Robo researcher claims SoFi trades triggered capital gains tax hit

Customers of Social Finance Inc.’s robo-adviser may incur some unexpected capital gains taxes after the company reallocated managed portfolios using new proprietary exchange-traded funds.

SoFi in February announced the coming of two ETFs with a 0% expense ratio for at least the first year. The proprietary ETFs began trading in April, and SoFi used them as replacements for the Vanguard Total Stock Market ETF in certain managed portfolios the following day, according to Backend Benchmarking, a research firm that opens accounts with several popular digital advice providers in order to track and compare performance.

The trade caused a significant taxable event, realizing both short- and long-term gains, according to Backend Benchmarking founder Ken Schapiro.

Other digital advisers have swapped out third-party funds for proprietary products, too. Fidelity Go replaced iShares ETFs with Fidelity’s no-fee mutual funds, and Wealthfront moved some clients into its in-house risky parity fund, last year.

The difference is that both of these companies notified customers about the upcoming trades, Mr. Schapiro said. Wealthfront gave investors the ability to opt out of the trade, while Fidelity offered to transfer those assets into self-directed accounts.

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Mr. Schapiro said SoFi did not provide advanced warning.

“I fail to see how SoFi was acting in their clients’ best interests in swapping funds for their own. It’s going to take me 35 years to make up the capital gains tax hit,” Mr. Schapiro said in a statement. “Although their platform has a suite of undeniably compelling products, we question whether their customers are their top priority.”

In an emailed statement, a SoFi spokesperson said the company, like any investment adviser, regularly makes changes to the composition and allocation of portfolios in relation to client investment objectives and risk tolerance.

The spokesperson said that SoFi notified clients about the trades “in a timely fashion in accordance with regulations,” but added that “institutional asset managers do not typically forecast trades. Doing so can impact market integrity in a negative way by disseminating large trade information inappropriately.”

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Backend Benchmarking’s latest report on robo-advisers also said that after the turbulence in late 2018, performance of algorithmically managed portfolios bounced back in the first quarter of 2019. Robos from TIAA, Prudential and Acorns were particularly strong in Q1.

Looking at longer-term results, Fidelity Go and SigFig emerged as leaders in two-year and three-year performance.

Related Topics: Fidelity Investments