Robo-advisers face first reckoning in downturn

The market correction on Friday and volatility that continued into this week may be the first test of automated investment platforms that critics of robo-advisers have been waiting for.

Monday morning brought a series of nervous tweets from investors and commentary from critics who joked about robo-advisers’ clients calling in to get help and not being able to speak with a live person.

At the same time, Vanguard’s Personal Advisor Services unit, which offers a combination of automated investing and advisers available by phone, said that the unit had experienced 9% higher requests for client consultations than usual.

I had faith in @Wealthfront in the beginning, but it’s hard to convince myself to continue to invest when I’ve been down ~5% M-o-M.

— jb (@jbarbagallo) August 20, 2015

“The current market conditions will present challenges to the robo-advisors,” said Joel Bruckenstein, a consultant and publisher of Technology Tools for Today, in an email. One challenge is, “What happens if clients of these robos panic and want to talk to someone?”

Even traditional broker-dealers have even been overwhelmed by the large trading volumes. Both TD Ameritrade Inc. and Scottrade, for example, said on Twitter that they were having delays due to the high trading volume and market volatility.

Without behavioral coaching from advisers, clients would be tempted to make rash decisions or jump into conservative investments at the wrong time, said Aaron Klein, co-founder of Riskalyze, which offers tools for investors to gauge risk tolerance.

“Robo-advisers have not done a good job of preparing their clients for this type of market, and they tend to brag about the low number of service professionals for every client they have,” Mr. Klein said. “The reality is that clients need the behavioral coaching. This is the traditional advisers’ time to shine.”

"Uh, hello, Mr. Robo Advisor?

Who do I speak to about my allocations? I’ll hold…."

— Sean McLaughlin (@chicagosean) August 24, 2015

Robo-advisers, however, which generally take a passive approach to investing, were busy getting out in front of the storm on Friday and again on Monday. Many had sent out emails to clients even before the worst of the volatility set in, while some turned to blogs and Twitter to try and calm clients.

Wealthfront, one of the largest automated investment platforms with around $2.6 billion in assets, took to social media and was active on Twitter, engaging users that voiced concerns about their Wealthfront accounts.

After Wealthfront client Kirtika Ruchandani, a software engineer according to LinkedIn, tweeted that her portfolio looked “hopeless,” Wealthfront replied saying, “Although it can be difficult, it’s important to keep a long-term view,” and included a link to a 2014 blog post from the firm’s founder, Adam Nash.

“Wealthfront clients are predisposed to the fact that markets go up and markets go down, ” Mr. Nash said in an emailed statement. “We make sure to communicate with them along the way whether via email or on social media to reinforce long-term passive investing and ensure they have a clear understanding of what that strategy means.”

FutureAdvisor, another robo-adviser, said that it was sending out personalized emails to users and had advisers on staff to take calls “for moments like this,” according to Joseph Fahr, the company’s vice president of marketing.

“It’s a little early for us here, and we’ve gotten maybe a couple calls this morning, but nothing crazy by any means,” Mr. Fahr said. “We’ve more than anything been focused on communication with our users.”

Betterment, which also has around $2.6 billion in assets, did not seen any increase in withdrawals and, in fact, had people looking to contribute money because they saw the down markets as an opportunity to buy in at lower prices, according to the firm’s director of finance, Dan Egan. Only 17% of clients checked their balance over the weekend, which was in-line with a typical weekend, he said.

First real test of whether robo advisor clients freak out and pull money without an advisor to talk to

My bet is money sticks

— Leigh Drogen (@LDrogen) August 23, 2015

He added that most of the customers who sign on for robo-advisers know that they are investing for the long term, and generally are not calling in concerned about short-term issues.

“We really do benefit from having a smarter customer base,” he said.

Joe Duran, the chief executive officer of United Capital, a registered investment adviser with about $15 billion in assets under management, warned that if robo-advisers weather a large correction it would likely put additional pressure on human advisers if clients’ portfolios produce the same results.

“What I think is really happening is a lot of clients are parallel opening a robo portfolio while keeping money with their existing advisers,” Mr. Duran said. “If people make it through a big decline and don’t do anything silly with a robo, then the obvious question they’ll ask their adviser is ‘What am I paying you for?’”

Robo-advisor senses danger. pic.twitter.com/ELyj7VJdaV

— Ivan the K ️ (@IvanTheK) August 23, 2015

An earlier version of this story incorrectly stated that Betterment had send out an email to all of its clients advising them not to overact to the market downturn. That message was part of an email that is regularly sent to new Betterment clients.