Tax Smart Transition Features Disclosure

Advisors who use Betterment’s tax smart transition features, a suite of tax-aware portfolio management tools, should consider the following information before using any of the features, and for communicating this information, as necessary, to their clients.

Advisors should be aware of how tax smart transition features interact with other Betterment portfolio management features.

• When Betterment’s trading algorithm evaluates client accounts for tax loss harvesting and rebalancing opportunities, it generally prioritizes identifying potential tax loss harvests ahead of potential rebalancing opportunities, and not all client goals are guaranteed to be evaluated on any given day for either tax loss harvesting or rebalancing.
• Advisors should also be aware that Smart Transitions features may work differently for custom portfolios and portfolios containing mutual funds than for Betterment constructed or third-party portfolio strategies, and that rebalancing transactions could be more or less effective at reducing drift depending on the portfolio strategy of a given goal.
• Advisors should also be aware that if a security group contains a mutual fund as its primary ticker or as a sell-only substitute, the security group containing the mutual fund will not be eligible for tax loss harvesting, and Advisors are not able to elect mutual funds as secondary or tertiary tickers for any security group, unless the mutual fund is defined as a sell-only substitute.
• Advisors should also be aware that target date mutual funds are not compatible with Betterment's tax coordination feature if the tax coordinated goal contains a taxable component. Target date mutual funds are compatible with tax coordinated goals that contain only tax-advantaged accounts (e.g. Traditional IRA and Roth IRA). 
• Advisors should also be aware that Smart Transitions features may be impacted or disabled under certain circumstances for clients who have securities-backed lines of credit (“SBLOCs”) to which their non-qualified (i.e., taxable)  account(s) are pledged as collateral.

Custom rebalance settings

Advisors have the option to enable or disable automated rebalancing on any of their clients’ eligible goals. When automated rebalancing is disabled for a particular goal, Betterment will seek to reduce drift for that goal in response to cash flows (such as deposits, withdrawals, or dividend reinvestments) but will not initiate an automated rebalance based solely on drift from the portfolio’s target allocation. Betterment endeavors to process updates to rebalancing configurations as quickly as possible, but Advisors should be aware that such updates may not complete until the next market day. Betterment reserves the right to disable automated rebalancing on client goals when it determines that doing so is in clients’ interests, such as to manage potential tax impacts during a portfolio strategy transition. 

Advisors also can set customized drift thresholds for a client’s portfolio. If cash flows are not sufficient to keep a client’s portfolio within its applicable drift tolerance (such parameters as disclosed in Betterment’s Form ADV), automated rebalancing sells overweight holdings in order to buy underweight ones, aligning the portfolio more closely with its target allocation.  Advisors can also elect to have Betterment only rebalance a client’s portfolio in response to cash flows. Rebalancing requires a minimum portfolio balance (Advisors can review the estimated balance  at www.betterment.com/legal/portfolio-minimum).  The rebalancing algorithm is also calibrated to avoid frequent small rebalance transactions and to seek tax efficient outcomes, such as preventing wash sales and minimizing short-term capital gains. Betterment's trading algorithm typically checks accounts approximately once each market day to identify rebalancing opportunities. When Betterment’s trading algorithm evaluates client accounts for tax loss harvesting and rebalancing opportunities, it generally prioritizes identifying potential tax loss harvests ahead of potential rebalancing opportunities, and not all client goals are guaranteed to be evaluated on any given day for either tax loss harvesting or rebalancing. Betterment does not guarantee that any automated rebalancing transaction will occur at a specific time. Betterment also reserves the right to limit or postpone rebalancing transactions in order to prioritize other trading activity on any given day, including days where extreme market conditions produce a higher volume of trading. 

Betterment also permits Advisors to initiate a rebalancing transaction at any time (subject to a one per goal per day limitation on Advisor-initiated rebalance transactions, and as long as no other portfolio changes are pending in the customer’s account). Betterment will seek to execute such Advisor-initiated rebalancing transactions as soon as reasonably possible, but Betterment does not guarantee immediacy of execution for rebalancing transactions or that it will complete rebalancing transactions in any particular window of time. Betterment will seek to minimize negative tax consequences from an Advisor’s initiation of a rebalancing transaction, but Advisors should be aware that such rebalancing transactions may result in tax consequences that Betterment’s automated rebalancing feature would have avoided. Betterment will provide the Advisor an opportunity to review a tax impact preview of a rebalancing transaction before initiating it, but this is just an estimate and is not intended to provide a comprehensive accounting of all tax consequences from a transaction. Potential negative tax consequences from initiating a rebalancing transaction include but are not limited to generating wash sales and/or permanently disallowed losses.

