Malkiel: Cheap Money Advice For The Wired

December 10, 2012


Ludwig: It seems to me that the traditional approach—the advisor sitting down with investors, holding their hands and explaining everything and taking care of everything—is actually stripped away in the Wealthfront model, is it not? Maybe the very wired population from Silicon Valley that Wealthfront is prospecting is OK with increasingly virtual connectedness, but Wealthfront is serving up John Bogle’s humble arithmetic of index investing and your notion that stock picking is a fool’s errand in a largely online experience. Is that really a viable way to build a business?

Malkiel: You’re on to something. I think you need a wired generation to make this work. I know my own son does more on the computer than I do, and his 6-year-old son sometimes shows up his dad in terms of what he can do. There’s no doubt that that’s a part of Wealthfront’s idea.

But let’s also talk about one thing that Wealthfront is going to do that I think is so important and maybe is easier to do in the Wealthfront context than in the advisory context.

I know a lot about advising in that I’m the informal advisor to all the Princeton widows. I remember so well in 2008, some of them coming into my office shedding buckets of tears, saying: “I can’t stand it anymore; tell me it’s OK if we just sell all my equities.” I did this pro bono, but it’s expensive in terms of time, and I’d feel so proud of myself when the widow would leave and she hadn’t sold her equities. But what I would never do at that point—and this is something Wealthfront is going to do—is to say: “Listen: not only should you not sell your equities, but this is the time to rebalance.”

Now I think that to the extent that you’ve got a wired generation, and they trust you and they think you really know what you’re doing, they will say, “OK, you do it for me at low cost, and when the next 2008 comes around, we’re going to rebalance, and in fact we’re even going to buy more equities.”

We’re just so emotional about investing, that by letting it go on automatic pilot is probably even better than what the advisor could do, even if the advisor was low cost and had the best motives in the world.

Ludwig: You’re saying the whole computer interface actually enhances the probabilities that you’re going to do the right thing—which basically means you’re less likely to do the wrong thing, like the widows you just spoke about. Is that a fair characterization of what you’ve just said?

Malkiel: That is certainly a fair way of looking at it. And, in Wealthfront, you’ve got someone that’s looking at the universe of index funds and ETFs and knows exactly where to go. And the other thing that is so attractive to me is—that to the extent we have taxable accounts—one of the things we’re going to do is tax-loss harvest. If you’ve got a Vanguard Total Stock Market Fund, and this was ’08 and you’ve got a loss, well, we’ll sell it and buy a Schwab fund.

I’m using those two as examples because in both cases we’re talking about expenses of 5 basis points or less. We tell people we know where the good low-cost funds are; we’re going to do the rebalancing for you; we’re going to do the diversification for you—including into emerging markets. And for taxable accounts, we’re going to tax-loss harvest for you. Tax-loss harvesting is the only sure way I know of generating alpha.



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