It was a move intended to protect investors from market volatility.
But a decision by Betterment to temporarily suspend trading the morning after the Brexit vote — shutting out its retail and institutional clients until nearly noon — has the wealth management industry wondering aloud if the robo adviser harmed its reputation instead.
Competitors in the digital advice space are eager to point out they did not and would not take such action, questioning Betterment's read of the market that morning. Some advisers express concern about how the decision was communicated and have lingering questions about Betterment's policy regarding trading suspension.
"I was disappointed," says J.R. Robinson, a Betterment Institutional client and owner of Financial Planning Hawaii. "I thought it was a sign of immaturity on the part of Betterment.
"The notion they would halt trading on a 2% market drop; I was very surprised,” he adds, echoing the opinion of other advisers. “I couldn’t imagine if Vanguard would ever do the same thing."
Post-Brexit, many clients may want to sell, but others could see the volatility as a boon.
Betterment's decision also serves as a potential warning for financial advisers as they begin pairing up with platforms in an evolving era of digitally enabled advice, says Michael Kitces, partner and director of wealth management for Pinnacle Advisory Group in Columbia, Md., and co-founder of the XY Planning Network, which has a partnership with Betterment Institutional.
"Be certain you pick a TAMP that aligns with your investment philosophy and view of the markets," Kitces says.
'ANYTHING BUT IMPULSIVE'
Betterment, which now manages nearly $5 billion of client and institutional accounts, is adamant the suspension decision "was anything but impulsive," according to spokesman Joe Ziemer. "It was a prudent decision made in our role as a fiduciary."
Ziemer says the firm closely watched as news outlets began reporting a potential victory for the campaign in Britain to leave the European Union.
"Although U.S. markets would not open for another 12 hours, a number of indicators gave a clear preview. U.S. equity index futures, which trade overnight, revalued substantially," Ziemer wrote in an email. "European markets, which opened at 3 a.m. EST, were roiling. As our team monitored this activity overnight, it became apparent that the U.S. market open would be extremely rocky and unpredictable — in other words, a poor environment for long-term investors."
Betterment as a policy delays trading at the start of any day by 30 minutes. That morning, it extended its automatic 30-minute waiting period and checked different market factors, Ziemer says.
"Among other things, we monitored bid-ask spreads in the ETFs we use in our portfolios. We looked for the reappearance of normal market maker participation and a stabilization in order book dynamics. We waited for a reversion to stable short-term price action. Based on these factors, we determined to wait until around 11:45 a.m. to commence trading on our automated platform. At that time, we determined that conditions had generally normalized, and commenced trading on our automated platform, at which point, all outstanding transactions were processed."
Advisers were emailed a short note that morning about the suspension from Betterment. When Kitces' XY Planning Network asked for more details, such as when the suspension would end, a second note followed from Betterment Institutional head Tom Kimberly explaining the decision with some context. However, retail clients did not get any notice — Ziemer says that's because they "rely on our expertise to make day-to-day investment management decisions in their best interest."
"To be clear, Betterment received no benefit for delaying trading — we did so because we believe it best for our clients."
In its client agreement, Betterment states that its users understand it does not "guarantee access to the website and account management … all the time," and that account access may be "limited or unavailable during periods of market volatility, peak demand, systems upgrades, maintenance or for other reasons."
Ziemer wrote the delay was done "with the best interest of our clients at the forefront," noting during the August 2015 flash crash, its half-hour delay in the morning protected client portfolios. Betterment did see a small increase in customer support inquiries, he added. "To be clear, Betterment received no benefit for delaying trading — we did so because we believe it best for our clients."
'WE SAW NO REASON'
That explanation did not sway Kitces' doubt about the suspension's duration. "Why did it take until nearly noon?" he asks. "Most of the market selloff happened in the first 30 minutes of the morning, afterwards it was flat."
Competing digital advice providers also disagreed.
"Given that the market trading was orderly, we saw no reason to suspend trading," says Wealthfront spokeswoman Kate Wauck. "We are always monitoring the markets for issues that might be problematic from an execution standpoint."
Wauck notes during last August's correction, "only about a third of our clients even logged on to their accounts. With the Brexit news the number of clients who logged on to their accounts was much lower than that."
Personal Capital did not see a need to halt trading, says Vice Chairman Mark Goines. "Brexit is not the first market event that has caused a stir among investors in recent months, and we have been very focused on helping our clients make sense of the Brexit, its impact on the markets, and its effect on their long-term holdings."
"Betterment is well-known for having a behavioral finance angle to how it designs the service offering, and this trading halt fits in with the larger picture of what they are trying to accomplish."
Vanguard's hybrid robo, Personal Advisor Services — the largest digital advice platform in the market, now managing $36 billion in AUM — experienced call volumes 70% over the daily forecast and web traffic volume was higher as well than a typical Friday in summer, says spokeswoman Katie Hirt. While most of the calls were related to Brexit inquiries, there wasn't any broad communication planned ahead of the vote, she says, nor were there any service stoppages or delays that morning after the vote.
Some market commentary and investors on social media revived skepticism about how robos would fare in a bull market. But there was widespread understanding, if not support, of Betterment's actions on behalf of its retail client segment.
"Betterment is well-known for having a behavioral finance angle to how it designs the service offering, and this trading halt fits in with the larger picture of what they are trying to accomplish," says Lex Sokolin, chief operating officer of wealth management tech firm Vanare.
"Just because you have massive technology systems executing your decisions does not mean that human judgment is not involved in running these systems. I find nothing controversial in their decision to protect clients from well-defined behavioral mistakes, as long as this type of protection is disclosed explicitly on their ADV."
