REDWOOD CITY, Calif., June 15, 2017 /PRNewswire/ -- Today, Wealthfront announces Advanced Indexing, the latest feature in the company's unique PassivePlusⓇ approach to investments. PassivePlus represents a collection of peer reviewed, rules-based strategies that aim to increase a client's after-tax return while maintaining the same level of risk. Advanced Indexing joins Wealthfront's previous two PassivePlus features, daily tax-loss harvesting and stock-level tax-loss harvesting known as Direct Indexing, as impactful capabilities that are offered at no additional cost to its 0.25% annual advisory fee.
Conceived by its team of PhDs led by Dr. Burton Malkiel, Chief Investment Officer and Jakub Jurek, Vice President of Research, Advanced Indexing applies multiple investment factors to tilt the weighting of stocks that make up the U.S. stock allocation of a client's diversified portfolio. Multi-factor models have been used by institutional investors since the 1970s and more recently were recognized by the Nobel Prize awarded in 2013. Firms like Dimensional Fund Advisors (DFA) have employed multi-factor models to attract assets in excess of $500 billion.
"Recently we've seen a proliferation of factor-based strategies in the form of Smart Beta ETFs, but 95% of them fail to capitalize on the diversification potential from optimizing exposure across multiple factors," says Jurek. "Wealthfront's Advanced Indexing combines academically robust, time-tested factors with our Direct Indexing to improve client's after-tax returns. Moreover, we deliver this at no incremental cost to the client, unlike Smart Beta ETFs."
Advanced Indexing improves on existing Smart Beta ETFs in three ways:
- Multiple Factors: By combining five relatively uncorrelated factors that include; value, momentum, dividend yield, market beta and volatility, Advanced Indexing is likely to outperform a traditional market capitalization weighted index fund over the long-run, while minimizing the potential for underperformance. A 2016 report from Morningstar, finds that only 5% of Smart Beta ETFs apply a multi-factor portfolio construction methodology.
- No Management Fee: Wealthfront does not charge a management fee for Advanced Indexing, which means the benefits accrue entirely to the client. Issuers of Smart Beta ETFs typically charge an incremental management fee that eats up the benefit the retail investor would receive.
- Tax Efficiency: Wealthfront offers a unique combination of Advanced Indexing with its Direct Indexing in order to use the losses harvested through Direct Indexing to minimize the gains that are subject to taxes. This approach is not possible in a fund structure because the Investment Company Act of 1940 prohibits fund issuers from distributing losses.
Based on our extensive backtesting detailed in our Advanced Indexing white paper, we expect the U.S. stock allocation of the client's portfolio to outperform the cap-weighted index by up to 1% annually. Advanced Indexing is available to all Wealthfront clients who invest at least $500,000 in a taxable account.
"There are decades of research showing that chasing the market is a fool's errand," says Dr. Malkiel. "But there are methods beyond buying and holding an index you can employ to give yourself a leg up; keep fees low, be smart about taxes and stay diversified. Wealthfront can deliver different flavors of these strategies directly to the retail investor under our PassivePlus investment strategy for no additional cost through the use of technology."
In addition to expanding its suite of PassivePlus investment features, Wealthfront has recently shipped a number of cutting edge financial planning capabilities that distinguish the company as the only advisor to offer investment management and financial planning through a strictly software-based service. This strategy has accelerated the company's rate of growth in assets and clients. In the first five months of 2017, Wealthfront added approximately $2 billion in assets and now manages over $6.7 billion.
Wealthfront is the only robo-advisor to offer both investment management and financial planning exclusively through software. Because of this approach, the company has quickly become the automated advisor of choice among young people. Anyone can open a Wealthfront investment account with $500 to access a unique PassivePlus investment strategy and all clients receive financial planning through the service, Path. All for an annual management fee is 0.25%. Wealthfront was launched by Andy Rachleff and Dan Carroll in December 2011 and currently manages nearly $7 billion. For more information please visit www.wealthfront.com.
The 1% figure is based on backtesting. Backtested results are hypothetical, are not an indicator of any investor's actual current or future experience, and are provided for illustrative purposes only. Hypothetical performance is developed by the retroactive application of a model designed with the benefit of hindsight and has inherent limitations. Specifically, hypothetical results do not reflect actual trading or the effect of material economic and market factors on the decision-making process.
Wealthfront assumed we would be able to purchase the securities recommended by the model and the markets were sufficiently liquid to permit all trading. Clients evaluating this information should consider the processes, data, and assumptions used by Wealthfront during its backtesting. Backtested results were adjusted to reflect the reinvestment of dividends and other earnings and are presented net of advisory fees.
Some of Wealthfront's investment strategies can lead to high levels of trading that could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (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.
Both daily tax-loss harvesting and stock-level tax-loss harvesting described in this release 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 ordinary income and distributions.
The effectiveness of the tax-loss harvesting 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). 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 Wealthfront accounts. Clients are 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. 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.
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.
PassivePlus® is a registered trademark and property of CSSC Investment Advisory Services, Inc. ("CSSC") and is used under license. CSSC and Wealthfront are not affiliated companies.