Back in January I signed up to two different robo advisors, so I could compare them and see which one worked better for me and if they did better than my traditional brokerage account. If you are not familiar with the concept of a robo advisor they are brokerages where, instead of picking stocks and funds yourself or with the help of a financial advisor, you select a level of risk and an algorithm selects a set of financial assets for you. The algorithm can also automatically re-balance your portfolio and do “tax loss harvesting” for you (I’ll explain that latter).
I singed up for both on the same day (January 15th) and funded both of them with $1000. I did not add any more to the investment accounts over the 6 months. No more one time or automatic deposits. Here is how it went.
Sign-up for both was easy and simple. Just some biographic / due diligence questions and the account is created! Where they start to differ is in how they suggest what general investment portfolio you should go with.
SoFi only asked for my age before making a suggestion. Wealthfront asked several more questions about my risk tolerance before making a suggestion. The Wealthfront process left me feeling more confident in the suggestion, but in both cases I ended up with their most aggressive portfolio allocations.
Funding the accounts is another area where they were similar, but not the same. In both cases you need to add an external savings or checking account. They both also use a system (which looks to be provided by the same vendor) where you select your bank from a menu and provide your login details. The system then connects to your bank’s website and scrapes the account details. This seemed a little sketchy to me, but it also looks like this the the direction several fin-tech companies are going. Fortunately for me, my bank was not on their list, so I entered my ACH details manually.
The first difference here was that it was much easier to find the button to manually add an account on SoFi than on Wealthfront. Wealthfront also required verifying the account using small test transactions. This lead to a delay in funding my Wealthfront account. So while I setup both transfers on the same day (Jan. 15), it took a whole extra day for Wealthfront to receive the money and start investing putting it a day behind.
Before discussing the results there are a couple differences between the two that I should point out. First is that SoFi’s investment mix includes funds managed by SoFi. It’s up to you to decide if you are comfortable with the robo advisor buying it’s own funds with your money.
Tax Loss Harvesting
And second is that Wealthfront supports automatic “tax loss harvesting” and SoFi does not (I told you I would come back to that). Tax loss harvesting is way to reduce tax burden by selling an asset at a loss and then buying a different asset that is similar (but not substantially similar) to the one that was sold. It’s important that they are not “substantially similar” so as not to trigger what the IRS calls a “wash sale”, which would prevent you from claiming the loss when you do your taxes. The idea is that you can offset the taxes on gains by locking in today’s losses, but still maintain the same market exposure in your portfolio.
There is a lot of nuance and complexity in tax loss harvesting that is explained a lot better elsewhere, but there are two issues I want to highlight here. Wealthfront takes steps to ensure that they don’t trigger a wash sale, but that only extends across Wealthfront accounts. Since IRS wash sale rules are applied across all of your accounts you could lose the benefit of the harvesting if you (or another robo advisor) buy an asset that Wealthfront sold at a loss. The other issue to keep in mind is that you don’t get to reduce your taxes by the full amount of the loss. Your real savings depends on your tax bracket. So if your top marginal tax rate is 24% and you have loses of $100 your savings would be at most $24.
In the end, this is about which robo advisor made more money over the same amount of time. I’m happy to say that they both made money, but one definitely made more than the other. On June 30th my Wealthfront account had $1090.95 (+9.095%), where as SoFi had $1108.68 (+10.868%). That is a difference of 1.77 percentage points. Some of this difference could be due to the one day head start SoFi had. It could also be due to Wealthfront’s tax loss harvesting. According to Wealthfront’s dashboard, $11 of tax losses were harvested. If these losses were not locked in the totals could have been much closer. It’s also important to note that this was a short and very not scientific study, so your milage may very. For me, the win goes to SoFi! But that’s not all…
Adding “Money” Accounts
In the middle of this experiment SoFi and Wealthfront both added high interest savings accounts, so I just want to add a few brief thoughts about them. As of the time of writing, SoFi’s hybrid savings account is offering 2.25% APY and comes with a debit card and ATM fee reimbursement. Wealthfront is offering 2.57% APY and not much else. So if you just need somewhere to put some cash, but don’t want to invest it, Wealthfront’s cash account may be for you. But if you want to be able to get cash out, with out a separate checking account, you may want to consider SoFi. And remember that the interest rates are subject to change. They can go up, or down.
Edit (2019-08-02): Their rates did go down recently, due to the rate cut by the Fed. SoFi is now at 2.0% and Wealthfront is at 2.32%.