Market Risk - The price of any security or the value of an entire asset class can decline for a variety of reasons outside of Wealthfront’s control, including, but not limited to, changes in the macroeconomic environment, unpredictable market sentiment, forecasted or unforeseen economic developments, interest rates, regulatory changes, and domestic or foreign political, demographic, or social events. If you have a large allocation to a particular asset class, it may negatively affect your overall performance to the extent that the asset class underperforms relative to other market assets. Conversely, a small allocation to a particular asset class that outperforms other asset classes in a particular period will cause that your account to underperform relative to the overall market.
Advisory Risk - There is no guarantee that Wealthfront’s investment approach will necessarily produce the intended results. It’s possible that you or Wealthfront may experience computer equipment failure, loss of internet access, viruses, or other events that may impair access to Wealthfront’s software based financial advisory service. Wealthfront and its representatives are not responsible to any Client for losses unless caused by Wealthfront breaching its fiduciary duty.
Software Risk - Wealthfront delivers its financial advisor services entirely through software. Consequently, Wealthfront rigorously designs, develops and tests its software extensively before putting such software into production with actual Client accounts and assets and periodically monitors the behaviors of such software after its deployment. Notwithstanding this rigorous design, development, testing and monitoring, it is possible that such software may not always perform exactly as intended or as disclosed on our website, app, blogs or other Wealthfront disclosure documents, especially in certain combinations of unusual circumstances. Wealthfront continuously strives to monitor, detect and correct any software that does not perform as expected or as disclosed. It is Wealthfront’s policy to ensure that any Clients who suffer financial harm due to any software that does not perform as expected or as disclosed as a result of a result of Wealthfront’s breach of fiduciary duty are made whole.
Volatility and Correlation Risk - Wealthfront’s security selection process is based in part on a careful evaluation of past price performance and volatility to evaluate future probabilities. It is possible that different or unrelated asset classes may exhibit similar price changes in similar directions which may adversely affect your account, and may become more acute in times of market upheaval or high volatility. Past performance is no guarantee of future results, and any historical returns, expected returns, or probability projections may not reflect actual future performance.
Liquidity and Valuation Risk - High volatility and/or the lack of deep and active liquid markets for a security may prevent Wealthfront from selling your securities at all, or at an advantageous time or price because Wealthfront’s executing broker-dealer may have difficulty finding a buyer and may be forced to sell at a significant discount to market value. Some securities (including ETFs) that hold or trade financial instruments may be adversely affected by liquidity. While Wealthfront values the securities held in your accounts based on reasonably available exchange-traded security data, Wealthfront may from time to time receive or use inaccurate data, which could adversely affect security valuations, transaction size for purchases or sales, and/or the resulting advisory fees paid by you to Wealthfront.
Credit Risk - You could be exposed to the risk that financial intermediaries or security issuers may experience adverse economic consequences (including impaired credit ratings, default or insolvency), which in turn may affect your portfolio values or management. In addition, exchange trading venues or trade settlement and clearing intermediaries could experience adverse events that may temporarily or permanently limit trading or adversely affect the value of your securities. Finally, any issuer of securities may experience a credit event that could impair or erase the value of the issuer’s securities held by you. Wealthfront seeks to limit credit risk by generally adhering to the purchase of ETFs, which are subject to regulatory limits on asset segregation and leverage such that fund shareholders are given liquidation priority versus the fund issuer; however, certain funds and products, which Wealthfront generally does not invest in, may involve higher issuer credit risk because they are not structured as a registered fund.
Legislative and Tax Risk - Performance may directly or indirectly be affected by government legislation or regulation, which may include, but is not limited to: changes in investment adviser /financial advisor or securities trading regulation; change in the U.S. government’s guarantee of ultimate payment of principal and interest on certain government securities; and changes in the tax code that could affect interest income, income characterization and/or tax reporting obligations. Wealthfront does not engage in tax planning, and in certain circumstances you may incur taxable income on your investments without a cash distribution to pay the tax due.
