If you trusted Betterment with your investments and suffered unexpected losses, you may have legal options to pursue recovery. In 2023, the Securities and Exchange Commission charged Betterment LLC with material misstatements and omissions that cost over 25,000 investor accounts approximately $4 million in potential tax benefits. This page explains what happened, your rights as an investor, and how an experienced securities litigation attorney can help you recover your losses.
Key Takeaways
- The SEC fined Betterment $9 million for coding errors and disclosure failures affecting 25,000+ accounts
- Investors lost approximately $4 million in tax benefits due to algorithm and software problems
- FINRA arbitration is the primary legal pathway for recovering investment losses
- Time limits apply: you generally have 6 years to file a FINRA arbitration claim
- A securities attorney with broker-dealer experience can identify hidden claims in your account
The SEC Enforcement Action Against Betterment
On April 18, 2023, the SEC issued a landmark enforcement action against Betterment LLC, one of the largest robo-advisors in the United States. The charges revealed systemic failures in Betterment’s automated investment services that harmed thousands of investors.
What the SEC Found
According to SEC Press Release 2023-80, Betterment committed multiple violations related to its tax loss harvesting (TLH) service between 2016 and 2019:
- Software disclosure failures: Betterment failed to disclose changes to its TLH scanning frequency
- Programming constraints: The company did not inform clients about technical limitations affecting their accounts
- Coding errors: Two separate computer coding errors prevented TLH from functioning properly for some clients
- Contract notification failures: Betterment failed to provide advance notice of changes to advisory contracts
- Recordkeeping violations: The company did not maintain required books and records
Important: These failures meant that investors who signed up for tax loss harvesting services did not receive the benefits they were promised. The algorithm simply did not work as advertised for many clients.
How Betterment Robo-Advisor Losses Affected Investors
The impact of Betterment’s failures was substantial and far-reaching:
| Impact Category | Details |
|---|---|
| Affected Accounts | Over 25,000 client accounts |
| Lost Tax Benefits | Approximately $4 million total |
| Additional Coding Error Impact | 700 accounts lost an additional $1 million in benefits |
| SEC Penalty | $9 million |
| Violation Period | 2016-2019 |
Beyond the documented SEC enforcement action, recent customer complaints in 2024 and 2025 reveal ongoing concerns with Betterment’s services, including account freezing issues, withdrawal delays, and customer service problems.
Understanding Your Rights as a Betterment Investor
As a registered investment adviser with the SEC, Betterment owes its clients fiduciary duties. This means the company is legally required to:
Duty of Care
Betterment must act in your best interest when providing investment advice. This includes ensuring that automated systems function as promised and that algorithm-driven recommendations serve your financial goals.
Duty of Loyalty
Betterment must put your interests ahead of its own. The company must disclose any conflicts of interest and cannot prioritize platform profits over client outcomes.
When Betterment’s algorithms fail to perform as advertised, or when the company fails to disclose material information about its services, these fiduciary duties may be breached.
Types of Betterment Robo-Advisor Losses You May Recover
Depending on your situation, you may be able to pursue recovery for several types of losses:
Tax Loss Harvesting Failures
If you enrolled in TLH services but the algorithm did not execute tax-saving trades as promised, you may have lost significant tax benefits that should have been captured.
Algorithm Mismanagement
Automated trading systems that do not function according to stated strategies may cause unnecessary losses or missed opportunities for gains.
Unsuitable Recommendations
Robo-advisors must still provide suitable investment advice based on your risk tolerance, time horizon, and financial goals.
FINRA Arbitration: The Path to Recovering Your Losses
While the SEC can impose penalties on companies like Betterment, regulatory fines do not directly compensate affected investors. To actually recover your investment losses, you will likely need to pursue FINRA arbitration.
FINRA Arbitration vs. FINRA Complaints: Filing a FINRA complaint alerts regulators to potential misconduct but will not recover your money. FINRA arbitration is a legal proceeding where arbitrators can award damages to compensate you for your losses.
