Tuesday, December 17, 2013

Wealthfront Client Meeting with Burton Malkiel

This year, Wealthfront hosted a fireside chat with Burton Malkiel at the Stanford faculty club. It was my first chance to talk with Malkiel since 2005, and I got to ask him about his opinion of the stock market. He said that while the US stock market is now historically expensive, but the developed markets and European markets are looking cheap, so "this is a good opportunity to do some rebalancing."

Wealthfront also divulged some interesting information: they currently have $450M in assets under management, compared to $90M around this time last year, so their service has gained a lot of traction. Not only are the number of accounts increasing, the average account size has also been increasing. (The first time you see the tax loss harvesting numbers they post to your account, you'll be motivated to shove more money into the account) They currently have 32 employees with 18 engineers, and they expect to have more than half the company be engineers for the foreseeable future.

Malkiel says they've been splitting up the fixed income segment to do things that make sense under the current environment. For instance, AT&T bonds are paying 4% while AT&T stocks are yielding 5% in dividends. It thus makes much more sense to own AT&T stocks rather than bonds. That's an interesting approach, though I would point out that Swensen thinks that corporate bonds are not worth holding.

Someone pointed out that with the new individual stock based tax loss harvesting, they risk accidentally triggering the wash sale rule if they have accounts elsewhere or vest company stock. The answer to the latter is that they allow you to have a blacklist of stocks that they'll never buy or sell on your behalf, and the wash sale triggering based on another advisor trading on your behalf simply means you don't recognize all the tax losses you could otherwise be entitled to. They note that they plan to provide turbo-tax compatible reports, so turbo-tax should be able to reconcile all the buys and sells that they do on your behalf.

One thing that I was very pleased to see was when someone asked whether the resulting decreased cost basis of your holdings wouldn't wash out in the end when you do withdraw the money. Malkiel's response was that he was so old he didn't expect to pay any capital gains at all on his holdings as they will get stepped up upon inheritance. Andy Rachleff also mentioned that "our tax loss harvesting service is not suitable for short term investments." It's a strong statement of where Wealthfront wants to go, and I applaud them for making such a strong statement up front.

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