Betterment is facing a class action lawsuit filed by a client who alleges the robo advisor did not act in the best interests of its clients with regards to its cash sweep program, according to Wealth Management.
The suit was filed in New York federal court by New Jersey resident Michael Treadway. He alleges that Betterment, as part of its Transfer Sweep Program (TSP), swept excess cash from clients into deposit accounts with participating banks that did not generate any interest. As a result, he said, investors lost significant interest they would have otherwise earned if Betterman had placed the money into deposit accounts paying “reasonable” market rates.
Treadway states that Betterment’s own materials acknowledged that funds held in its Transfer Sweep Program earn no yield, but that the firm’s advisors received payments from the participating TSP banks based on balances maintained in those accounts.
“Thus, every dollar of client cash swept into the TSP increased the base on which Betterment could earn bank payments, even though the client received no interest on that same cash,” the complaint read.
Betterment’s disclosure documents noted its incentive to increase the balances in the TSP accounts. But Treadway contends the documents did not “disclose the magnitude of Betterment’s bank-paid compensation, the spread retained, the amount of lost client yield, or the alternatives that could have allowed clients to earn interest on cash.”
The complaint points out that Betterment’s Cash Reserve program offered clients “the opportunity to earn interest on cash,” but the TSP disclosures did not explain why clients’ funds would be swept into a non-interest-bearing account when interest-bearing opportunities were available.
“Had Betterment provided full and fair disclosure of these material facts, plaintiff and other class members would not have agreed to have their cash swept into the TSP, would have transferred those funds to available interest-bearing alternatives, would have invested those funds elsewhere, or otherwise would have taken steps to avoid the loss of interest and Betterment’s undisclosed capture of the economic return on their cash,” said Treadway.
Treadway, claiming to represent all those who have been affected by Betterment’s sweep program, contends that the firm violated its fiduciary duty as a registered investment advisor.
“We believe the claims are without merit and intend to defend against them vigorously,” a Betterment spokesperson told InvestmentNews via email regarding the lawsuit. “We’re unable to comment further on the specifics of pending litigation.”
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