Additional issue is how these companies come about. They seem to be dependent on backtests to see if their secret formula works. While this approach might be workable in coding, it is not so straightforward in finance. As pointed out in the blog:
>But again and again, Wealthfront tries without blinking to draw a straight line between tax alpha and cold hard cash. For example, they offer a chart titled “After-tax Price Return of VTI vs. Direct Indexing” that appears to show that if you had merely flipped on Direct Indexing in 2000, you would have earned ~2% compared to losing 9% with Vanguard’s ancient index fund technology! They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.
What Wealthfront did not talk about is - with S&P500 component stocks changing, so will the portfolio. It would need to rebalanced and constituted causing brokerage and other charges. While in hindsight it looks great, the actual trades during live environment could have been different.
Oh, I'm sure that startups know very well how poor and incomplete that methodology is. They just present this non-forward tested approach to fool the end users who don't know any better.
>But again and again, Wealthfront tries without blinking to draw a straight line between tax alpha and cold hard cash. For example, they offer a chart titled “After-tax Price Return of VTI vs. Direct Indexing” that appears to show that if you had merely flipped on Direct Indexing in 2000, you would have earned ~2% compared to losing 9% with Vanguard’s ancient index fund technology! They appear to reach these numbers simply by adding the maximum possible tax alpha to VTI’s return.
What Wealthfront did not talk about is - with S&P500 component stocks changing, so will the portfolio. It would need to rebalanced and constituted causing brokerage and other charges. While in hindsight it looks great, the actual trades during live environment could have been different.