The Securities and Exchange Commission has ordered Ally Invest, a robo-advisor, to pay a $500,000 fine for breaches of fiduciary duty related to conflicts of interest associated with its "Cash-Enhanced" accounts.
According to the SEC's order, Ally Invest failed to disclose material facts concerning its selection of a 30% cash allocation for its no-advisory-fee Cash-Enhanced robo accounts, as well as Ally Invest's application of its stated investment methodology in those accounts.
Starting in September 2019, Ally Invest allocated 30% of client assets in its Cash-Enhanced accounts to cash, "but failed to disclose that it had a conflict of interest in setting this allocation because the allocation percentage was selected, in part, to generate a financial benefit for Ally Invest's affiliated broker-dealer and its affiliated bank to make up for the revenue Ally Invest lost from not charging an advisory fee on these accounts," the order states.
In addition, from September 2019 to October 2022, Ally Invest "inaccurately disclosed that its portfolio management services for its Cash-Enhanced Accounts were based on an investment methodology called Modern Portfolio Theory when, in fact, only the non-cash portion of the assets in the Cash Enhanced Accounts was managed according to Modern Portfolio Theory," the order continues.
"Because Ally Invest's affiliated broker-dealer received a rebate reflecting a portion of the interest that was generated by the cash held in the Cash-Enhanced Accounts, Ally Invest had an incentive to set a higher cash allocation percentage for these accounts," the order states. "Ally Invest's affiliated bank also received cash deposits from certain client accounts at the non-affiliated clearing broker, including the Cash-Enhanced Accounts, and earned interest on such deposits by loaning the deposited funds."
As a result of this conduct, Ally Invest willfully violated Section 206(2) of the Advisers Act.
In August 2025, Ally Invest updated its Form ADV Part 2A to provide disclosure concerning its conflict of interest in setting the cash allocation for the Cash-Enhanced accounts, the order explains.
"Ally Invest disclosed in its Forms ADV Part 2A from September 2019 through October 2022 that its portfolio management services are based on Modern Portfolio Theory," the SEC said.
Ally Invest's statement about Modern Portfolio Theory was misleading because Ally Invest did not use the strategy to select the cash allocation portion of the Cash-Enhanced accounts.
"Rather, the portfolios' cash allocation was based, in part, on Ally Invest's desire to make up for revenue lost from not charging an advisory fee on the Cash-Enhanced Accounts," the order states.
Instead, Ally Invest used Modern Portfolio Theory to guide the investment of only the 70% of a client's account that was allocated to securities rather than cash, the SEC said.
In October 2022, Ally Invest updated its Form ADV Part 2A to disclose that it constructed only "the invested (i.e., non-cash) portions of [its] portfolios based on Modern Portfolio Theory."
Ally Invest was also ordered to send a copy of the SEC's order to former clients affected by the practices via email or mail within 45 days.
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