The $14B robo's ADV will remain clean but it'll live -- like Acorns before it -- with a BrokerCheck violation based on how it managed cash when it was a $608-million firm with a smaller compliance staff

June 22, 2018 — 8:17 PM UTC by Brooke Southall


Brooke's Note: Not only is Betterment the biggest free-standing retail robo in terms of assets and revenues, but arguably, it has the best brand. Wealthfront, SigFig, Trizic, Jemstep, Upside etc. seem not to suggest a value or values proposition. Betterment speaks with a touch of poetry both to its aspiration to do things better and cheaper than Wall Street and also to be Vanguard-like squeaky clean. But here is a case where, in its efforts to do better in the former category, it earned an ugly side-door scratch by running afoul of FINRA. It's notable that, as many robos started, they used Apex Clearing, TD Ameritrade or Pershing as their broker-dealer. Betterment got its own BD, which it believes is key in gaining its market leadership. The company's views on that have not changed. In fact, its arch-rival, Wealthfront, has also brought its custody in-house. Wealthfront nixes Apex Clearing and explains it as step in ridding 'semi-manual processes and disjointed systems'

Betterment has learned the hard way that what goes around as start-up, can come back around in late adolescence and result in a black eye from regulators.  

Back when it had $608 million in managed assets, the New York-based startup routinely rushed cash to clients without enough concern for its reserves. In one May 30, 2014 reserve calculation, it overstated customer-related debits in the customer reserve formula by $816,000.

Betterment has done a lot of growing since then. It now manages more than $14 billion, but FINRA has just docked it for $400,000 to atone for a start-up program that allowed customers – as a courtesy – to access cash proceeds from securities sales on the day after the transaction was executed.

Typical brokerage accounts demand customers wait a standard three business days until securities transactions settle. 

It's the latest robo-advisor to get in trouble for having its own broker-dealer -- something human RIAs generally do not have. Acorns, which manages about $900 million of assets, agreed last July to a $175,000 settlement with FINRA, though that amount was reduced after it claimed hardship because of low revenues, according to its BrokerCheck record. .

Et tu Acorns?

Acorns got in trouble for having 10 million records in 22 categories in the digital equivalent of erasable ink. The categories included instant messages and trade confirmations. It has since rebuilt its system to include records only in "non-erasable" and "non-rewritable" form.  As Acorns grapples with monetizing 1.1 million micro-accounts, the laid-back LA robo-advisor brings Wealthfront’s former chief exec onto its board

In retrospect, the Betterment overreach was an act of zeal by a firm determined to show that it could give customers a friction-free experience of straight-through processing to avoid any vestige of Wall Street, retail-front machinery.

But Betterment managed to elicit one of Wall Street's uglier dings -- a BrokerCheck violation. Betterment, however, did not run afoul of the SEC, which oversees its RIA. No other actions or investigations are pending by any regulators, according to the firm.

The violations happened before Betterment launched its RIA custody business.

Brexit effect

Betterment had one other scrape with procedural questions after Brexit. Betterment explains why its Brexit-sparked trading halt on Friday wasn't 'suspended' trading In that instance, regulators were not involved but drew raised eyebrows from reporters and advisors. Betterment shut down trading post-Brexit to dodge 'trading blindly into extraordinary volatility'

"We take this stuff insanely seriously," says Joe Ziemer. spokesman for Betterment in an interview. All FINRA examinations since 2014 got completed without deficiency findings, he adds.

Betterment now has eight legal and compliance people on staff for its $14 billion in managed assets, up from two at the time. Betterment's customers still wait the standard three days now.


No people referenced

Mentioned in this article:

Betterment Holdings Inc.
Financial Planning Software
Top Executive: Jon Stein

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Jeff Spears said:

June 22, 2018 — 11:35 PM UTC

Even professionals with B/D experience find that FINRA doesn’t give firms the benefit of the doubt like the SEC does. The CCO of a brokerage firm needs a FONOP partner that will file and take responsibility for the monthly net cap requirements. It was something I underestimated but my FINOP never did!

B. Mitchell said:

June 25, 2018 — 5:08 AM UTC

Many disturbing features here so let's just begin by noting you are in genesis with 2014 your charter date and right out of the gate material absences exist. Things like ethical actions, supervision of staff, prudently ensuring the business effectively can preserve customer accounts, and their integrity. Rules spanning 17a-4, 17a-3, 4511 – business critical rule requirements found in the "Exchange Act" but not in your shop involves those important documents relating to every aspect of the business. Seems you felt "trade confirmations" were no longer needed. If there is one area BD's must not disrespect or meddle in- it is the evidence of customer account information- found in the trade confirm. However, the big, messy one is the 17-a, 17a-3 and 4511 failures present- these can illustrate for everyone, in clear, succinct, neon bright cascading torrent of color just what caliber of a professional tam is at work over there. This one will keep you a level ! Audited shop for a good number of years- like 6. Level I members get audited each year- by the Finra staffers who like to get their hands dirty. When no surveillance or supervision is in place for emails and IM"s ( looks like you misplaced hundreds of thousands of them, WHAT, DOES ACORNS stand for "ALL CORRESPONDENCE NEEDS SHREDDING?") you create a safe way for staff members to trade on insider information, abuse the public, and even customers plus you introduce the likelihood of financial theft opportunity and AML activity. Finally, you confuse your reader here a bit- a clearing firm custodies the assets of the asset owner / account owner - and in order for a bd to be self clearing they must be a 250k net capital broker dealer. An Omnibus -wrap relationship is what you have with the thieves over at Apex. The sub accounting and allocation of trades can be done with a third party or with linking the trading system interfaces, etc. CONCLUSION: The regulatory pressure will be thick and they will try to break spirits by auditing you in July and August each year. With this AWC fresh in their minds the only swift and safe solution is to bring in a heavy hitting compliance officer with a reputable track record- the arrival of this person will reverse all perceptions and restore you to a routine audit only member where people smile at one another, and morale is restored. For example, bringing in someone like me, would do just that. Let me know if I can help- we'd need to heighten supervision for a time but this is unrelated to firm growth.

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