Betterment Faces Class Action Lawsuit Over Cash Sweep Accounts
A Betterment client is suing the firm, alleging that advisors diverted their clients’ excess funds to banks and into zero-interest-bearing bank accounts, causing investors to “lose substantial interest they would otherwise have earned.”
Michael Treadway, a New Jersey resident, has filed a class action lawsuit in New York federal court claiming to be a Betterment customer and representing all those affected by the company’s purge policies.
According to Treadway, the eligible funds in the account were deposited into deposit accounts at participating banks as part of Betterment’s Transfer Sweep program.
While Treadway says Betterment’s own material TSP accounts don’t earn interest, but because they do, Treadway and others lose what they’ve gained if Betterment is paying the money into deposit accounts at “fair market value.”
While Betterment TSPs are clearly not an “interest-bearing” financial option, Treadway reports that Betterment advisors have received fees from participating TSP banks based on balances held in those accounts.
“Consequently, every dollar of customer cash invested in the TSP increases the basis on which Betterment receives bank fees, even though the customer has no interest on that same cash,” the complaint reads.
Indeed, Betterment’s disclosure documents suggest the conflict has an incentive to increase the scales. Still, Treadway argued that the disclosures “did not disclose the amount of compensation Betterment Bank will pay, the continued distribution, the amount of lost customer product, or the options available to customers to pay interest in cash.”
As an example, Treadway highlighted the Betterment Cash Reserve program, which gives customers “the opportunity to earn interest in cash,” but argued that the TSP disclosures did not explain why customers’ funds would go into an interest-free account.
“Had Betterment made full and fair disclosure of these material facts, Plaintiff and other class members would not have agreed to have their funds deposited into the TSP, moved their funds into interest-bearing options, invested those funds elsewhere, or otherwise taken steps to avoid losing interest and preventing Betterment from receiving cash.”
Representatives for Betterment did not respond to requests for comment before publication.
As part of the lawsuit, Treadway is seeking monetary damages for the unit, as well as a court order to stop Betterment operating the TSP in its current form, diverting customer funds to the event without fairly compensating customers, or otherwise disbursing customer cash.
A number of companies in the industry have faced similar class action lawsuits over the past several years for allegedly mismanaging their clients’ money laundering accounts.
Meanwhile, regulators at the Securities and Exchange Commission launched their own investigations into large brokerages, including Merrill Lynch, Wells Fargo, and Morgan Stanley (the commission settled charges against them). In January 2025, the first two companies And Morgan Stanley closed the inquiry without action. next May).
Citywire first reported on Betterment’s class action suit.
