Compliance April 18, 2023

Betterment Pays SEC $9M for Misstatements Regarding Tax Loss Harvesting

The digital advice and IRA provider agreed to pay the fines without admitting or denying wrongdoing.

Reported by


Betterment LLC has paid the Securities and Exchange Commission $9 million for allegedly omitting or failing to provide “several material facts” related to tax loss harvesting services to clients, the SEC and firm announced on Tuesday. The funds are meant to be distributed to Betterment clients affected by the violations.

According to an SEC order, the New York-based digital investment firm failed to provide clients with notice of changes to contracts and did not maintain certain required books and records. The SEC alleged that from 2016 to 2019, Betterment misstated or omitted facts concerning tax loss harvesting that intended to scan clients’ accounts for opportunities to reduce their tax burden. The failures cost more than 25,000 clients about $4 million in potential tax benefits, according to the SEC.

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Betterment is among a group of digital investing and advice platforms that connect consumers directly to services ranging from robo-advised retirement accounts to cryptocurrency assets to financial education. The firm said in an online statement that the tax loss harvesting issue involved less than 1% of the total losses harvested by Betterment since it introduced the service in 2014. The median payout to each client effected is expected to be less than $100, Betterment said.

According to the SEC, Betterment went awry from the Investment Advisers Act of 1940 through actions such as failing to disclose changes in the software related to its scanning frequency for tax benefits. The regulator also charged the firm with failing to disclose a programming constraint affecting certain clients and with having two computer coding errors that prevented harvesting losses for some clients.

“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,” Antonia M. Apps, director of the SEC’s New York regional office, said in a statement. “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.”

The regulator also found that Betterment failed to provide advance notice of changes to its advisory contract, as well as failing to maintain accurate books and records reflecting written agreements, actions that violated its fiduciary duty as an investment adviser.

According to the SEC, the firm consented to the entry of the SEC’s order finding that it violated Sections 204, 206(2) and 206(4) of the Investment Advisers Act of 1940 and related rules.

“While Betterment reached a settlement with the SEC, it neither admits nor denies any wrongdoing,” Betterment stated. “The SEC Order acknowledges that Betterment addressed the TLH-related coding and disclosure issues by 2019. In the years since 2019, Betterment has also made significant investments to build and strengthen its compliance program.”

The firm said the settlement will be deposited into a “fair fund” that will compensate impacted customers for any potential tax benefits they missed due to the legacy issues. Those customers will be notified later this year once it is approved by the SEC.

Betterment said its tax loss harvesting services, which is provided “without additional fees,” identifies and sells holdings that have decreased in price during temporary market declines. The service has saved 275,000 customers who enabled the feature an estimated hundreds of millions of dollars, according to the firm.

In Practice April 17, 2023

New Retirement Firm Aims to Partner with Generalist Advisers

Freedom Fiduciaries seeks to manage plan fiduciary duties so smaller financial advisories can focus on client relationships, wealth management.

Reported by


During more than a decade of work in the wholesale retirement plan space, Shane Hanson saw a problem: The general financial advisers he was selling to were often not able to fully meet the needs of the plan sponsor and plan participants.

“I would come across generalist advisers who needed to close a plan, and I would come in to help them,” Hanson says. “The issue is that at the end of the day, you can only be so many things to so many people. … I knew when I left that the plan sponsor was not truly being serviced.”

Hanson says that after seeing hundreds of these situations, he saw an opening in the market to provide retirement services to smaller advisers overseeing about 10 to 15 clients. If he could provide the 3(38) fiduciary investment services, along with back-office support, he believed the advisers could focus on client relationships and “higher-fee” areas such as wealth management and insurance.

Those generalist advisers “are trying to do the best that they can, but they just don’t focus on the space or have someone on their team who specializes in it, so they struggle with scale and being bogged down by the day-to-day needs,” he says. “If we can provide that solution, they can focus on their wealth management or financial advice or insurance, and we will take care of the plan sponsor and participant.” 

Freedom

Shane Hanson.

Last Thursday, Hanson and his business partner, Cristina Hansen, made his vision reality by launching a retirement consulting firm called Freedom Fiduciaries LLC, overseeing about $200 million in client assets with six staff members.

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The firm, based in Boise, Idaho, is offering advisers ERISA 3(38) services, as well as what it calls the Bac(k) Office solution to handle the “day-to-day minutiae” of retirement plan servicing, including service issues, payroll consulting and plan design discussions.

Freedom Fiduciaries is also offering participant communication and engagement tools to be used by advisers and plan sponsors, namely ParticipantIQ for participant communication and FiduciaryIQ for fiduciary training and guidance for sponsors.

“Over the past decade, the retirement plan industry has evolved and now demands a specific skill set from retirement plan specialists,” Dick Darian, the CEO of retirement industry consultancy Wise Rhino, said in a statement with the announcement. “The need for a robust back-office solution has never been greater and will only increase as the industry becomes more specialized and complex.”

For the Assist

Hanson says Freedom Fiduciaries is looking to work alongside advisers in a split-fee model depending on what services are requested. The retirement adviser, who was the captain of his college basketball team at Chaminade University of Honolulu in 2010-11, equates the relationship to a sports team.

“Our role on this team is to specialize in consulting on the retirement plan and letting that partner adviser shine with what they are best at, which is going after that ancillary business, which is looked at as a higher-margin business,” he says. “They have the relationship with the business owner, and that’s why the adviser is in the plan.”

In the current plan landscape, large retirement advisories and insurance and benefits aggregators are setting a torrid pace acquiring wealth managers, with the goal of providing the full range of services to employers. Meanwhile, small retirement plan providers are inking deals with registered investment advisories to provide retirement plan backing for clients.

Hanson sees the firm servicing those financial advisers and broker/dealers who fall through the cracks. The big aggregators are not, in his view, looking to acquire an adviser who is managing 10 to 15 employer clients.

“They are not on an acquisition spree for the everyday 10-15 plan adviser,” Hanson says. “Who is going to help these advisers? I’m looking to fill a gap in the marketplace.”

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