Tax-Loss Harvesting Risk - Clients who activate our tax-loss harvesting service are subject to the following risks:
- Wealthfront’s tax-loss harvesting strategy is not intended as tax advice, and Wealthfront does not represent in any manner that the tax consequences described will be obtained or that Wealthfront’s investment strategy will result in any particular tax consequence. The tax consequences of this strategy and other Wealthfront strategies are complex and may be subject to challenge by the IRS. This strategy was not developed to be used by, and it cannot be used by, any investor to avoid penalties or interest.
- When Wealthfront replaces investments with “similar” investments as part of its tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower your tax bill while maintaining a similar expected risk and return on your portfolio. Expected returns and risk characteristics are no guarantee of actual performance.
- 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.
- The effectiveness of the tax-loss harvesting strategy to reduce your tax liability will depend on your entire tax and investment profile, including purchases and dispositions in your (or your 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). 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 may be subject to limitations under applicable tax laws. For example, if you have insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against your income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
- If you and/or your spouse have other taxable or non-taxable investment accounts, and you hold in those accounts any of the securities (including options contracts) held in your Wealthfront account, you cannot trade any of those securities 30 days before or after Wealthfront trades those same securities as part of the tax-loss harvesting strategy to avoid possible wash sales and, as a result, a nullification of any tax benefits of the strategy. For more information on the wash sale rule, please read IRS Publication 550.
- Wealthfront only offers tax-loss harvesting for accounts held at Wealthfront. You are responsible for monitoring your and your 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. Wealthfront may lack visibility to certain wash sales, should they occur as a result of external accounts, and therefore Wealthfront may not be able to provide notice of such wash sale in advance of your receipt of the IRS Form 1099.
- Except as set forth below, Wealthfront will monitor only your (or your 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 that loss is usable by you in the most efficient manner. You may request that Wealthfront monitor your spouse’s accounts at Wealthfront to avoid the wash sale disallowance rule. If Wealthfront monitors 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.
- Under certain limited circumstances, there is a chance that Wealthfront trading attributed to tax-loss harvesting may create capital gains. In addition, tax-loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account.
Potentially High Levels of Trading Risk - 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.
Foreign Investing and Emerging Markets Risk - Foreign investing involves risks not typically associated with U.S. investments, and the risks may be exacerbated further in emerging market countries. These risks may include, among others, adverse fluctuations in foreign currency values, as well as adverse political, social and economic developments affecting one or more foreign countries. In addition, foreign investing may involve less publicly available information and more volatile or less liquid securities markets, particularly in markets that trade a small number of securities, have unstable governments, or involve limited industry. Investments in foreign countries could be affected by factors not present in the U.S., such as restrictions on receiving the investment proceeds from a foreign country, foreign tax laws or tax withholding requirements, unique trade clearance or settlement procedures, and potential difficulties in enforcing contractual obligations or other legal rules that jeopardize shareholder protection. Foreign accounting may be less transparent than U.S. accounting practices and foreign regulation may be inadequate or irregular.
ETF Risks, including Net Asset Valuations and Tracking Error - ETF performance may not exactly match the performance of the index or market benchmark that the ETF is designed to track because 1) the ETF will incur expenses and transaction costs not incurred by any applicable index or market benchmark; 2) certain securities comprising the index or market benchmark tracked by the ETF may, from time to time, temporarily be unavailable; and 3) supply and demand in the market for either the ETF and/or for the securities held by the ETF may cause the ETF shares to trade at a premium or discount to the actual net asset value of the securities owned by the ETF. Certain ETF strategies may from time to time include the purchase of fixed income, commodities, foreign securities, American Depositary Receipts, or other securities for which expenses and commission rates could be higher than normally charged for exchange-traded equity securities, and for which market quotations or valuation may be limited or inaccurate.
You should be aware that to the extent you invest in ETF securities you will pay two levels of advisory compensation – advisory fees charged by Wealthfront plus any management fees charged by the issuer of the ETF. This scenario may cause a higher cost (and potentially lower investment returns) than if you purchased the ETF directly.
