Alpha in the form of tax savings is the latest marketing strategy for “robo” advisers to distinguish themselves among an increasingly crowded field.
Betterment, a provider of automated investment services, last Thursday launched its
Tax Impact Preview feature, which shows clients the tax impact they may face for withdrawals or changes to their asset allocation prior to making the transaction.
“People play with their allocations without realizing that a ton of trading is going on,” said Alex Benke, product manager at Betterment. “This is another feature that can make people take pause and see if they really want to make that change given the impact.”
There's a behavioral finance element at work: An investor who sees the size of a potential tax bill will probably have second thoughts about tinkering excessively with his account.
The tax impact isn't always necessarily a negative matter, though.
“A loss is actually valuable in that it saves you taxes with tax-loss harvesting, so this could highlight that they're saving on taxes,” said Mr. Benke. “But we found that even in case of losses, people didn't realize that they were realizing the losses when they did this.”
Tax Impact Preview isn't the first tax-savings feature that Betterment has added. In fact, the two largest robo-advisers in the industry,
Wealthfront and Betterment, offer automated tax-loss-harvesting services for clients with at least $100,000 and $50,000 invested, respectively. FutureAdvisor, another automated investment service, also offers tax-loss harvesting.
For the robo-adviser set, tax alpha is becoming a way for services to distinguish themselves and grow account balances while still adhering to the practice of keeping investment expenses as low as possible. Indeed, the amount saved on taxes,
per hypothetical examples from Wealthfront, can boost after-tax returns by over 1.29%.
“Whereas the basic service of using ETFs and quarterly rebalancing makes sure that you don't drift from the asset allocation is a commodity product that you can charge a low fee for, this is a way for them to grow revenue and market it as a differentiator,” said Sophie Schmitt, senior analyst at Aite Group.
“It's a way to generate returns without taking huge risks for clients,” she said. “It seems like a sensible approach for that conservative investor who doesn't see the appeal of investing for getting wealthy but for preserving capital.”
