealthfront Inc., one of the largest online advisory firms.
In the 5,000-word
post, Mr. Kitces refuted the calculations and assumptions underpinning a white paper released by Wealthfront to promote its tax-loss-harvesting features, saying the paper drastically overstated the benefits to an average investor and raised larger questions about the ability of the online platform to serve investors' needs “using only an investment team and sharp engineers but without actually having a [certified financial planner] or [certified public accountant] in a high-level advisory or leadership position.”
The paper drew fire from Wealthfront chief executive Adam Nash, who said there were flaws in the way Mr. Kitces represented the data and that the report included “inflammatory” remarks, including an insinuation that if Wealthfront did not make changes, it could face scrutiny from regulators for misstating projected investment returns.
“Unlike a research paper, some of the criticisms are quite ad hoc,” Mr. Nash said. “It's very obvious that he's trying to make a point … It's not his job to properly report our research. For some of his bigger points, I think his examples are cherry-picked.”
Wealthfront, which was founded in 2008 and manages $600 million in client assets, has marketed its web-based tax-loss harvesting service as sophisticated and inexpensive, as the growing company looks to persuade investors that its algorithm-powered approach to investing can be useful to wealthy clients.
In a
blog post announcing new features in December, former Wealthfront president and CEO Andy Rachleff described the service as delivering “more ways to minimize your taxes than any other financial adviser in the investment management industry.”
Wealthfront's service holds a portfolio of securities representing the broad stock market and looks for opportunities to sell individual stocks when doing so could offer tax benefits. When a security declines by a certain amount, for instance, it gets sold and replaced by a stock with a high correlation, meaning it tends to move in tandem with the stock it replaced. The service is offered to accounts with more than $500,000, and the firm assesses no transaction costs or other charges on top of its annual 0.25% advisory fee.
[More: Wealthfront introduces individual stock picking]
Mr. Kitces said that while Wealthfront has some unique benefits, the white paper about its tax-loss-harvesting feature misstated how much of a benefit investors could enjoy, and ignored the fact that some investors might face higher taxes in the future. He added that other advisers make similar misrepresentations, but that Wealthfront is “the only one putting it on the front page of their website as an enhancement to their [clients'] long-term returns.”
But what Mr. Kitces, a partner at Pinnacle Advisory Group in Columbia, Md., and an occasional consultant, did not disclose in the article that he had a business relationship with Betterment, a New York-based Wealthfront competitor with $303 million in assets. He also did not disclose the relationship in a
blog he wrote about Wealthfront last month for
InvestmentNews.
He did
display a Betterment logo on a separate section of the website about his consulting business.
Facing
pressure on Twitter from a Wealthfront publicist, Mr. Kitces appended a disclosure to the tax-loss-harvesting blog later Wednesday. He said he had written about the issues before his relationship with Betterment.
In an interview, Mr. Kitces said he was paid by Betterment to speak to the firm's employees about the advisory business in mid-December.
“Companies seek me out because of the analysis that I can do and the knowledge I have of the industry,” Mr. Kitces said. He said he had a number of clients, including financial advisers, who are presumably in competition with Wealthfront.
Mr. Kitces declined to discuss the financial terms of the relationship with Betterment, saying he was prohibited from doing so by the terms of his contract. He said the payment was marginal, representing less than 1% of his annual income.
“We have no ongoing relationship,” Joe Ziemer, a Betterment spokesman, wrote in an e-mail. “It was strictly a one-afternoon engagement. He is not an adviser or regular consultant to the company.”
Betterment declined to disclose the terms of the contract. Mr. Ziemer said the firm “had no knowledge that he was working on this piece.”
“We talked about what features advisers would like and tax loss harvesting was discussed as a feature, but we did not discuss Wealthfront,” Mr. Ziemer said.
Mr. Kitces said it was unfortunate that the disclosure issue would distract from the substance of his critiques.
Mr. Nash acknowledged that Mr. Kitces made some good points in his blog and that minor adjustments would be made to the paper, but that the firm was unlikely to dramatically change the results or the conclusion. He said Wealthfront was working to revise the paper, but does not know when the updated version will be available.
“Back-of-the-envelope numbers are always quicker to do than rigorous research and analysis,” Mr. Nash said.
