A Betterment client is suing the firm, alleging advisors moved clients’ excess cash into sweep accounts at banks that didn’t generate any interest, leaving investors having “lost significant interest they would have otherwise earned.”
New Jersey resident Michael Treadway filed the class action lawsuit in New York federal court, alleging he was a Betterment client and claiming to represent all those who’d been affected by the firm’s sweep policies.
According to Treadway, the eligible funds in his accounts had been swept into deposit accounts at participating banks as part of Betterment’s Transfer Sweep Program.
Treadway acknowledges that Betterment’s own material states that TSP accounts don’t earn interest, but because they did so, Treadway and others lost out on what they might have earned had Betterment swept the cash into deposit accounts paying “reasonable market rates.”
While Betterment was clear that the TSPs were not an “interest-bearing” cash option, Betterment advisors allegedly received payments from the participating TSP banks based on balances maintained in those accounts, according to Treadway.
“Thus, every dollar of client cash swept into the TSP increased the base on which Betterment could earn bank payments, even though the client received no interest on that same cash,” the complaint read.
Indeed, Betterment’s disclosure documents noted the conflict that it has an incentive to increase those balances. Still, Treadway argued the disclosures did not “disclose the magnitude of Betterment’s bank-paid compensation, the spread retained, the amount of lost client yield, or the alternatives that could have allowed clients to earn interest on cash.”
As an example, Treadway highlighted Betterment’s Cash Reserve program, which offered clients “the opportunity to earn interest on cash,” but argued the TSP disclosures didn’t explain why clients’ funds would be swept into a non-interest-bearing account when interest-bearing opportunities were available.
“Had Betterment provided full and fair disclosure of these material facts, plaintiff and other class members would not have agreed to have their cash swept into the TSP, would have transferred those funds to available interest-bearing alternatives, would have invested those funds elsewhere, or otherwise would have taken steps to avoid the loss of interest and Betterment’s undisclosed capture of the economic return on their cash,” Treadway argued.
Representatives from Betterment did not respond to a request for comment prior to publication.
As part of the suit, Treadway is seeking monetary damages for the class, as well as a court-ordered mandate that Betterment stop operating the TSP “in its current form, directing client cash into the arrangement without fair compensation to clients, or otherwise profiting from the spread on client cash.”
Numerous firms in the industry have faced similar class action lawsuits resulting from their alleged misdoings in managing clients’ cash sweep accounts over the past several years.
Meanwhile, regulators at the Securities and Exchange Commission also launched their own investigations into large brokerages, including Merrill Lynch, Wells Fargo and Morgan Stanley (the commission settled charges against the first two firms in January 2025 and closed its inquiry into Morgan Stanley without enforcement action the following May).
Citywire first reported on Betterment’s class action suit.