An ETF typically includes embedded expenses that may reduce the fund's net asset value, and therefore directly affect the fund's performance and indirectly affect your portfolio performance or an index benchmark comparison. Expenses of the fund may include ETF management fees, custodian fees, brokerage commissions, and legal and accounting fees. ETF expenses may change from time to time at the sole discretion of the ETF issuer. Wealthfront discloses each ETF’s current information, including expenses, on the Site. ETF tracking error and expenses may vary.
Inflation, Currency, and Interest Rate Risks - Security prices and portfolio returns will likely vary in response to changes in inflation and interest rates. Inflation causes the value of future dollars to be worth less and may reduce the purchasing power of your future interest payments and principal. Inflation also generally leads to higher interest rates, which in turn may cause the value of many types of fixed income investments to decline. In addition, the relative value of the U.S. dollar-denominated assets primarily managed by Wealthfront may be affected by the risk that currency devaluations affect your purchasing power.
College Savings Account Risks – College Savings Accounts are subject to various risks, including but not limited to:
Special Nature of Plan Interests - You and your beneficiary do not have access or rights to any assets of the state sponsoring our 529 Plan or any assets of the state trust of the Section 529 college savings plan (a “Plan”) other than the assets credited to your account for your beneficiary. The college savings account is an investment vehicle. College savings accounts are subject to certain risks including: (i) the possibility you may lose money over short or even long periods of time; (ii) the risk of changes in applicable federal and state tax laws and regulations; (iii) the risk of Plan changes including changes in fees and expenses; and (iv) the risk that contributions to the college savings account may adversely affect the eligibility of your beneficiary or you for financial aid or other benefits. Some Municipal Fund Securities (MFSs) in your college savings account carry more and/or different risks than others. You should weigh such risks with the understanding that they could arise at any time during the life of your account.
Municipal Fund Securities - When you contribute to your college savings account, your money will be invested in MFSs. An investment in your college savings account is not a bank deposit. None of your account, the principal you invest nor any investment return you earn, is insured or guaranteed by (i) any state or any state agencies, instrumentalities or funds, (ii) any officer, official, staff member of any state, (iii) any Plan or any program manager of any such Plan, (iv) any board of any state trust issuing MSFs for a Plan (a “Board”), (v) any such state trust (as “State Trust”), (vi) Wealthfront, (vii) each of their respective affiliates, officials, officers, directors, employees and representatives, (viii) the federal government, (ix) the Federal Deposit Insurance Corporation (“FDIC”), or (x) any other governmental agency. Investment returns will vary depending upon the performance of the designated portfolios in your account. You could lose all or a portion of your investment.
Relatively Short Investment Time Horizon - Relative to investing for retirement, the holding period for college savings investors is very short (e.g., 5-20 years versus 30-60 years). Also, the need for liquidity during the withdrawal phase (to pay for qualified higher education expenses) generally is very important. You should strongly consider the level of risk you are willing to assume.
Limited Investment Direction - You may not direct the underlying investments in your college savings account. The ongoing investment management is the responsibility of Wealthfront. The only manner in which you can affect your investment management is to change your risk score, which is limited to two times per year, or upon the change of your beneficiary. Once the permitted two per calendar year risk score changes are made in your account, a subsequent risk score change in your account within the same calendar year will not be processed. The choice of the underlying investments of the MSFs is subject to the approval of the Board. Automatic investment exchanges that occur as your assets move through the glide path do not count towards your twice per calendar year investment exchange limit.
Liquidity Risk - Investments in a Plan are considered less liquid than other types of investments (e.g., investments in ETFs) because the circumstances in which you may withdraw money from a Plan account without a penalty or adverse tax consequences are significantly more limited.
Potential Changes to the Plan – The Board generally reserves the right, in its sole discretion, to discontinue the Plan or to change any aspect of the Plan. For example, the Board may change the Plan’s fees and expenses; add, subtract, or merge the MSFs; close an MSF to new investors; or change the program manager or the underlying investment(s) of an MFS. Depending on the nature of the change, you may be required to, or prohibited from, participating in the change with respect to accounts you established before the change. A particular program manager may not necessarily continue as the Plan’s program manager, and Wealthfront may not necessarily continue as the investment adviser and distributor to a Plan (although Wealthfront will continue as your investment adviser until either Wealthfront or you terminates that investment advisory relationship).
