Market pullback presents robo-advisers with biggest test yet

Robos' growing popularity and the size of the market sell-off combined for a one-two punch

Feb 6, 2018 @ 2:45 pm

By Greg Iacurci

Robo-advisers underwent their biggest stress test to date Monday as the market's slide drove a surge in the volume of investors trying to access their accounts at the fledgling companies, most of which aren't yet 10 years old. The experience could lead to a broader reassessment of robos' investment strategies in down markets.

"Robos have never been tested en masse under stressful market conditions," said Louis Harvey, president and CEO of Dalbar Inc. "Back in 2008, they may have existed but they certainly weren't the dominant force that they are today. So you wouldn't have had a volume test — or, in the vernacular, a stress test."

A couple of the industry stalwarts — Betterment and Wealthfront Inc. — didn't fare particularly well Monday. Their websites crashed amid a deluge of investors accessing their accounts as the Dow Jones Industrial Average tumbled nearly 1,600 points, before closing down 1,175.23 points for a loss of 4.6%. It was the Dow's largest intraday point drop ever.

Betterment clients couldn't log in to their accounts for around 30 minutes in the afternoon because of "particularly high volume," said spokeswoman Arielle Sobel. Wealthfront Inc. clients had similar problems for a short period. Both companies resolved their problems yesterday. They didn't quantify the surge in volume.

"They'll assess how they can improve their services for huge moves in the market, and I do think we'll see a lot of volatility in 2018," Kelley Byrnes, wealth management analyst at Celent, said of the robos. "Hopefully this isn't recurring."

Javier Paz, a senior analyst at Aite Group, believes the sharp market downturn will cause many robos to reassess their "long-only" view of portfolio management.

"Robo firms, by and large, are long-only funds, and behave like that," Mr. Paz said. "This [downturn] is a test of their sophistication, their asset selection for their portfolios."

Most robo-advisers also don't have policies in place to "pare sustained market losses at certain levels that they could determine either themselves or in conjunction with investors," Mr. Paz said in a 2017 report.

Robo-advisers sprang up during the years-long bull run in stocks following the financial crisis. Betterment, one of the industry pioneers, entered the digital advice market in 2008, Personal Capital in 2009, Wealthfront in 2011 and WiseBanyan in 2013, according to consulting firm Aite. More traditional firms, such as Charles Schwab Corp., Vanguard Group and Fidelity Investments, didn't enter the market until after 2015.

While there have certainly been other notable market hiccups over the past decade — in August 2011 and August 2015, for example — analysts believe yesterday represented something different, given both the severity of the pullback and the growth in popularity of robo platforms over the past decade.

Aite Group expects the number of robo-advice users to swell to 17 million by 2021, up from 1.8 million in 2016. Their assets under management are expected to hit $1 trillion by 2020, up from approximately $223 billion in 2017, Aite estimates.

"A lot of these robos are relatively new technology. I don't think their systems have been tested to a huge degree," said David Goldstone, primary research analyst at BackEnd Benchmarking, which publishes a report on robo-advisers. "I don't think we've seen a time in the market since the advent of most robo technology where investors are pulling a lot of money out of the market and getting very skittish."

"We don't think this is a game changer for robo advice but there's definitely work to be done to restore confidence," he added.

Of course, issues weren't just isolated to robos. Popular online brokerage platforms such as those of Fidelity, Charles Schwab and Vanguard also reported web outages.

"I don't think it's just a robo issue. I'm sure financial advisers were inundated with calls yesterday, as well. And likewise with employees changing their 401(k) allocations," Ms. Byrnes said. "I think as long as robos are transparent and respond right away, they're probably fine."

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