The automated fiduciary

Investment advisors who are paid by fees, not commissions, have a fiduciary duty to seek out the best products and services for their clients and to always put a customer’s best interests first. And that obligation applies not just to human advisors, but to automated investing platforms as well, according to a recent Securities and Exchange Commission fine on robo-advisor Betterment.

The fiduciary obligation is the highest standard of care for an investor, and it has two prongs: duty of care, in which an advisor needs to make informed recommendations and scrutinize funds and securities with a critical eye; and duty of loyalty, in which an advisor can’t have an undisclosed economic or personal interest that would bolster their own bank accounts by recommending one investment over another. In other words, a fiduciary has to do the most to make a client the most money.

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In the eyes of the SEC, doing the most includes ensuring that a customer’s tax bills on her investments are minimized as much as possible so that they don’t cut into her net profits. That’s why Wall Street’s regulator slapped Betterment, a fee-only automated investing platform, with a $9 million fine for inconsistently scanning customers’ account for tax-loss harvesting opportunities.?

Under that strategy, losing stocks or funds are sold, with the losses offsetting the taxable gains on winning ones. Investors lost more than $4 million in potential tax-related benefits owing to Betterment’s coding errors and algorithm changes, the SEC said.?

With more than 770,000 customers and north of $34 billion in assets under management, Betterment is the single-largest stand-alone automated investing platform. And that makes the SEC fine a warning not just to other platforms but to all independent advisors.

Read more: Robo-advisor Betterment to pay $9 million for overpromising tax strategies

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