Betterment Missed Some Tax Trades
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“Any one may so arrange his affairs that his taxes shall be as low as possible,” said Learned Hand; “he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” But what about the reverse? If you are an investment adviser with a fiduciary duty to your clients, do you have an obligation to minimize their taxes? You do have a duty to be loyal and diligent and do a good job for them; you try to maximize their risk-adjusted return, and generally speaking reducing taxes increases returns more reliably than does, like, having a lot of investment skill. “I will buy stocks that go up, so my clients have high returns”: hard to do. “I will sell stocks that have gone down and rotate into similar stocks to generate losses to shield my clients’ capital gains”: pretty straightforward as these things go.
On the other hand, if you fail to minimize your clients’ taxes, it would be a little weird for a government regulator to come in and punish you. It’s not clear that government regulators have, you know, an interest in encouraging tax minimization? But here is a US Securities and Exchange Commission enforcement action fining Betterment LLC $9 million for not fulfilling its fiduciary duty to minimize its customers’ taxes. Well, technically the fine is for advertising that it did a better job of minimizing taxes than it actually did: