Robo-advisor Betterment Pays SEC $9 Million in Taxes

Financial Planners

The headquarters of the U.S. Securities and Exchange Commission in Washington.

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Robo-advisor firm Betterment on Tuesday agreed to a $9 million settlement with the U.S. Securities and Exchange Commission over alleged failures related to automated tax services.

The amount was distributed among approximately 25,000 client accounts, resulting in lost potential tax benefits of approximately $4 million from 2016 to 2019, the SEC claims.

Betterment estimates that the median payout to investors will be less than $100. Affected customers will be notified of compensation later this year when the SEC approves the sales plan, the company said.

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Betterment did not admit or deny wrongdoing as part of the settlement agreement.

Betterment was one of the first crops of automated investment platforms for individual investors, so-called robo-advisors, which began to emerge around 2008 when the advent of the iPhone created a ubiquitous digital culture.

Betterment’s alleged failure relates to “harvesting tax losses.”

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Basically, this technique is common among financial planners who try to reduce or eliminate taxes on investment gains by offsetting losses from other investments. This may mean, for example, selling losing shares to offset the winner’s taxes.

The SEC alleged that Betterment “misrepresented or omitted several important facts” in communications with clients regarding its tax loss harvesting services.

Software tweaks and coding errors found

Among other things, the company did not disclose software tweaks related to how often it scans customer accounts for tax-saving opportunities.There were two computer coding errors that resulted in some customers’ losses not being recovered.

“Betterment did not accurately describe its tax loss collection services and lacked transparency about service changes, restrictions and coding errors that negatively impacted thousands of clients,” said the SEC’s New York. Antonia M. Apps, Director of Regional Offices, said. in a written statement on Tuesday.

Betterment 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 in a written statement Tuesday.

Since its introduction in 2014, Betterment has saved hundreds of millions of dollars in taxes for more than 275,000 customers who used the service.

“[Betterment] We are cooperating fully with the SEC’s investigation and are pleased to have reached a resolution on these matters.”

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