- Key insight: Ally’s cash-enhanced accounts were engineered so that the company could make up revenue that it lost from not charging advisory fees, according to the SEC.
- What’s at stake: The company has used its robo-advisory products to complement its banking offerings for roughly a decade.
- Forward look: Ally must correct how it markets the service to clients, the SEC said, but the actual product doesn’t have to change.
Ally Financial will pay a $500,000 fine to the Securities and Exchange Commission for violations related to its robo-advisor.
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The fine is part of a settlement, made public Monday, in which the SEC found that the company didn’t properly disclose how it was allocating customers’ assets, and why. Now, Ally must tell clients about its regulatory infraction, and certify compliance with the SEC’s rules.
The SEC found that Ally’s allocation of assets for its cash-enhanced accounts represented a conflict of interests that wasn’t spelled out to clients for nearly six years. Ally neither admitted nor denied the SEC findings. The company did not immediately respond Tuesday to a request for comment.
The enforcement action won’t likely be a major blow to Ally, which has been building its investment advisory services for about a decade. Ally’s advisory business serves about 80,000 accounts, with roughly $1.7 billion of regulatory assets under management, per a public filing earlier this month.
The company advertised its cash-enhanced accounts, an option in its robo-advisory business, as charging no advisory fees. But the accounts allocated 30% of client assets to cash, which benefitted Ally through both rebates and interest on deposits, according to the SEC.
The SEC contends that although there could be several reasons for establishing the 30% cash allocation, Ally’s incentive to do so “was heightened” by its lack of advisory fees.
Key to the regulator’s complaint was that although Ally told clients about the cash allocation, it didn’t make clear its reasons for putting 30% of customers’ funds into cash. Ally advertised to clients that the cash portion of the portfolio was a buffer, meant to balance out potential risk.
“Yet, Ally Invest did not disclose all material facts about its conflict of interest,” the SEC said in its order. “It failed to disclose that the thirty percent cash allocation was selected in part to make up for it not charging an advisory fee on the cash-enhanced accounts, or the associated conflict of interest.”
The cash-enhanced account was the default recommendation to clients who began using Ally’s robo-advisory services from September 2019 through September 2022.
Ally’s broker-dealer subsidiary and its banking subsidiary both reaped gains from the advisory subsidiary’s cash-enhanced accounts, according to the SEC.
The clients’ cash was custodied by a non-affiliated clearing broker, which deposited the money at various banks, including Ally. Ally loaned out those deposits, and paid the interest it earned on them back to the non-affiliated clearing broker. The non-affiliated clearing broker then paid Ally’s affiliated broker-dealer a rebate, which represented a portion of the interest generated by the cash.
The value of the rebate offset some of the revenue that Ally lost by offering the accounts without an advisory fee, per the SEC.
The company began allocating 30% of client assets in the accounts to cash in September 2019, and didn’t begin appropriately disclosing conflicts of interest until August 2025, the SEC said.
Ally has previously said that its portfolio management services for the accounts were based on a methodology called Modern Portfolio Theory. But the SEC found that methodology was actually only applicable to the non-cash portions of the portfolio.
The $196 billion-asset company first bought an online brokerage firm in 2016, and spun out robo-advisory products from there. Wealth management has been a growing way for banks to boost deposits, capture more high-net-worth clients and bulk up on non-interest revenue.
In recent years, Ally executives have said that the company’s investment advisory business “complements” Ally Bank’s deposit franchise, since most of the new users of the investing subsidiary are existing bank customers. Ally has also beefed up its human offerings in its wealth management business.
During the second Trump administration, SEC enforcement activity, including monetary penalties, has slowed significantly, per Cornerstone Research. The SEC has emphasized that its enforcement program prioritizes traditional fraud, and “must be tempered by fair process, good judgement, integrity, and rectitude.”
Ally’s advisory business has no history of regulatory infractions.
But last fall, Ally’s broker-dealer for self-directed trading activity was hit with an $850,000 fine by a self-regulatory body, the Financial Industry Regulatory Authority. The penalty was the result of failing to preserve about 22.6 million electronic communications with customers between September 2016 through November 2022.