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Do I need to sell any securities before I transfer my account to Wealthfront?

It depends. Wealthfront can transfer most U.S. stocks and ETFs without issue, but we ask that you sell or leave behind the following types of securities:

A Special Note on Mutual funds:  We are able to transfer and sell thousands of mutual funds but we can’t yet all of the available products because selling mutual funds is not standardized.  Mutual funds are not currently part of our tax efficient conversion plan and we will attempt to sell them as soon as they arrive.  To speed up the transfer and conversion process we ask that you liquidate or leave your mutual funds in your current account.  If you currently own a Vanguard mutual fund that can be converted to an ETF you can work with Vanguard to convert your holding and then transfer it Wealthfront.  

    • Low priced stocks sometimes referred to as “Penny Stocks.”  These securities do not trade on an exchange and are often hard to sell.  If your security is worth less than $5 and does not trade on an exchange you must sell it or leave it behind to proceed with the transfer. If you choose to leave it behind, please make sure that your remaining balance is above your current firm’s minimum balance requirements. If it isn’t, your firm will reject the transfer.
    • Individual Bonds and other fixed income products. This does not apply to bond ETFs or mutual funds. This means if you own a bond or other fixed income product issued by an individual company, organization, or governmental body it cannot transfer to Wealthfront.  You must sell it or leave it behind to proceed with the transfer.
    • Annuities and other insurance products. Wealthfront does not hold these products and you must surrender your contract or leave it behind to proceed with the transfer.  Please note that these products may have fees or surrender charges associated with the liquidation.  Check with your current firm before proceeding for more information.
    • Options and other derivative securities. Wealthfront does not hold these products and you must sell it or leave it behind to proceed with the transfer.
    • UIT (Unit Investment Trusts).  Wealthfront does not hold these products and you must sell it or leave them behind to proceed with the transfer.

 

 

Any other product that is not actively traded on a US exchange.  This includes private investments, foreign stocks, hedge funds, and many REITs.  

Disclosure

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.

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