Changes to a Plan may or may not be beneficial to you. The Board may terminate a Plan by giving written notice to you, but even if the Board terminates the Plan, you and your beneficiary’s rights to your account assets will be unaffected. An MFS may be temporarily uninvested during a transition from one investment underlying an MFS to another underlying investment. The transaction costs associated with any liquidation, as well as any market impact on the value of the securities being liquidated, will be borne by the MFS which ultimately may impact the individual portfolios holding that MFS.
Status of Federal and State Law and Regulations Governing a Plan - Federal and state law and regulations governing the administration of Plans could change in the future. In addition, federal and state laws on related matters, such as the funding of higher education expenses, treatment of financial aid, and tax matters are subject to frequent change. It is unknown what effect these kinds of changes could have on your college savings account. You should also consider the potential impact of any other state laws on your account. You should consult your tax advisor for more information.
Eligibility for Financial Aid - The treatment of college savings account assets may have an adverse effect on your beneficiary’s eligibility to receive assistance under various federal, state, and institutional financial aid programs.
No Guarantee That Investments Will Cover Qualified Higher Education Expenses; Inflation and Qualified Higher Education Expenses - There is no guarantee that money in your college savings account will be sufficient to cover all of your beneficiary’s qualified higher education expenses, even if contributions are made in the maximum allowable amount for your beneficiary. The future rate of increase in qualified higher education expenses is uncertain and could exceed the rate of investment return earned by a Plan account over the relevant period of time.
Portfolio Line of Credit (See endnote below) – A loan made to you under this service is technically a margin loan subject to the following risks:
- You can lose more funds than you deposited in your margin account. A decline in the value of securities that are purchased on margin may require you to provide Wealthfront with additional funds to avoid the forced sale of those securities or other securities or assets in your margin account(s).
- Wealthfront can force the sale of securities or other assets in your margin account(s). If the equity in your margin account falls below the maintenance margin requirements, or our higher “house” requirements, Wealthfront can sell the securities or other assets in any of your margin account(s) held with Wealthfront to cover the margin deficiency. You also will be responsible for any shortfall in the margin account after such a sale.
- Wealthfront can sell your securities or other assets in margin accounts without contacting While Wealthfront will attempt to notify you of margin calls, Wealthfront is not required to do so. However, even if Wealthfront has contacted you and provided a specific date by which you can meet a margin call, Wealthfront can still take necessary steps to protect its financial interests, including immediately selling your securities without providing you notice.
- You are not entitled to choose which securities or other assets in your account(s) that are liquidated or sold by Wealthfront to meet a margin call. Because the securities are collateral for your margin loan, Wealthfront has the right to decide which security to sell in order to protect its interests.
- Wealthfront can increase its margin requirements at any time and is not required to provide advance written notice to Changes in Wealthfront’s policy often take effect immediately and may result in the issuance of a margin call. A failure by you to satisfy the call may cause Wealthfront to liquidate or sell securities in your margin account(s).
- You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to you under certain conditions, you do not have a right to the extension.
Any reference to Wealthfront in this section refers to our broker dealer subsidiary, Wealthfront Brokerage
This material was prepared to support the marketing of Wealthfront's investment products, as well as to explain its tax-loss harvesting strategies. This content is not intended as tax advice, and Wealthfront does not represent in any manner that the tax consequences described herein will be obtained or that Wealthfront's tax-loss harvesting strategies, or any of its products and/or services, will result in any particular tax consequence. The tax consequences of the tax-loss harvesting strategy and other strategies that Wealthfront may pursue are complex and uncertain and may be challenged by the IRS. This white paper was not prepared to be used, and it cannot be used, by any investor to avoid penalties or interest.
Prospective investors should confer with their personal tax advisors regarding the tax consequences of investing with Wealthfront and engaging in these tax strategies, based on their particular circumstances. Investors and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor's personal tax returns. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. When Wealthfront says it 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. Expected returns and risk characteristics are no guarantee of actual performance.
