Michael Treadway’s class action alleges Betterment profited from bank fees on zero-interest cash sweeps while clients missed out on yield. The case could reshape how robo-advisors handle idle cash.
A Betterment client is suing the robo-advisor, alleging it swept customer cash into deposit accounts that paid no interest while the firm itself collected fees from the participating banks.
New Jersey resident Michael Treadway filed the class action in New York federal court. He claims to represent all Betterment clients whose cash was moved into the firm's Transfer Sweep Program, or TSP. The complaint argues that Betterment had an incentive to maximize those balances because it received compensation from the TSP banks based on the amount held in the accounts.
Treadway acknowledges that Betterment's own disclosures state the TSP accounts do not earn interest. He argues the firm did not fully explain why client funds were swept into non-interest-bearing accounts when interest-bearing options were available. The complaint alleges that Betterment's disclosures did not reveal the size of the bank payments it received, the spread it retained, or the amount of yield clients lost.
"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 reads.
Treadway points to Betterment's Cash Reserve program, which offers clients interest on cash. He argues the TSP disclosures never explained why the robo-advisor would choose a zero-interest sweep over that alternative. Had Betterment provided full disclosure, he says, he and other class members would have moved their cash to interest-bearing accounts or invested it elsewhere.
The suit seeks monetary damages for the class and a court order requiring Betterment to stop operating the TSP in its current form. Betterment did not respond to a request for comment.
The case follows a wave of similar lawsuits against brokerages over cash sweep practices. The Securities and Exchange Commission investigated the issue at large firms, settling with Merrill Lynch and Wells Fargo in January 2025 and closing its inquiry into Morgan Stanley without enforcement action the following May.
Industry observers say the Betterment suit could sharpen scrutiny on robo-advisors, many of which rely on cash sweep revenue. The model – earning bank fees on client cash that sits idle – has drawn complaints from customers and regulators alike. If Treadway's case succeeds, it could force digital advice firms to offer interest-bearing sweeps as the default, or at least to disclose the exact economics of their cash programs.
The complaint also raises a question of fiduciary duty. Betterment, like many robo-advisors, holds itself out as a fiduciary under the Investment Advisers Act. Critics argue that sweeping cash into a zero-interest account while the advisor pockets a fee conflicts with that duty. Treadway’s lawsuit tests whether a fiduciary can satisfy its obligations with a boilerplate disclosure that the account pays no interest.
A court date has not been set. Treadway is represented by the law firm of Labaton Sucharow, which has handled similar securities class actions.
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