As the stock market dips and volatility rises, digital investment platforms are going online to calm investor fears about what — and what not — to do in a downturn.
Wealthfront chief executive Adam Nash, for example, took to Twitter in a big way last Thursday with more than a dozen tweets explaining to his 11,800 followers what his company, which now stands at approximately $1.4 billion in assets under management, is doing to shore up investor portfolios during the downturn.
“Volatile markets are a fact of life. You can't control them. You can, however, automate the right decisions,” Mr. Nash tweeted.
He asserted that automated portfolio rebalancing and tax loss harvesting help portfolios stay diversified by buying low and selling high. He added that
Wealthfront has executed more than 200,000 rebalancing and tax-loss harvesting trades for clients in the past five weeks.
The advisory industry is keeping a close eye on how so-called “robo-advisers” will fare during a significant market downturn. That's because the digital platforms didn't exist before the 2008 financial crash and have yet to weather a prolonged correction.
Indeed, some industry watchers warn that the fast-growing digital investment platforms risk losing assets when the first big market correction comes because they do not have flesh-and-blood employees to dispel fears of skittish investors.
“Only time will tell how these firms will do in a downturn,” said Grant Easterbrook, a Corporate Insight analyst who has spent several years opening accounts with dozens of online advisory platforms.
Now may be a good time to judge. The stock market saw
a major pullback last week as the Dow Jones Industrial Average rode through gyrations that included a 300-point drop in the Dow Jones Industrial Average on Thursday.
In response, robo-advisers got busy in social-media channels to calm investors.
SigFig, for example, on Thursday published a blog post about 20 stocks that expose undiversified investors to single-stock risk. And
FutureAdvisor on Monday tweeted that too much trading “can be hazardous to your wealth health,” followed by a link to a blog post about how overtrading undermines returns.
Like human advisers, new online advice firms must maintain constant and timely communication with their clients during market turbulence, according to Mr. Easterbrook, author of
Transcending the Human Touch: Onboarding and Product Strategy for Automated Investment Advice.
“Firms may need to prepare to take the 'Swiss Army' approach to a downturn, similar to what Vanguard has used in the past,” Mr. Easterbrook wrote in an email. “This boils down to having almost every employee ready to drop what they're doing and go all-hands-on-deck to answer customer service phone or email inquiries during periods of uncertainty.”
To be sure, Betterment does just that as it works to educate investors about market volatility, said CEO Jon Stein, who noted that it is company policy for all of Betterment's approximately 60 employees to speak with investors who phone in. The company currently has $875 million in assets under management.
“Everybody here at Betterment takes customer calls,” Mr. Stein said. “Some volatility in the markets is normal and natural. We always educate our investors about that and we focus them on goals, be they retirement or a house down payment or saving for college. We remind them they're investing for the long term even if there's a 20% market drop. And we remind them they may still be on track.”
In addition, he said, Betterment publishes blog posts reminding investors about behavioral economics topics such as the short-sightedness of
high-frequency monitoring of account balances.
Bill Doyle, a principal analyst at Forrester who has written about Wealthfront, said the digital investment platform's investors are not interested in trying to time the market when it gets volatile.
“They're buying into this principle of a well-allocated investment plan,” Mr. Doyle said, adding that Mr. Nash and Wealthfront co-founder and executive chairman Andy Rachleff are specifically using social media to reach their Millennial investors.
“They're using the digital channel, like the tweet storm from Adam Nash and additional blog posts from Adam and Andy that make the case for a diversified plan that gets aggressively rebalanced during times of volatility,” Mr. Doyle said. “They're delivering this reassurance in the channel that their customers expect the best experience to happen in, which is the digital channel. Their Millennial customers don't want to be reassured by a 60-year-old adviser. They trust the machine.”