Acting as the adviser for retail investor clients, Betterment took a paternalistic approach in protecting them from market harm, says Aaron Klein, chief executive of portfolio and risk analysis firm Riskalyze. "I think that's defensible," he says. "It also speaks volumes about their approach, but that’s their prerogative."
The problem, Klein says, is how the suspension also affected advisers on Betterment's institutional platform.
"I think there's some trust broken. It didn't appear there was any market disruption driving that decision, that it was a judgment call by Betterment. That's tough for an adviser to hear. On the institutional side, I hired you for execution, not to lock me out of my accounts. You denied me the ability to make a judgment call."
'TOUGH TO JUSTIFY'
Klein says including advisers in a unilateral trading suspension was "a tough move to justify."
"You’ve got a lot of advisers depending on the platform and making the decision to tie their hands — well I don't think it feels really good as an adviser to have your hands tied."
Kitces echoes the sentiment, noting that he spoke to dozens of upset advisers in the XY Planning Network who had been using Betterment Institutional. They only learned about the suspension from the initial note, which "caused an initial uproar."
"The challenge in this is that if a client says sell, you sell," he says. "But this puts the adviser in a position of go between. I can't because Betterment won't. The adviser is in an awkward position to take flak for Betterment.
"What if at that moment a client wanted to buy at a discount," he continues. "They couldn't, and then by the afternoon the market's bounced back, and now the discussion is, 'You've cost me money.' It's an awkward dynamic. It's supposed to be a piece of automated tech, but suddenly there's human intervention subject to criteria no one entirely understands except Betterment."
"You’ve got a lot of advisers depending on the platform and making the decision to tie their hands — well I don't think it feels really good as an advisor to have your hands tied."
Eric Roberge, a Boston-based fee-only adviser and Betterment Institutional client, says the suspension did not affect his day, since the clients he has on the platform are long-term investors anyways.
"But it did raise a lot of questions about they type of relations I have with Betterment," says Roberge, founder of Beyond Your Hammock, a practice catering to millennials. "How are they defining what extreme volatility is and how long a trading suspension might last?"
Roberge says he would like Betterment to reach out to advisers and clarify its suspension policy, as the episode has him rethinking his use of their platform. "The thought goes through your head, that if another replication of Betterment comes along and that has that option, it might be a better fit for an adviser who does have discretion over client funds."
Betterment in its response did not clarify what volatility criterion it considers enough to trigger a trading suspension.
Hawaii-based adviser Robinson says he doesn’t want an explanation from Betterment, he wants it to end the practice.
"It’s a dangerous precedent to keep people from accessing their own money," he says. "Hopefully they'll realize what a mistake it was and not do it again."
But Pamela Horack, a fee-based adviser outside Charlotte, N.C., says she was not upset by Betterment's decision, and in fact was in support of it. Horack, too, says her clients were not affected by the decision because they are long-term investors.
"When I did get their first message, I read that and I was totally okay with it," Horack says. "In hindsight it was a good move on their part."
Horack noted, though, that retail clients using Betterment weren't informed of the suspension, and the second note wasn't a complete explanation of the platform's decision.
"You know what, in a Black Swan event, who knows what to communicate about the event, that's maybe where they were. I felt fine, and I was glad they let me know."
'MAY NOT BE THE BEST FIT'
At any rate, such decisions should be better communicated, Vanare's Sokolin says, who is a competitor to Betterment's institutional platform and says a trading suspension would not happen at its private-label robo NestEgg.
"[For] RIAs that use Betterment Institutional, Betterment essentially acts as a TAMP," he says. "It should be clear up front to RIAs, as well as to end-clients, who the manager of the account really is, where the funds sit, and who has the final authority to trade and manage the account.
"For institutional clients that want control, and desire to put their investment and trading thinking forward, this event demonstrates that Betterment may not be the best fit, and an adviser-first firm is a better solution. Advisers need to invest the time to decide how much they want to outsource, and what is important to keep in."
Vanguard's PAS clients don't make trades directly online, they need to call a Vanguard adviser first, notes firm spokeswoman Hirt. "The adviser has discretion over the client's assets, and during market volatility acts as an emotional circuit breaker. But if a client is rattled and insistent on making a trade, we will implement that trade."
“It's supposed to be a piece of automated tech, but suddenly there's human intervention subject to criteria no one entirely understands except Betterment."
Wealthfront alludes to the trading suspension as a trust issue. "As a still fairly new company, it is important to communicate with clients any time they might experience something new or different with our service," Wauck says.
Indeed, Kitces says he had numerous conversations with advisers in the XY Planning Network who were deeply concerned about the stoppage. "What happens if the window remains longer the next time, or the market doesn't stay flat? Now you're getting to the point where clients are financially damaged because couldn’t buy or sell, despite a direct order to buy or sell."
BETTER OUTCOMES?
Betterment should clarify its approach to volatility, says Joel Bruckenstein, co-creator of the Technology Tools for Today conference series.
"On the one hand, I would think that this type of decision should have been explained in advance to advisers and retail clients. How will Betterment handle future episodes of high volatility in the markets? Are there any policies and procedures in place that govern these decisions, and if so, have they been clearly shared with clients in advance?"
"Is it possible that embracing market volatility might have led to better outcomes for clients? I don’t know, but I think it is a fair question to ask."
Echoing Kitces, Bruckenstein says advisers will have to consider carefully the digital advice platform they use as a tool for the future.
"Robos are relatively new, and they don’t all operate the same way apparently, so it is difficult at this point to draw any conclusion across the board," he says. "Clients need to clearly understand the policies of the firm they are working with, and it is the responsibility of the firm to clearly communicate their policies and procedures to their clients."
