SoFi refunds investors for tax hit caused by proprietary ETFs

Action reminds one expert of SEC requirement regarding improper share classes

Sep 23, 2019 @ 2:03 pm

By Ryan W. Neal

When investors incurred capital gains taxes because Social Finance Inc. replaced Vanguard funds with proprietary ETFs in some portfolios managed by its robo-adviser, the company defended the move as a regular change relating to client investment objectives and risk tolerance.

The company maintains the moves were made to improve portfolios in clients' long-term best interest, but now SoFi is refunding money that clients may have lost.

In an email, SoFi notified users they will see a credit in their automated investing accounts to cover the capital gains taxes they may have incurred as a result of the April changes.

"In keeping with our commitments to put your interests first and to help you get your money right, we decided to take this action in an attempt to put you in the same tax position you would have been in had we not made the change," the email said.

According to Micah Hauptman, a financial services counsel at the Consumer Federation of America, this case looks like the actions the Securities and Exchange Commission has brought against advisory firms for improper share classes. Firms that failed to properly disclose conflicts had to rebate extra costs born by investors, Mr. Hauptman said.

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It is unclear if SoFi's refund to investors is a response to regulatory pressure or if the firm is just being cautious. SoFi declined to comment.

"One more thought is that the tax hit is just one added cost of being transferred into their own funds. There are also the costs of buying, selling, and holding the new funds," Mr. Hauptman said in an email. "While the SoFi ETFs are free now, they are only free because they have an expense waiver. Once the expense waiver runs out, investors may be paying much more than they otherwise would be if they stayed in the funds they were in."

[More: Michigan RIA to pay $2.5 million for mutual fund conflicts]

SoFi has aggressively expanded its services beyond lending in the past few years. The company now offers digital advice, a no-commission trading platform, high-interest savings accounts, a free debit card and its own ETFs. The company even bought the naming rights to a new National Football League stadium in Los Angeles.

"Combined with big marketing efforts, like this stadium deal, SoFi is trying to make itself into a household name and become consumers' one-stop-shop for financial services," said Backend Benchmarking head of research David Goldstone.

Mr. Goldstone criticized SoFi for the April portfolio moves but commended the company for compensating investors for losses.

"Managers must balance the best interests of their clients with their own ambitious expansion goals and conflicts of interest inherent in selling proprietary products," he added.

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