The FINRA Arbitration Process
According to FINRA’s Arbitration and Mediation resources, the process involves:
- Filing a Statement of Claim: You submit a detailed document outlining your claims, the misconduct involved, and the damages you are seeking
- Respondent’s Answer: Betterment or its affiliated broker-dealer responds to your claims
- Discovery: Both parties exchange relevant documents and information
- Arbitration Hearing: Evidence and testimony are presented to a panel of arbitrators
- Award: The arbitrators issue a binding decision, which may include monetary damages
What the Statistics Show
According to FINRA’s 2024 Dispute Resolution Statistics:
- 84% of customer arbitration cases were resolved through settlement or awarded damages
- Investors prevailed in 41% of cases that went to a full arbitrator decision
- The average case duration was 12.5 months in 2024
- Mediation achieved an 87% settlement rate
Critical Time Limits for Betterment Robo-Advisor Loss Claims
Acting quickly is essential when pursuing claims related to Betterment robo-advisor losses. Multiple time limits may apply to your case:
| Time Limit | Rule/Statute | Details |
|---|---|---|
| 6 Years | FINRA Rule 12206 | No claim eligible for FINRA arbitration if 6 years have elapsed from the event |
| 2 Years | Federal Securities Law | From discovery of the fraud for Rule 10b-5 claims |
| 5 Years | Federal Statute of Repose | Absolute deadline regardless of when fraud was discovered |
| 3 Years | California State Law | For fraud and misrepresentation claims under California law |
Time is Critical: If you experienced Betterment robo-advisor losses during the 2016-2019 period when the SEC documented violations, some deadlines may be approaching. Contact a securities attorney promptly to evaluate your options.
Why You Need a Securities Attorney for Robo-Advisor Claims
Pursuing claims against a major robo-advisor platform requires specialized knowledge of both securities law and the technical aspects of automated investment systems.
The Insider Advantage
Attorney Gary Varnavides brings a unique perspective to robo-advisor loss cases. With 10 years at Sichenzia Ross Ference LLP defending broker-dealers and investment advisers, Gary understands how these firms operate from the inside. This experience allows him to:
- Identify defenses that Betterment and similar platforms are likely to raise
- Recognize when algorithmic failures constitute actionable misconduct
- Navigate the technical complexities of automated trading systems
- Understand the regulatory landscape for robo-advisors
Gary has been recognized as a Super Lawyers Rising Star from 2015 through 2023, placing him in the top 2.5% of attorneys in the New York Metro area. He is licensed to practice in California and New York.
The Growing Problem of Robo-Advisor Regulatory Failures
Betterment is not the only robo-advisor facing regulatory scrutiny. According to FINRA’s 2025 Annual Regulatory Oversight Report, the use of artificial intelligence and automated investment tools presents significant compliance risks including:
Regulatory Concerns
- Recordkeeping failures
- Customer information protection gaps
- Risk management deficiencies
- Regulation BI compliance issues
Industry Statistics
- 78% of robo-advisors use AI models lacking explainability
- 62% had undocumented model changes per FINRA studies
- 100% increase in AI-related securities class actions (2023-2024)
The SEC has prioritized examination of automated investment tools, focusing on the fairness and accuracy of representations, operational consistency with disclosures, and the appropriateness of algorithm-produced advice.
Steps to Take If You Suffered Betterment Robo-Advisor Losses
If you believe you have suffered losses due to Betterment’s failures, take these steps to protect your rights:
Step 1: Gather Documentation
- Account statements showing your investments and returns
- Trade confirmations and transaction records
- Communications from Betterment about services and features
- Tax documents showing actual benefits received
- Marketing materials that described the services you enrolled in
Step 2: Calculate Your Losses
- Compare actual returns to promised or expected returns
- Identify missed tax loss harvesting opportunities
- Document any fees paid for services not properly delivered
- Note any periods when the algorithm appeared to malfunction
Step 3: Consult a Securities Attorney
An experienced attorney can review your account, identify potential claims, and advise you on the strength of your case. Initial consultations are typically free and confidential.
