Robo-advisors and taxation?

Bob24 · 21-02-2020 06:56PM #1

I am thinking robo-advisors could become a cheap way for retail investor to start investing small amounts without knowing much about investment strategies and with reasonably low fees. Essentially they are investing money in various asset categories through ETFs based on the investor profile provided by the user, and automatically rebalancing the portfolio on a regular basis, for a fee which is quite lower than actively managed funds and with full flexibility with when and how much money goes in and out of the investment. So it is classic ETF passive investment but with guidance to build a diversified portfolio of ETFs and automated rebalancing to keep it in line with the investment goal.

Exemples which I believe are available to Irish residents:
- https://www.keytradebank.lu/en/investing/keyprivate/
- https://birdee.co/en/

Does anyone know how it is treated in terms of taxation? I.e. is the robo-advisor service as a whole considered as the investment vehicle (meaning no tax event is triggered when ETFs are being sold and purchased to rebalance the portfolio, and the only tax events are when money comes out of the robo-advisor).
Or is each individual ETF considered an investment vehicle directly own by the investor meaning that when the robo-advisor buys and sell to rebalance the portfolio it will trigger a tax event? (which to me would make the service a lot less attractive as it would make it tax inefficient and could make tax reporting a pain if there are many rebalancing operations)

Jim2007 · 21-02-2020 07:28PM

Bob24 wrote: »

I am thinking robo-advisors could become a cheap way for retail investor to start investing small amounts without knowing much about investment strategies and with reasonably low fees. Essentially they are investing money in various asset categories through ETFs based on the investor profile provided by the user, and automatically rebalancing the portfolio on a regular basis, for a fee....

There is no way for a person to invest small amounts of money cheaply.... these kinds of products are not intended to grow your wealth, they are designed to cream fees of customers they would not otherwise be able to get a fee from.

If you are investing a small amount - Then save it up and make one or two purchases of a large caps fund per years., when you have say 20k in that, switch to mid caps and later small caps and so on. When you have say 50k+ invested then you can start worrying about things like regularly re balancing portfolios etc...

Bob24 · 21-02-2020 07:41PM

Jim2007 wrote: »

There is no way for a person to invest small amounts of money cheaply.... these kinds of products are not intended to grow your wealth, they are designed to cream fees of customers they would not otherwise be able to get a fee from.

If you are investing a small amount - Then save it up and make one or two purchases of a large caps fund per years., when you have say 20k in that, switch to mid caps and later small caps and so on. When you have say 50k+ invested then you can start worrying about things like regularly re balancing portfolios etc...

From what I can see annual fees for these services range from 0.25-0.75% per year (plus you need to add the fees of the ETFs they are invested in which probably brings the total to 0.5-1% per year). And usually there are no entry or exit fees. So while not the same thing, this actually makes it cheaper and more flexible than most investment funds.

I am not looking at using them myself, but I am considering recommending them to someone and I wouldn’t say those are crazy fees for someone who wants to get started with investing. It is a bit more expensive than telling them to do passive investing with let’s say a world share ETF of which they’d purchase a few hundred euros every month, but since we will probably be due for a stock market correction in short to medium term I kind of like the idea that it would automatically rebalance their gains across different asset categories. And sure another option is diversified investment funds with dynamic asset allocation and I am not discarding those, but as I said they are definitely not cheaper in terms of fees and a thread about something newer such as robo advisors seemed more fun :-)

And I really wonder about the tax treatment ...

FernandoTorres · 24-02-2020 09:35AM

Bob24 wrote: »

I am thinking robo-advisors could become a cheap way for retail investor to start investing small amounts without knowing much about investment strategies and with reasonably low fees. Essentially they are investing money in various asset categories through ETFs based on the investor profile provided by the user, and automatically rebalancing the portfolio on a regular basis, for a fee which is quite lower than actively managed funds and with full flexibility with when and how much money goes in and out of the investment. So it is classic ETF passive investment but with guidance to build a diversified portfolio of ETFs and automated rebalancing to keep it in line with the investment goal.

Exemples which I believe are available to Irish residents:
- https://www.keytradebank.lu/en/investing/keyprivate/
- https://birdee.co/en/

Does anyone know how it is treated in terms of taxation? I.e. is the robo-advisor service as a whole considered as the investment vehicle (meaning no tax event is triggered when ETFs are being sold and purchased to rebalance the portfolio, and the only tax events are when money comes out of the robo-advisor).
Or is each individual ETF considered an investment vehicle directly own by the investor meaning that when the robo-advisor buys and sell to rebalance the portfolio it will trigger a tax event? (which to me would make the service a lot less attractive as it would make it tax inefficient and could make tax reporting a pain if there are many rebalancing operations)

It'd be no different to investing through a platform like Degiro, you're still liable for all of the tax recording and payments. I'm sure they provide you with a listing of all the rebalancing transactions but you'll still have to calculate your own tax. I think the term "advisers" is very loose here. They're not taking into account any of your personal circumstances to deliver this "advice". They've basically developed a suite of ETFs that they sell to everyone and charge a fee for the service.

