Robo-advisor and wealthtech testing

What breaks in robo-advisors and what it costs

A robo-advisor earns its advisory fee or subscription on every managed account, every day, so a defect in valuation, trading, or tax logic repeats across the book until a billing run, a tax form, or an examiner finds it.

• Advisory fee billed on the wrong asset base. The billing job reads the custodial feed, which counts a pending deposit in the balance before the deposit settles, and it bills two linked household accounts separately. On a synthetic schedule of 0.40% up to 100,000.00 and 0.25% above, household accounts of 80,000.00 and 60,000.00 each billed at 0.40% pay 560.00 per year instead of 500.00. The SEC Division of Examinations lists incorrect householding, misapplied breakpoints, pending deposits in custodial feeds, and unrefunded prepaid fees on terminated accounts among observed fee deficiencies, which often led advisers to return money to clients (SEC risk alert, 10 November 2021). Our financial calculation testing recalculates each fee from an independent reference model.
• Harvested loss undone by a recurring deposit. The tax-loss harvesting engine sells a fund at a loss and switches to a replacement fund, but the weekly recurring deposit or a dividend reinvestment buys the original fund 12 days later. IRC section 1091(a) disallows the loss when substantially identical securities are acquired within 30 days before or after the sale. For covered securities with the same CUSIP in the same account, 26 CFR 1.6045-1(d)(6)(iii)(A) requires the broker to report the disallowed loss on Form 1099-B and add it to the basis of the new shares. When the repurchase happens in the client's IRA, Rev. Rul. 2008-5 holds that the loss is disallowed and the IRA basis is not increased, so the tax benefit is lost for good.
• Lot relief method differs between engine and custodian. The engine computes the harvested loss on the highest-cost lots, but the sell order reaches the clearing broker without a lot instruction. Under 26 CFR 1.1012-1(c)(1), stock sold without adequate identification is charged against the earliest lot, and 1.1012-1(c)(8) accepts a standing order as that identification. The 1099-B then reports a different basis and holding period than the in-app tax report, and the client files on the 1099-B.
• Drift check that counts unsettled cash. The rebalancer treats an unsettled deposit as a cash overweight, sells equities to restore the 60/40 target, and buys them back after settlement. Each cycle realises short-term gains in taxable accounts. SEC staff guidance says a robo-adviser should consider disclosing that its algorithm might rebalance more often than a client expects, and should consider policies for testing algorithmic code before and after release (IM Guidance Update 2017-02).
• Depreciation alert measured from the wrong baseline. An EU portfolio management app compares today's value with yesterday's value, or resets the baseline after each deposit, so a gradual 12% fall never triggers a notice. Article 62(1) of Delegated Regulation (EU) 2017/565 requires the firm to inform the client when the portfolio value at the start of the reporting period depreciates by 10%, and at each further 10%, by the end of that business day.