The charts showing potential tax savings ("Annual Tax Alpha") from the tax-loss harvesting strategies are historical simulated returns based on backtesting and do not rely on actual trading using client assets. The results are hypothetical only. Several processes, assumptions and data sources were used to create one possible approximations of how Wealthfront's tax-loss harvesting strategy might have benefited investors in the past, and a different methodology may have resulted in different outcomes. These results were achieved by means of the retroactive application of a model designed with the benefit of hindsight. The results of the historical simulations are intended to be used to help explain possible benefits of the tax-loss harvesting strategy and should not be relied upon for predicting future performance.
We simulated the potential after-tax benefits of our tax-loss harvesting services and found that asset-class tax-loss harvesting it added an average of at least 1.55% annually and stock-level tax-loss harvesting combined with asset-class tax-loss harvesting added an average of at least 2.03%. We used several assumptions to create these possible approximations, but did not rely on actual client trading history. These results are based on a study Wealthfront conducted for the years between January 2000 and August 2014, assuming a Wealthfront account with a risk score of 7 an initial deposit of $100,000, additional quarterly deposits of $10,000, and periodic rebalancing for asset-class tax-loss harvesting and an initial deposit of $500,000, additional quarterly deposits of $50,000, and periodic rebalancing for stock-level tax-loss harvesting combined with asset-class tax-loss harvesting. Dividends and interest were not considered.
To compare the possible benefit of continuous vs. annual year-end tax-loss harvesting, we use the same assumptions for the historical simulation for the years between January 2000 and December 2012 but with tax-loss harvesting opportunities examined daily vs. annually at year-end.
Different methodologies may have resulted in different outcomes. For example, we assume that an investor's risk profile and target allocation would not have changed during the time period shown; however, actual investors may have experienced changes to their allocation plan in response to changing suitability profiles and investment objectives. Furthermore, material economic and market factors that might have occurred during the time period could have had an impact on decision-making. Actual investors on Wealthfront may experience different results from the results shown. There is a potential for loss as well as gain that is not reflected in the hypothetical information portrayed. Investors evaluating this information should carefully consider the processes, data, and assumptions used by Wealthfront in creating its historical simulations.
While the data used for its simulations are from sources that Wealthfront believes are reliable, the results represent Wealthfront's opinion only. The return information uses or includes information compiled from third-party sources, including independent market quotations and index information. Wealthfront believes the third-party information comes from reliable sources, but Wealthfront does not guarantee the accuracy of the information and may receive incorrect information from third-party providers. Unless otherwise indicated, the information has been prepared by Wealthfront and has not been reviewed, compiled or audited by any independent third-party or public accountant. Wealthfront does not control the composition of the market indices or fund information used for its calculations, and a change in this information could affect the results shown.
The chart showing the tax alpha and cumulative return for daily tax-loss harvesting clients is based on Wealthfront's estimates from existing client data since we launched our asset-class tax-loss harvesting in October 2012 through October 2013. The chart was based on the subset of our clients with tax-loss harvesting enabled in their accounts and the returns and tax alpha were estimated for their accounts only. The return estimates were based on time-weighted returns. The cumulative returns were calculated by taking the composite's daily return based on its daily balance series, where the composite's balance is the aggregated value of all the accounts under our TLH strategy. We then compound the daily return series to get the compounded return over the period. The monthly tax alpha was calculated using the net tax benefit/liability and dividing by the aggregate balance. The net tax benefit over the period includes the liquidation of positions transferred in and sold to invest the client account in the Wealthfront portfolio.
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. 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 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.
As part of transferring your account to Wealthfront, we will apply our algorithms to sell your account, seeking to minimize any potentially negative tax impact and optimizing for other factors, and invest the proceeds into a Wealthfront portfolio. Liquidating your transferred account may cause, among other things, realized capital gains or losses in specific securities, surrender fees, and redirection of declared dividends or distributions. Also be aware selling down securities prior to transfer could subject you to the same risks.