Tax Smart Transition Features Disclosure
Updated May 22, 2023
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 it, 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 an account to identify tax loss harvesting and rebalancing opportunities, it will only initiate one such instruction at any given time and typically prioritizes harvesting tax losses over rebalance opportunities. Advisors also should be aware that Smart Transitions features may work differently for custom portfolios 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.
Custom rebalance settings
Advisors have the option to enable or disable automated rebalancing on any of their clients’ 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.
Advisors are also able to set an annual realized gains allowance target for each client. Once the target is reached 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 losses.
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. 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 such transactions will impact a setting that their Advisor has selected for their account.
The gains allowance target is static, but year-to-date realized gains are not. If a client realizes losses (either through user-initiated transactions or automated transactions such as tax loss harvesting), the remaining allowance could expand, and rebalancing transactions that realize gains could 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 significant price movement in the window between the algorithm’s identification of the trade and trade execution. 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 is based on taxpayer status, so the accounts included for a given gains allowance will vary depending on the client’s tax filing status. For example, a married couple filing separately will each have their own gains allowance, whereas a married couple filing jointly will have a single gains allowance.