Betterment's move to halt trading following Brexit vote sparks controversy

The decision also shines the spotlight on algorithm-based investing and role of fiduciary

Jun 28, 2016 @ 1:40 pm

By Alessandra Malito

Betterment, the leading independent robo-adviser, pulled a Wizard of Oz moment on Friday when it decided to delay trading for two and a half hours to protect investors from market volatility following the shocking Brexit vote.

The suspension, which started when the market opened at 9:30 a.m. ET, prompted critics across the industry to slam the move as unnecessary. That Betterment failed to tell investors, and only informed advisers using Betterment Institutional, added fuel to the fire.

Nevertheless, the decision reminded users and non-users alike that there are actual humans making decisions behind the robo-advisers.

"There is always going to be a human element," said Matthew Fronczke, senior executive consultant and head of consulting at kasina. "It's not truly automated."

Betterment's decision was made to shield investors from the volatile turns resulting from Great Britain's vote to leave the European Union.

The robo takes the role of an adviser for clients, and as a sub-adviser for traditional advisers, to build portfolios and allocate them how they see fit. In a Monday blog post, the company said it is responsible for making decisions on an investor's behalf, "and because we are your fiduciary, we make these decisions with your best interest in mind."

Delaying trading is something human advisers do all the time, a spokesman added.

"People are thinking of us as a day trading platform rather than a discretionary adviser, which is what we are," said Joe Ziemer, Betterment's spokesman.

Betterment specifically highlights in its client agreement that it reserves the right to suspend access to the program with or without prior notice as a result of system repairs, upgrades or market volatility.

The robo, which only uses exchange-traded funds, also suspends trading for the first half hour of the market's day and the last half hour to avoid the worst times of the day to put in ETF orders.

But other digital advisers thought it best not to touch their platforms at all. SigFig, FutureAdvisor, which was acquired by BlackRock, and Wealthfront left their platforms untouched.

"Just because markets may be up or down doesn't mean we should suspend trading," said Mike Sha, chief executive of SigFig. He said trading halts should be made when trades are not being executed properly, which was not the case on Friday, despite prices being down.

Wealthfront took to Twitter on Monday, responding to one individual's question whether or not it had halted trading. Wealthfront did not respond for a request to comment.

FutureAdvisor considered Friday "business as usual," Bo Lu, CEOof the robo, said in an email. Human traders were monitoring algorithm recommendations closely, as it always does, he added.

For all robos, though, whether to delay trading or not, people were making the decisions.

Financial advisers who use Betterment Institutional were not impacted by the suspension, citing clients' long-term goals as their use for the robo. Scott Weiss, director of financial planning at the Weiss Financial Group in Mahopac, N.Y., said he and his clients were not affected, and he wasn't upset by the decision, but he was surprised.

"The whole robo thing is so new that we're still finding our way through it," Mr. Weiss said. Friday has made him more alert to Betterment trading policies. "There was some sense of relief that they're not just letting algorithms do their own thing and that there is a human element behind it."

Pam Horack, a financial adviser at Pathfinder Planning in Lake Wylie, S.C., said it "uncovered the man behind the curtain." She said she appreciated the conservative stance and that they contacted advisers.

One of the main critiques of Betterment's decision on Friday was that the company did not inform retail investors. Overall, robo-advisers are providing a great service to advisers and clients, but not being more transparent when investors want to move their money could lead to distrust, Mr. Fronczke said. Traditional advisers would have talked through clients' requests to withdraw or reallocate assets.

"They would have talked through it and then acted in the best interest of clients," Mr. Fronczke said. "Redeeming money at that time could be in the client's best interest. There is always two sides of the coin."


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