Robo advisors and tax harvesting

January, 15 2016 by Eric Linden

Hello fellow taxpayers. The Wily Tax Blogger is back to kick off 2016 with a new blog about an investment management tool I’ve discovered. Many of us make New Year’s resolutions about building wealth and being smart with our money, so I thought I would share this personal story about finance, retirement, tax loss harvesting, and reducing investment management fees.

Recently, I learned from a friend about a new financial investment movement known as “Robo Financial Advisement.” He’d heard about it from his twenty-something tech-savvy son. I tend to try and listen to the younger generation when it comes to a lot of things now. They are, generally, early adopters of trends and technology that will eventually become ubiquitous. This particular company caught my eye for two reasons: LOW FEES and TAX LOSS HARVESTING.

Historically, financial advisors have charged exorbitant fees on the services they offer and consumers have begun to take notice. These fees can really add up over time and eat away at that retirement return you are counting on to get you to 100! I noticed a particular “robo advisor” offered a .25% advisory fee. That is extremely low in comparison to what many other traditional advisors charge. A nice little bonus is that the first $10,000 is managed for free as well. Cool! I wanted to learn more.

Another great feature was automated tax loss harvesting. By definition, this is when you sell an investment (stock, ETF, etc.) for a loss in order to offset other taxable gains and thereby reduce your taxable income on that year’s tax return. (There are many nuances to this, of course. Did you think anything tax related would not have some fine print?) Of course, this tax harvesting only affects taxable accounts (not Roth, IRAs). Typically, you are forced to compute and make these tax decisions yourself; however, "robo advisor” algorithms power this for you and makes little micro tax moves on your behalf. Pretty amazing.

I liken this new technology to when ETRADE and Scottrade came into the market. They provided an online investing experience with low trading fees. “Robo advisors” go a step further, with computers actually doing the trading AND the strategy for you. I did not understand tax harvesting until recently, and I’ve also learned that taxes and fees make a major impact on your long-term retirement investment objectives. I am kind of a “set it and forget it” kind of investor, and this platform will, I hope, work well for me.

Do you have any experience with robo advisors? Share it here.

(This blog is just the personal opinion of the Wily Tax Blogger. It is not an official endorsement made by TaxAudit.)