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SoFi's Fund Swap Debacle Overshadows Strong Quarter for Robos

Social Finance's 'aggressive' push into proprietary funds raises questions about the interests of robo advisors, said analyst.

A strong first quarter 2019 for automated advice platforms, or so-called robo advisors, in general was overshadowed by questions surrounding one, specifically SoFi’s commitment to transparency, according to analysis provided in Backend Benchmarking’s most recent Robo Report. On a broad level, little changed this quarter from an investment management perspective: SigFig still led its peers in three-year trailing performance, while Fidelity Go captured top performance for two- and one-year trailing performance.

But strong returns were eclipsed, noted the report’s analysts, by SoFi's decision to swap Vanguard ETFs held in investor accounts for its own proprietary ETFs, which occurred shortly after the close of the quarter. Investors in the firm’s robo platform weren’t notified of the April 12 swap until April 17, unless they happened to check their portfolios. Investors also weren’t given the option of opting out of the swap, and some investors, including the founder and president of Backend Benchmarking, have complained of the taxes that were generated from the move, according to a report in The Wall Street Journal.

The language in the April 17 email from SoFi, sent after the fund swap had occurred, noted that “we’re swapping out higher fee ETFs for our new ETFs,” with a link that referred investors to an April 12 blog post describing the new ETFs. Part of the post describes the fees that are waived within the SoFi funds and a commitment to making sure “members have time to consider options” if the firm decides to remove the fee waiver.

The post was later updated on April 19 with an additional statement from the firm that included a promise to “continue to address individual member questions.”

SoFi’s stance is that its move first, notify later approach to the fund swap is simply part of the cost paid for the overall convenience of using a robo advisor. In other words, investor frustrations with the swap’s execution and any taxes generated should be viewed not as something unique to SoFi but as typical of business processes at any registered investment advisor. “Like any other investment advisor, we make changes regularly to the composition and allocation of our members' portfolios in relation to their investment objectives and risk tolerance,” a company spokesperson said in a statement. “We notified our members in a timely fashion in accordance with regulations,” remarking that “institutional asset managers do not typically forecast trades.”

It’s similar to the stance that Wealthfront took when it automatically opted investors into its risk parity fund, instead of having them manually opt in, or Fidelity’s approach to trading funds into its own no-fee mutual funds in 2018. The difference with those two cases, however, was investors had advance notice that the trades would be coming, and they were given the option of looking at alternatives, said David Goldstone, research analyst at Backend Benchmarking.

SoFi is “doing some aggressive expansion,” he added, pointing to the firm’s high-interest cash account, no-fee managed account, zero-commission trading on its self-directed and its newly launched ETFs. “That’s a lot of movement in the past year or two years.”

But that aggression could come back to bite the firm by damaging investors’ trust, said Goldstone. The fund swap was a good example of the risks SoFi is taking. “They weren't transparent about it. They didn't communicate about what they were doing. I think it wasn't handled well. And I think that the trust component is critical for these firms,” he said. It’s not the first time SoFi has faced questions about its business practices, and other fintechs have pressed the boundaries of the industry, only to rethink their approach.

Of the takeaways for investors using automated investing platforms, said Goldstone, one of them calls into question the set-it-and-forget-it message that robo advisors have been marketing. “It is never a great idea to completely trust somebody to discretionarily manage your assets without ever kind of checking in on them,” he said.

But the furor around SoFi’s fund swap may be symptomatic of something larger, added Goldstone. “If you look at what's going on with Facebook and other social media platforms, I think people are kind of getting hip to the fact that you can't necessarily blindly trust these large tech companies,” he said. “You kind of have to keep in mind what the interests are and what these companies are trying to achieve. I think you’ve got to be a smart consumer.”

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