Robo-Advisor Betterment to Pay $9 Million Fine For Tax Service Lapses

The SEC said the problems impacted more than 25,000 accounts of Betterment clients, who lost about $4 million in potential tax benefits.

By Rethinking65

Robo-advisor Betterment LLC has agreed to pay a $9 million penalty to settle Securities and Exchange Commission charges that it failed clients who used its automated tax loss harvesting service.

The SEC said the problems with Betterment’s TLH service adversely impacted more than 25,000 client accounts. Clients lost approximately $4 million in potential tax benefits, the SEC said. A fair fund with the $9 million civil penalty will be set up and distributed to the affected clients.

The SEC charged Betterment made misstatements and omissions about the tax-loss harvesting service, failed to provide clients with notice of changes to contracts, and didn’t maintain certain required books and records.

Betterment’s TLH service scans clients’ accounts for opportunities to reduce their tax burden. The SEC found that from 2016 to 2019, Betterment changed its scanning frequency of client accounts from daily to alternating days, but failed to disclose that to clients. It also didn’t disclose constraints to TLH clients that selected a third-party portfolio strategy available on Betterment’s platform with a Betterment-constructed portfolio. Third, Betterment had two computer coding errors that prevented TLH from harvesting losses for some clients, the SEC said.

The SEC’s order also found Betterment violated its fiduciary duty as an investment advisor by failing to provide advance notice of changes to its advisory contract. It also failed to maintain accurate and current books and records reflecting written agreements with certain clients, the SEC order said. The company also failed to adopt and implement written compliance policies and procedures for its TLH service.

“Robo-advisers have the same obligations as all investment advisers to ensure they are transparent about services they provide and upfront about any material changes to those services or issues that may negatively affect clients,” said Antonia M. Apps, director of the SEC’s New York Regional Office, in a prepared release. “Betterment did not describe its tax loss harvesting service accurately, and it wasn’t transparent about the service’s changes, constraints, and coding errors that adversely impacted thousands of clients.”

Betterment settled the case without admitting or denying the SEC’s findings.

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