The BEST Platform For Tax Advantaged Investing? - Frec Review

If you are investing in the stock market, you will know firsthand the impact taxes can have on your profits, especially if you have a larger account or have had a big concentration of value in one stock and need to sell out of it to reduce your risk and diversify your holdings. I'm looking at you tech bros who got stock options from your employer. It's the ultimate first world problem. I know I have too much of this one very valuable stock, but finding the right solution could save you thousands of dollars in taxes when you sell it. Well, today I want to talk about a company that specializes in tax aware investing. They can help you diversify out of concentrated stock positions in a tax efficient way while still pursuing broad market returns. And that company is Freck. Hey, credit warriors, welcome to the show. My name is Ben Hedges, a.k.a. The Credit Shifu. And on this channel, I cover U.S. credit cards, personal finance and luxury travel. If you like the sound of that, please subscribe. But let's get into it. And Freck did reach out to me to review their product. I do find it a very interesting system to take a look at, but I'm just going to do my best to describe clearly how it works. And you guys can make up your own mind what you think about it. One thing worth mentioning before we dive in, though, Freck's strategies are available for taxable brokerage accounts. So if you're thinking about using this for an IRA or a 401k, this won't work. This is specifically for your regular investment accounts where capital gains taxes actually apply, which is exactly why the tax aware approach matters. First, we need to explain two concepts, direct indexing and tax loss harvesting. Direct indexing is where instead of buying an ETF that tracks an index, you actually buy every stock in that index in the right proportions. Obviously, you don't manually do this on your computer buying the 500 stocks in the S&P 500, for example. No, you use a system which automates the process. And this is something that Freck does. With Freck, you can also make adjustments to which stocks are in the index by excluding entire sectors. Say there's something you consider too risky or unethical, like maybe you don't like power companies or you have a theory of your own and want to add a little extra to one sector, like you think health care stocks are undervalued, for example, like this guy does. This can also be done with individual stocks. Maybe you love Elon Musk and you think his companies are going to the moon. Well, you could add an extra allocation or increase the weight of Tesla in your index, for example. Or if you hate Elon, you could cut out Tesla altogether. Then tax loss harvesting is something Freck can do on top of direct indexing. Tax loss harvesting is when you or your money manager sells an investment that you are down on to capture a loss you can use to offset capital gains come tax season, but then rebuys another comparable stock or fund immediately to keep you invested and benefiting from potential gains. This avoids triggering the wash sale rule, which does not allow you to use a tax loss if you rebuy the same security within 30 days before or after the sale. Now let's get into talking about what Freck offers. And some of these options get quite complicated and innovative. First up, we have their classic direct indexing strategies. You get broad market exposure, similar to just buying the ETF version of an index, but add the potential for tax savings through automated tax loss harvesting. Freck even tells you which ETF their options are comparable to. For example, this S&P 500 direct index is comparable to investing in the ETF SPY, which is a very popular ETF that you'll hear a lot of financial YouTubers talking about. And then you have a load of other options for different indexes, different sectors, etc. Looking at the S&P 500 one, the annual fee is 0.09%, which is the same as the expense ratio on the ETF SPY. Freck estimates based on historical simulations that a $100,000 account could generate $25,000 in tax losses in three and a half years. Let's now look at Freck's second strategy, long short. It's still direct indexing, but it layers on something extra. You still pick an index to track like the S&P 500, but then Freck uses leverage to add additional long exposure and short positions. These extensions do two things for you. First, they let you tilt your portfolio towards a certain factor like growth or quality, which seeks to beat the index you're tracking. Second, they open up more chances to harvest tax losses. Now, if the terms long and short are new to you, here's a quick version. Going long just means buying a stock the normal way. You gain when it rises and lose when it falls. Shorting works the other way around. You borrow shares, sell them and aim to buy them back later at a lower price to return them to whoever lent them to you, usually your brokerage. And this all happens behind the scenes. So with a short position, you gain when the stock falls and lose when it rises. The combination of long and short extensions enable extra tax loss harvesting. When market falls, your longs show losses. So Freck might sell and rebuy other holdings in the index to realize those losses. When the market rises, your shorts show losses. So Freck might close those out. Either direction, there is a chance to capture losses while simultaneously aiming to beat the benchmark index overall with your factor tilt. Based on historical simulations, a $100,000 investment in Freck's S&P 500 140 slash 40 may generate between $43,000 and $47,000 in tax losses over three and a half years. You can deduct up to $3,000 in tax losses against ordinary income per year. And if you have more than $3,000 in losses in one year, you can carry that forward to deduct in future years. In addition, tax losses can be deducted against capital gains to an unlimited extent. So if you had $10,000 in tax losses from Freck and that year also sold a house and made $20,000 in profit that is considered capital gains, now you'd only owe capital gains tax on $10,000 instead of the full $20,000. All right, now that we've covered this strategy, let's look at the third kind of account that Freck offers called Diversify. And it builds on top of what is offered by the previous two. This product is designed for people who have built up a big position in one or just a few stocks. The Diversify strategy takes your appreciated shares and combines direct indexing with long and short extensions to reduce your concentration risk from day one while harvesting tax losses behind the scenes so that you can sell your concentrated position over time and tax efficiently. Once diversification is complete, you can switch to one of the other two strategies and continue tracking the market while capturing tax losses. So that is how Freck works from their most basic account up to their most advanced. Just a few final summary points about Freck accounts. Their classic direct indexing fees start at 0.09% per year, which is comparable or cheaper than many ETFs. Account minimums start at $20,000. That also includes automatic tax loss harvesting. Beyond the classic account, they have long short for those looking to amplify market returns while harvesting more losses. This advanced account is available starting at $100,000 or $500,000 depending on the leverage and fees start at 0.5% plus financing costs. And finally, if you are holding a heavily concentrated stock position, they have their Diversify strategy, which can help you transition out of it in a highly tax advantaged way. Minimums also start at $100,000 or $500,000 depending on the leverage and fees start at 0.6% plus financing costs. I think people in the audience who would benefit from this know who they are. If you don't fit the profile of someone who would benefit from this, don't worry about it. It's just an interesting product to learn about. But if you are someone who fits into the situations that Freck is designed to help with and would like to know more, go to freck.com slash Ben Hedges or click the link below. You can also schedule a free portfolio analysis with the Freck team and they will analyze your portfolio and help you determine the best way to get started. Plus, if you do decide to sign up, you get $250 when you fund an account. Link for that is down below. Thank you so much for watching guys. Please subscribe if you're new and we'll see you in the next video. Bye bye.