This week marks the first anniversary of the launch of Wealthfront’s software-based financial advisor. We have come a long way in the past year toward our audacious goal to democratize access to high quality financial advice. The speed and the distance we’ve traveled are due to the tremendous support of our clients and the incredible contributions of our Wealthfront team. Thank you!
It’s always fun to take a moment and reflect on where you’ve come from and where you are going when you’ve reached a milestone. On Dec. 1, 2011, we launched a low-cost service to create and manage diversified portfolios, using a well-established concept in finance called Modern Portfolio Theory.
Our approach got a huge endorsement this year, when the renowned economist Burton Malkiel joined our team as Chief Investment Officer. With Burt’s help and the help of another highly respected academic, Paul Pfleiderer, the C.O.G. Miller Distinguished Professor of Finance at Stanford Graduate School of Business, we made significant improvements to our risk assessment algorithms and the rigor of our asset allocation model.
Tax-loss harvesting and other features
Over the past year, we added many features to our service. Here’s a quick review:
• We added electronic bank transfer (ACH) so that you can now fund your account more conveniently.
• We added automated scheduled deposits, which allow you to use dollar-cost averaging to avoid some of the risks of the market’s highs and lows, and to enforce a savings routine on yourself.
• On Oct. 9, 2012 we added continuous tax-loss harvesting. Even high-end private wealth management accounts do not offer continuous – as opposed to year-end – tax-loss harvesting.
• We now offer our clients individual, joint and trust taxable accounts, and a variety of IRAs. We also support 401(k) rollovers.
• For the sake of simplicity, we now provide our service free of commissions and other ancillary fees. Compare this to other brokers and advisors who hide so many fees in their statements and disclosures that you need to be a detective to find them and a PhD to understand them.
• We offer our clients actionable, data-driven advice through our Knowledge Center on topics including college savings, which are the best tech companies to build a career, the role of your home in asset allocation and whether you should make angel investments.
Adam Nash joins
As an aside, I believe this data-driven advice is only possible because of the technical talent we’ve attracted to our company. Wealthfront is built on a fantastic engineering team, which has been widely recognized for its technical contributions including continuous deployment. In the past year, we have succeeded in marrying that talent with deeply experienced investment professionals.
The SEC rules prohibit us from quoting our satisfied clients or promoting their reviews. (The regulations that, in effect, protect the incumbents and make it harder for new companies to succeed are one of the great day-to-day frustrations of running a finance startup.) I’ve heard from hundreds of people at our seminars that they are trying our service, and our new assets continue to grow at a consistent rate of at least 15% a month.
This week, we announced that Adam Nash, an executive who played a key role in driving growth and product innovation at LinkedIn and eBay, joins us as our chief operating officer. Adam will oversee engineering, product and marketing at Wealthfront.
I can assure you we are not resting on our laurels. Our rate of innovation is increasing, and we plan to continue our rapid rate of new feature development. We continue to offer free seminars for companies that want to help their employees invest their savings. Talking to people in our market helps us shape our product roadmap.
Our strategy is informed by our mission to democratize access to high quality financial advice. We take this challenge very seriously. We want to build a great company by doing well for our clients.
We have a number of great new ideas in the development hopper to both improve and simplify our service, but would greatly appreciate hearing from you. Please email me at andy@wealthfront with any enhancements or new ideas you would like to see us implement.
We look forward to many more happy anniversaries.
Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.
This blog is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
When Wealthfront replaces investments with “similar” investments as part of the tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower an investor’s tax bill while maintaining a similar expected risk and return on the investor’s portfolio. Wealthfront assumes no responsibility to any investor for the tax consequences of any transaction.
Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that Wealthfront trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.
Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse’s accounts outside of Wealthfront to ensure that transactions in the same security or a substantially similar security do not create a “wash sale.” A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes. More specifically, the wash sale period for any sale at a loss consists of 61 calendar days: the day of the sale, the 30 days before the sale, and the 30 days after the sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). Except as set forth below, Wealthfront will monitor only a client’s (or client’s spouse’s) Wealthfront accounts to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions outside of Wealthfront accounts may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner.
A client may also request that Wealthfront monitor the client’s spouse’s accounts or their IRA accounts at Wealthfront to avoid the wash sale disallowance rule. A client may request spousal monitoring online or by calling Wealthfront at 844-995-8437. If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days.
About the author(s)
Andy Rachleff is Wealthfront's co-founder and Executive Chairman. He serves as a member of the board of trustees and chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship. Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. He also spent ten years as a general partner with Merrill, Pickard, Anderson & Eyre (MPAE). Andy earned his BS from University of Pennsylvania and his MBA from Stanford Graduate School of Business. View all posts by Andy Rachleff