Friday, May 30, 2014

Introducing Jemstep

After I met with the founder of Jemstep, I realized that his product was not for me, but a large group (probably even the majority) of Americans would find it to be a great product fit. When William Bernstein visited Google, he asked for a show of hands as to how many people in the room had sizable 401(k)s or IRAs as a percentage of their total portfolio. Nobody raised their hands. He said, "This is completely atypical of American society, where most people's financial assets are largely tied up in their 401(k) or IRA."

The net result is that my approach, and the approach of many of the products I introduce such as Wealthfront, are completely targeted towards people like me. When most of your financial assets are in after-tax portfolio, tax-loss harvesting becomes important, as does qualifying for long term capital gains taxes. When much of your assets are in IRAs or 401(k)s, however, then asset location becomes important.

Jemstep does the hard work of figuring out what the correct asset location for every asset is, and managing multiple assets across all counts. Unfortunately, because everything is done through TrustE, Jemstep cannot place trades for you, or actually manage your disparate accounts. What this means is that you have to manually enter the trades, and deal with the tax consequences thereof. This is in contrast to Wealthfront, which does place trades for you, etc.

Jemstep is fairly cheap. It charges about $70 for an unlimited sized portfolio, and correspondingly less if you have less than $500,000 in assets. But it does a lot less for you than Wealthfront, and you're still stuck with whatever transaction costs are involved. It also doesn't do any of the sophisticated tax-loss harvesting that Wealthfront does. For folks with large taxable portfolios, Wealthfront's fees more than pay for themselves when you take into account tax loss harvesting.

This all sounds really negative, but it isn't. If you're the beneficiary of a tech IPO, or just won the lottery or sold your business, this service is not for you. If you have a huge legacy portfolio in taxable accounts that are unconsolidated, you might want to try Jemstep, but my suspicion is that you're best off slowly migrating your account to Wealthfront, and Jemstep is at best a stop-gap. However, if you're middle-aged, and have a large tax-sheltered portfolio, then asset location matters a lot to you and you're better off with Jemstep than with Wealthfront, especially since it's unlikely that you're able to move your 401(k) to Wealthfront while you're working at the same employer for the next few decades.

In short, I'd suggest checking out Jemstep, but only if your tax-sheltered portfolio is a significant percentage of your net-worth (more than about 20%).
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