Bob24 · 24-02-2020 11:19AM

FernandoTorres wrote: »

It'd be no different to investing through a platform like Degiro, you're still liable for all of the tax recording and payments. I'm sure they provide you with a listing of all the rebalancing transactions but you'll still have to calculate your own tax. I think the term "advisers" is very loose here. They're not taking into account any of your personal circumstances to deliver this "advice". They've basically developed a suite of ETFs that they sell to everyone and charge a fee for the service.

I think it is not as simple as that. They might not all work in the same way, but as I understand it you are not getting a securities account with actual ETFs on it being purchased and sold in your name. For the one I saw which provides an explanation, what you are getting is an account with the robo-advisor service with your pot of money invested in a fund wrapping the ETF selection, and the fund itself is rebalanced based on the algorithm.

If this is how it works, it could be seen as a traditional mutual fund / ETF from a tax perspective (i.e. the fund/ETF is buying and selling shares, but as someone holding shares that fund these internal purchases and sales by the fund don't trigger tax liability for you). The problem is that not all of them are clearly explaining the legal structure behind the service.

FernandoTorres · 25-02-2020 10:38AM

Bob24 wrote: »

I think it is not as simple as that. They might not all work in the same way, but as I understand it you are not getting a securities account with actual ETFs on it being purchased and sold in your name. For the one I saw which provides an explanation, what you are getting is an account with the robo-advisor service with your pot of money invested in a fund wrapping the ETF selection, and the fund itself is rebalanced based on the algorithm.

If this is how it works, it could be seen as a traditional mutual fund / ETF from a tax perspective (i.e. the fund/ETF is buying and selling shares, but as someone holding shares that fund these internal purchases and sales by the fund don't trigger tax liability for you). The problem is that not all of them are clearly explaining the legal structure behind the service.

I can't see anything on either of the websites that would suggest that they are collective investment funds as defined by Revenue. From what I can see they're just vehicles through which you buy ETFs. I think Ireland is a bit out of the ordinary when it comes to treating ETFs and funds differently from a tax perspective so I doubt either of these companies have considered it given the small size of the Irish market.

Bob24 · 25-02-2020 11:05AM

FernandoTorres wrote: »

I can't see anything on either of the websites that would suggest that they are collective investment funds as defined by Revenue. From what I can see they're just vehicles through which you buy ETFs. I think Ireland is a bit out of the ordinary when it comes to treating ETFs and funds differently from a tax perspective so I doubt either of these companies have considered it given the small size of the Irish market.

Yeah these 2 don't explain how they are structured which I think is pretty bad of them, but it is hard to make an assumption either way (there is nothing on their websites either saying they are giving you a securities account which is holding and trading ETFs directly in your name).

That other one is pretty clear in explaining that money is invested in mutual funds (SICAV) which are wrappers for the ETFs selection: https://www.bcee.lu/en/private-customers/saving-and-investing/speedinvest-when-investing-becomes-as-simple-as-saving/
I don't believe it is easily accessible to Irish residents, but it goes to show this is a possible way to structure such service which IMO shouldn't trigger tax events before you take money out of the service.

Birdee however does give tax advice to French residents saying CGT is only due when you withdraw money from your portfolio (France and Belgium seem to be their main target markets):
https://birdee.zendesk.com/hc/en-us/articles/360004047514-Which-taxes-apply-on-your-portfolio-
"the capital gains generated by your Birdee portfolio are only subject to the “flat rate” if you redeem all or part of your portfolio. This implies that you only have to pay this tax if you withdraw money from your portfolio. In this case, the tax will be applied to the realized capital gains. If you keep your entire portfolio, you won’t have any tax to pay, even if your portfolio has generated capital gains.
"

But we agree this is a bit foggy and they are not explaining why this this the way it is meant to work - so I wouldn't take their advice at fare value.

RedRochey · 07-02-2021 08:26PM

Just looking into robo advisors now, did you get anywhere with these?

Bob24 · 07-02-2021 09:47PM

RedRochey wrote: »

Just looking into robo advisors now, did you get anywhere with these?

Didn’t really push it further sorry, but I think taxation would be a bit messy. I’d say a balanced multi-asset investment trust is easier.

RedRochey · 08-02-2021 09:37AM

Annoying to see the US have direct indexing and now even custom indexing and we don't even have robo advisors yet (not widely available anyway)

Robo-advisors and taxation?

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