SEC Charges Two Robo-Advisers with False Disclosures (2018)

[dangero]

This fine of $250,000 to Wealthfront means that their violations were 100% worth it. Their fund is 11 billion+ and they got an advantage over competitors by posting testimonials. SEC rules are very clear on this point and at the time other robo compliance officers were lamenting, “I don’t understand how they are able to do that legally.”

Well, guess what? They weren’t, but they took it as a calculated risk and the SEC announced they made the right choice when this fine was announced years later.

[randomacct3847]

I think you’re overestimating the revenue an asset manager makes with $11b assets under management (AUM).

They aren’t a hedge fund (no profit sharing) and take .25% in fees a year. $11b *.25% is only $27.5m. Hardly a unicorn scale business IMO unless they are pitching investors they’ll get to Blackrock scale (trillion in AUM). Personally I don’t see it. Switching cost is big for existing clients but new clients have a bunch of Robo options now including free ones offered by Schwab, big banks, etc.

For some perspective, after college I worked for an investment fund with around $3b AUM with around 7-8 full time staff with a similar fee structure...it was basically a nice lifestyle company for the two founders.

[colechristensen]

The fine probably has more to do with paying the costs of the SEC than punishing Wealthfront.

Regulatory actions don't happen in a vacuum and they aren't forgotten. Repeat actions don't necessarily get the same fine, and additional consequences (like more scrutiny for approval, more intense audits, etc) can come from ignoring regulations.

But also remember that these are large organizations being regulated in many many different and often vague ways. Violations happen and are dealt with.

[shhehebehdh]

Heck, they probably saved more than that over the years just by failing to implement the compliance program. I can’t imagine such a program would cost less than 250k to implement over three years. So they broke even on this deal before you even factor in ill-gotten gains.

[caprese]

$6 Udemy course, unpaid intern, $250,000 kickback to federal government, $250,006 SEO strategy

Invest in your SEO strategy like Wealthfront people!

[Animats]

Nothing to do with them being automated advisers. Just ordinary marketing deception.

"Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws."

"The performance comparisons were misleading because Hedgeable included less than 4 percent of its client accounts, which had higher-than-average returns."

[strstr]

“Wealthfront disclosed to clients employing its tax-loss harvesting strategy that it would monitor all client accounts for any transactions that might trigger a wash sale – which can diminish the benefits of the harvesting strategy – but failed to do so. Over a period of more than three years during which it made this disclosure, wash sales occurred in at least 31 percent of accounts enrolled in Wealthfront’s tax loss harvesting strategy.”

This seems like an actual error related to being a roboadviser.

[loeg]

The failure to monitor and avoid wash sales is very much specific to being a robo-advisor.

[anonu]

The robo advisor business isn't a great one. ETFs will provide the majority of the benefits you can get from robos. And you don't need to move your money

[mabbo]

I agree, yet still I use one. It's the convenience factor. For the small fees they pay, they implement the ETF strategy I would otherwise use. When I'm adding money, there's zero work or thinking.

Now, if I had $250k or more I might change my mind- there's a certain point where yes, it's worth my time to do this myself. But I'm not there yet.

[dehrmann]

Especially with tax loss harvesting and rebalancing, I'm suspicious of how roboadvisors do when you factor in the bid-ask spread. At least with ETFs, you can be confident someone like Blackrock isn't getting ripped off by limit orders or front-running trades.

[po]

I'm confused, were they not monitoring for wash sales even within Wealthfront controlled accounts? I can see it happening if you had external accounts (and I think usually these kinds of services warn you against that) but within Wealthfront itself is pretty weird.

[emit_time]

Tim Ferriss used to advertise for them... a lot...

Ooof

[zeckalpha]

(2018)

[sctb]

Thanks! Updated.