Step 4: Preserve Evidence
Do not delete emails, close accounts, or discard any documentation related to your Betterment investments until you have consulted with an attorney.
California Investors and Common Defenses
Additional Protections for California Residents
California residents who suffered Betterment robo-advisor losses may have additional protections under state law. The California Department of Financial Protection and Innovation (DFPI) regulates investment advisers operating in the state. California provides three FINRA arbitration hearing locations in Los Angeles, San Diego, and San Francisco. The California Corporations Code also prohibits market manipulation and fraudulent securities practices, providing additional grounds for claims in some cases.
What Betterment May Argue in Its Defense
Understanding potential defenses helps you build a stronger case. Based on experience defending broker-dealers, Betterment and similar platforms typically argue:
- Market risk disclaimer: Investment losses were due to normal market conditions, not platform failures
- Terms of service: Clients agreed to arbitration provisions and liability limitations
- Corrective action: The company fixed the issues and complied with SEC requirements
- No individual causation: Your specific losses were not caused by the documented failures
A skilled securities attorney can counter these defenses by demonstrating specific harm to your account and connecting documented failures to your losses.
Frequently Asked Questions About Betterment Robo-Advisor Losses
Can I still file a claim if the SEC already fined Betterment?
Yes. The SEC’s enforcement action and $9 million penalty do not prevent you from pursuing your own claim. In fact, the SEC’s findings can support your case by documenting Betterment’s failures. The SEC action was a regulatory penalty paid to the government, not compensation to affected investors.
How do I know if I was affected by Betterment’s tax loss harvesting problems?
Review your account records from 2016-2019 to see if you enrolled in tax loss harvesting services. If you did, a securities attorney can analyze whether your account was among those affected by the coding errors and disclosure failures documented by the SEC. Signs of potential issues include fewer tax loss harvesting trades than expected or lower tax savings than projected.
What is the difference between filing a FINRA complaint and FINRA arbitration?
A FINRA complaint alerts regulators to potential misconduct and may result in disciplinary action against the firm, but it will not recover your money. FINRA arbitration is a legal proceeding where you seek actual compensation for your losses. Only arbitration can result in a monetary award to you.
How long does FINRA arbitration take for robo-advisor cases?
According to FINRA’s 2024 statistics, the average case duration was 12.5 months. However, complex cases involving algorithmic trading systems may take longer. Many cases settle before reaching a full hearing, which can result in faster resolution.
What damages can I recover in a Betterment robo-advisor loss case?
Potential recoverable damages may include: actual investment losses caused by the platform’s failures, lost tax benefits from non-functioning tax loss harvesting, fees paid for services not properly delivered, and in some cases, attorney’s fees and costs. The specific damages depend on your individual circumstances.
Do I have to go to an in-person hearing for FINRA arbitration?
FINRA offers both in-person and remote hearing options. California has three hearing locations in Los Angeles, San Diego, and San Francisco. Your attorney can advise on the best approach for your case.
Is there a minimum loss amount required to file a claim?
There is no minimum loss requirement to file a FINRA arbitration claim. However, the costs and effort of pursuing a claim should be weighed against the potential recovery. A securities attorney can help you evaluate whether pursuing a claim makes sense for your situation.
Can I pursue a class action lawsuit against Betterment instead of arbitration?
Most brokerage and robo-advisor account agreements include arbitration clauses that require disputes to be resolved through FINRA arbitration rather than court litigation. An attorney can review your specific agreement to determine what options are available to you.
Take Action to Protect Your Investment Rights
If you suffered Betterment robo-advisor losses, time limits may be affecting your ability to pursue claims. The documented SEC enforcement action against Betterment provides a foundation for understanding what went wrong and how investors were harmed.
At Varnavides Law, we understand how robo-advisors and automated investment platforms operate. With a decade of experience defending broker-dealers and investment advisers, Gary Varnavides now uses that insider knowledge to help investors recover their losses.
Schedule Your Free Consultation
If you have questions about Betterment robo-advisor losses or other automated investment platform failures, contact us for a confidential case evaluation. We can review your account records and advise you on your legal options.
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