I wouldn’t trust any broker or advisor who would restrict access to my money. I work hard to earn it. So when I heard that the world’s largest robo-advisor, Betterment, halted trading on the morning after the Brexit vote, I was concerned.
When I found out how and why it did it, alarm bells went off in my head.
The fact is robo-advisors are not what they seem. Investors should think twice about using one to manage their money.
Automatic Investing Debunked[ad#Google Adsense 336×280-IA]Robo-advisors are a new breed of money manager.
They rely on software that uses algorithms to allocate, rebalance and trade their clients’ portfolios.
And they’ve been around for only six years.
I first wrote skeptically about this new class of financial advisors last September.
Robo-advisors like Betterment claim to offer better than average returns by using technology to remove behavioral bias from investing.
They’re generally cheaper than a human manager, too. Accounts are pitched to longer-term investors – not day traders – who are willing to ride out Mr. Market’s volatility.
With a service like Betterment, the entire investing process is automated.
An investor begins by answering some questions about risk tolerance. From there, a computer program kicks in to determine asset allocation. It will also buy or sell, usually exchange-traded funds, on the client’s behalf.
The program typically rebalances the portfolio quarterly and also automates tax efficiency. There is no interaction between the investor and a human advisor. Robo-advisors offer the ultimate lazy man’s account solution, which helps explain their popularity.
But in June, investors learned that robo-advisors aren’t as automated as they thought.
The morning following the Brexit vote, Betterment’s management team chose to suspend trading because of volatility. The computerized technology did not halt trading; people did.
The company’s CEO and other members of management decided to delay trading after monitoring volatility in U.S. stock futures and international markets overnight.
Then, Betterment’s team, including its behavioral finance specialist, decided to resume trading around 11:45 a.m.
For a firm that says it doesn’t time the market, that sounds an awful lot like market timing to me.
A Massive Communication Failure
Betterment notified only its institutional clients about the trading halt. Most retail investors knew nothing about it. Those who tried to log in to their accounts learned of the suspension, but weren’t told how long it would last.
The company’s client agreement spells out its rights to suspend trading. Technically, it did nothing wrong. But many of its clients didn’t read every line of the agreement and were caught off guard.
On its website, Betterment says that its technology benefits investors with “more transparency, more access to your money, and less stress.” But the funny thing is, in the midst of the Brexit chaos, it did the opposite.
Betterment customers couldn’t access their money, and many didn’t know why. Those who logged in only to find out that trading was suspended were most definitely stressed.
Computers Handle Asset Allocation, Not Timing
So, what can investors learn from the Betterment debacle? Robo-advisors are not 100% automated.
Betterment’s trading halt was the result of a human override. It proves that humans are still calling the shots.
Like any financial advisor, robo-advisors have their limitations. They cannot protect investors’ returns from negative behavioral bias – their own or a human advisor’s.
If you want to try out a robo-advisor, make sure you read the agreement’s fine print. Understand all policies before handing over your money. For example, understand just how long a trading halt for “investors’ own good” will be. It could be days or even weeks.
Better yet, consider managing your investments yourself.
It’s the easiest way to ensure you have access to your money at all times. Plus, you can cut out the advisory fees and give your returns an immediate boost. The Oxford Club offers top-notch financial research and advisory services that can help.
If you choose to invest with a manager, robot or human, always remember it’s your money, not your advisor’s. After its trading halt, perhaps Betterment needs a reminder of that.
Source: Wealthy Retirement