Betterment suspended trading on Friday of the Brexit result for almost 3 hours.
Because ETFs became illiquid and mispriced.
Betterment missed an opportunity to innovate in the way robo-advisors communicate in stressful market conditions.
Betterment, one of the top Fintechs in the robo-advsior space, deployed old-fashioned finance practices when the market got volatile and choppy.
Amy Radin an advisor from New York, opened up the topic (Are robo’s just robo’s on good days? The Betterment-Brexit indcident) as she is closer to the ripple effects on the branding of the “Robo-advisor” space; and sensed that especially financial advisors serving their clients through the Betterment platform, would have been stressed when confronted with no way out, for their clients.
I personally checked the facts around this incident. I found out that:
- Betterment as a policy delays trading at the start of any day by 30 minutes.
- Betterment notified B2B clients (financial advisors) of the suspension the Friday of the Brexit. But of course not how long it would last.
- Betterment did not notify retail clients about the suspension.
Bill Winterberg, the king for the digitization of US financial advisors, explains this very well in his FPPAD broadcast, titled SUSPENDED. The Betterment decision to halt trading, is a clearly discretionary one, and was triggered because the normally liquid low cost financial instruments used (country or sector ETFs) were MISPRICED & ILLIQUID suddenly. Betterment acted in the interest of their customers.
The Fintech Genome community identified multiple old-fashioned finance practices in the Betterment-Brexit incident
Marc Lussy points to lack of behavioral management
Humans are humans, and their emotions and their risk tolerance is affected by market conditions in all cases (whether their money is managed by a robo-advisor, or Warren Buffet himself). Marc reminds us that our reactions haven’t changed at all since the tulip crash. Technology doesn’t improve our confidence or can it level out the fluctuations of our risk tolerance. Even with a high tech house, when the hurricane hits, we panic.
Marc Lussy, from Investments by Objectives (IBO), believes that digital only (with no ability to call a human and ask a question) will not be the model adopted. Humans need their emotions to be managed and the re-invented role of financial advisors will be important.
Serena Torielli points to an old-fashioned asset allocation algorithm
Serena pointed to a AdviseOnly survey that shows that approximately, 40% of robo-advisors use the 60+yr old asset allocation theory MPT (Modern Portfolio Theory) despite the great UX. So, behind the scenes there is a very old fashioned asset allocation algorithm deciding the exposures of our portfolio.
Andre Faessler points to old-fashioned compliance and communication
Andre, advisor for Riskalyze, sees the discretionary decision as a compliance driven judgment call. Since most risk assessment questionnaires used by robo-advisors are old-fashioned, they fail to consider that risk tolerance changes with the market conditions. Therefore, there is a need for a discretionary compliance intervention in abrupt market conditions.
He points out also that the communication with clients from robo-advisors is at best on a weekly basis, which is very much like old-fashioned wire house practices.
Bernard Lunn points to old-fashioned PR ways
Bernard refers to the CEO of Betterment, appearing on CNBC to communicate that business is in tact and instead of outflows, they experienced inflows as the market was dropping. CNBC appearances are old channels of communication that have questionable effect on the brand damage that such incidents may have.
I see, old-fashioned agreement signing
On page 65 of the Betterment retail agreement, this issue of “halting trading” and the “discretionary nature of the engagement with Betterment” is addressed. This is an old fashioned conundrum when a customer signs an 80 pages’ agreement but in reality isn’t aware what the essential parts are and find out the hard way what he-she agreed for.
Join the conversation if you have an insight, on Are robo’s just robo’s on good days? The Betterment-Brexit indcident.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.
[…] It also reminded me of the Betterment/Brexit incident in July 2016! When the unexpected election results hit the market, ETFs became illiquid and mispriced. Betterment suspended trading for retail on that Friday of the Brexit results for almost 3 hours. Read more details here. […]
[…] Cela m’a également rappelé l’incident Betterment / Brexit en juillet 2016! Lorsque les résultats électoraux inattendus ont frappé le marché, les FNB sont devenus non liquides et mal évalués. Betterment a suspendu les échanges pour le commerce de détail ce vendredi des résultats du Brexit pendant près de 3 heures. Lire plus de détails ici . […]