Gains Allowance

Advisors are also able to set an annual realized gains allowance target for each client. If the gains allowance target is met in a given year, Betterment's algorithm will seek to avoid rebalancing transactions that would result in the realization of gains, but may still initiate automated rebalancing transactions that are expected to realize a loss. Client goals in accounts with a gains allowance could experience higher levels of drift than goals in accounts without gains allowances, including when rebalancing would necessitate exceeding the configured gains allowance. Exceeding the gains allowance target will not impact tax loss harvesting trades, which may occur regardless of year to date gains incurred. In addition, once the annual target is exceeded, if an advisor initiates a "no short term capital gains" type portfolio change, resulting transactions may realize losses or sell assets not held at a gain or a loss. For clients who have one or more of their accounts pledged to a securities-backed lines of credit (“SBLOCs”) offered by Betterment through The Bancorp, any capital gains allowance set by an Advisor on such a pledged account will not be respected to the extent that The Bancorp directs Betterment to initiate a forced liquidation pursuant to the terms and conditions of the SBLOC.

In-kind transfers to Betterment are subject to applicable terms and conditions. Certain single stocks, mutual funds, and other security types which Betterment is unable to hold on an ongoing basis will be sold upon arrival regardless of gains allowance constraints, and even if rebalancing is disabled. Advisors have the ability to view in the application which assets are supported to hold on an ongoing basis.  

Transactions initiated by Advisors/their clients are never blocked on account of having reached the gains allowance target and could cause a client to exceed their allowance target. In addition, fee assessments and goal-to-goal transfers could cause a client to exceed their gains allowance target. Advisors should be aware that their clients will not be able to see their gains allowance target in the interface and could initiate transactions that cause the gains allowance target to be exceeded. Clients will be warned that client-initiated withdrawals, allocation changes, and goal-to-goal transfers will impact a setting that their Advisor has selected for their account.  

If a client reaches their gains allowance target but then realizes losses (either through user-initiated transactions or automated transactions such as tax loss harvesting), year-to-date net realized gains will decrease and could cause rebalancing transactions that realize gains to resume. Advisors also can change gains allowances at any time.

The gains allowance is a target that Betterment seeks not to exceed for any automated rebalancing transaction. Betterment typically will not initiate a rebalancing transaction if the expected realized gains from that transaction exceed the gains allowance, but there are certain circumstances under which a rebalancing transaction may inadvertently result in the gains target being exceeded. These situations include, but are not limited to, transactions that are initiated when 1) market data relied on by the algorithm is stale or delayed, or 2) there is price movement in the window between the algorithm’s identification of the trade and trade execution, including in the case of trades involving mutual funds (i.e., because mutual fund transactions are priced once a day). In addition, certain portfolio actions, including but not limited to transfers to or from accounts at other custodians, can result in retroactive changes to cost basis that would not be reflected at the time rebalancing transactions occur and may therefore also result in exceeding the gains allowance.

The gains allowance can be configured to support most tax situations. For example, a married couple filing separately can each have their own gains allowance, and an irrevocable trust can also have its own gains allowance.

Mutual Fund Behavior

Advisors should be aware that the following specifications apply to all mutual funds included in client portfolios.

Mutual funds trade only once per day, after the market closes. A trade to buy or sell shares of a mutual fund is executed at the next available net asset value, which is calculated after the market closes and may be different from the previous day's closing net asset value. Advisors and clients should be aware that any transactions that involve selling ETFs and buying mutual funds may take an extra business day to complete due to the way these trades must be executed. Typically, deposits, withdrawals, and allocation changes for portfolios that incorporate mutual funds made in Betterment’s interface must be completed before noon Eastern time on a business day to result in trades on that same day; actions taken in the interface after noon Eastern typically will result in trades being placed on the following business day. These timelines are not guaranteed. Betterment may delay mutual fund purchase transactions to avoid violations of applicable laws or regulations, including rules pertaining to free riding. When withdrawing from portfolios incorporating mutual funds, the settled amount may vary from the requested amount due to price fluctuations between the withdrawal request and trade opportunity. Transactions are rounded to the nearest thousandth of a share, and there may be account adjustments following a cash flow into or out of a client’s account as a result of such rounding.

Betterment does not support purchases of mutual funds with investment minimum thresholds,  shareholder-type fees (such as sales loads and redemption fees), and distribution-type fees (such as 12b-1 fees)  in the ordinary course of business. In certain cases, Betterment can hold these types of mutual funds when transferred into a Betterment account via an ACATS transfer. Please see our ACATS disclosures for more information.

In any client account that contains mutual funds, due to small price fluctuations in mutual funds that may occur on the transaction date (the last business day of the period), Betterment will accrue any fees over- or under-assessed and apply the difference to adjust the following period’s fees. Betterment will automatically debit the prorated amounts of the fees from the assets in a client’s account on a monthly or quarterly, as applicable, basis in arrears.