2. They are probably more tax efficient.
Robo-advisors can be more tax efficient in their portfolio construction in terms of the vehicles they use and of locating assets such as IRAs versus taxable accounts, Roth told ETF.com.
Using Wealthfront, again, as an example, Roth said that the firm does a great job at locating assets where they are most efficient. The firm also does what he calls “tax-loss harvesting” by selling a security after a loss and replacing it with a similar security—all in an automated, software-based process.
“For example, let’s say you were in a Vanguard Total Stock Index ETF (VTI | A-100) that lost 20 percent of its value,” Ross explained in a recent blog. “Wealthfront could sell this fund and buy the Schwab Broad Market Index ETF (SCHB | A-100) without waiting the 31 days needed to avoid the IRS wash rule that would void the loss for tax purposes.”
Wealthfront also does this type of tax-loss harvesting at a specific-stock level. This strategy can add annual gains to an investor’s portfolio overtime in tax savings. While it’s not necessarily a novel idea, robo-advisors are the first to put these strategies within reach of every investor for an extremely low cost, Roth says.