Robo-advisor Betterment settles tax charges with SEC for $9 million (2024)
The U.S. Securities and Exchange Commission headquarters in Washington.
Al Drago/Bloomberg via Getty Images
Robo-advisor firm Betterment agreed on Tuesday to settle charges with the U.S. Securities and Exchange Commission for $9 million over alleged failures related to an automated tax service.
The sum will be distributed among roughly 25,000 client accounts, which lost about $4 million in potential tax benefits from 2016 to 2019, the SEC alleged.
The median payout for investors will be less than $100, Betterment estimated.Affected customers will be notified of their compensation later this year when the SEC approves a distribution plan, the company said.
Betterment didn't admit or deny wrongdoing as part of its settlement agreement.
Betterment was among the initial crop of automated investment platforms — so-called robo-advisors — for retail investors that started cropping up around 2008, when the advent of the iPhone created a ubiquitous digital culture.
In basic terms, this technique — common among financial planners — seeks to reduce or eliminate taxes owed on investment profits by offsetting them with losses from other investments. That might mean selling losing stocks to offset taxes on winners, for example.
The SEC alleged that Betterment "misstated or omitted several material facts" in client communications concerning its tax-loss harvesting service.
Software tweaks and coding errors found
Among other things, the company didn't disclose a software tweak related to the frequency with which it scanned customer accounts for tax-saving opportunities, and had two computer coding errors that prevented some clients' losses from being harvested, the SEC said.
"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," Antonia M. Apps, director of the SEC's New York regional office, said in a written statement Tuesday.
Betterment had fixed the related coding and customer disclosure issues by 2019, the company said. Since then, Betterment has "made significant investments to build and strengthen its compliance program," it said Tuesday in a written statement.
The tax-loss harvesting service saved hundreds of millions of dollars in taxes for more than 275,000 customers who have used it since it was introduced in 2014, Betterment said.
"[Betterment] fully cooperated with the SEC's inquiry and is pleased to have reached a resolution on these issues," it said.
Robo-advisor Betterment agreed to pay $9 million to settle allegations that it made misstatements about its tax-loss
tax-loss
Capital loss is the difference between a lower selling price and a higher purchase price or cost price of an eligible Capital asset, which typically represents a financial loss for the seller. This is distinct from losses from selling goods below cost, which is typically considered loss in business income.
Without admitting or denying the SEC's findings, Betterment agreed to a cease-and-desist order, a censure, and to pay a $9 million civil penalty that will be distributed to affected clients.
Robo-advisor firm Betterment agreed on Tuesday to settle charges with the U.S. Securities and Exchange Commission for $9 million over alleged failures related to an automated tax service.
SIPC membership: Betterment provides Securities Investor Protection Corporation (SIPC) insurance, like any investment broker. This insurance covers your portfolio and uninvested cash in case Betterment goes bankrupt. Your portfolio is insured up to $500,000, with up to $250,000 maximum for uninvested cash.
While tax-loss harvesting with a robo-advisor in a brokerage or non-retirement account is typically a wise move, self-directed investors might have more difficulty with the process. Individual investors need to regularly monitor their investments to uncover harvestable tax losses.
“Betterment is where, following the repair or reinstatement works, the claimant has a newer or better property than they would have had but for the breach.” A claimant is generally entitled to the reasonable cost of making good.
Betterment is a solid robo-advisor choice for people who want to get serious about investing for something big, like a home down payment, college fund or their own retirement. Betterment's algorithms match your risk tolerance and specific goals to diversified portfolios of low-cost exchange traded funds (ETFs).
Both companies are among the winners in our list of the best robo-advisors of 2023, with Wealthfront winning best overall, best for goal planning, best for portfolio construction, and best for portfolio management, while Betterment is best for beginners and best for cash management.
Stocks and Bonds Investing Accounts Betterment's investment advice is available for 0.25% (25 bps) per year or $4 per month. While it will impact our fees, Betterment does not require you to maintain a minimum balance for your account.
Betterment is registered with the U.S. Securities and Exchange Commission (SEC), so it has a federal duty to serve your best interests. Furthermore, most robo-advisor companies also maintain heavily encrypted websites, so you typically won't have to worry about your data and money's safety.
Like any company, Betterment also has some cons. It doesn't offer customers the ability to trade or buy individual investments, and its educational library also could be more comprehensive.
Betterment was founded in 2008 in New York City by Jon Stein, a Columbia Business School MBA graduate, and Eli Broverman, a lawyer out of NYU School of Law. Betterment, LLC was established as a Delaware corporation on April 7, 2009.
In our analysis, the two robo-advisors with the top scores were Wealthfront and Betterment. Wealthfront stands out as a low-cost option with flexible, diversified investment portfolio choices. Betterment also has low fees, and we like that you can add on human advice if you need it.
The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.
Robos can “help create a portfolio you are comfortable with.” (To be clear, robo advisors don't protect you from market fluctuations; you can still lose money if the stock or fund you invest in tanks after you buy it, and you choose to sell.
www.betterment.com. The company is based in New York City, registered with the Securities and Exchange Commission, and a member of the Financial Industry Regulatory Authority. It is a registered investment advisor and broker-dealer.
The crash led to Congress to passing the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC "was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing."
Under the new “T+1” settlement cycle, all applicable securities transactions from U.S. financial institutions will settle in one business day of their transaction date. For example, if you sell shares of ABC stock on Monday, the transaction will settle on Tuesday.
Betterment charges are collected by the urban local bodies when property prices have increased owing to the developments in physical infrastructure or the development of any commercial or related establishment. The calculation of these charges is usually done based on the market value (per sq m) of a plot.
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