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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.
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.
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Mentioned in this article:
Betterment Holdings Inc.
Financial Planning Software
Top Executive: Jon Stein
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