For the most part, the automated online advice firms known as robo advisors passed their first major market correction last August.
But the volatility following the now infamous Brexit decision last week was more than a flash crash; it was based on a sociopolitical event that dominated the news cycle, rocked the global economy and could possibly lead toward a worldwide recession. Even if the overall dip wasn't as drastic as the August 2015 volatility, emotions are high and investor anxiety is widespread.
So how did the robos handle things this time?
Betterment became the talk of the industry with its unusual and controversial decision to suspend trading for the first two hours of Friday, June 25. While the New-York based company informed advisors using Betterment Institutional, retail investors using its primary product said they weren't aware of the halt.
Company spokesman Joe Ziemer told WealthManagement.com that the company believes it acted prudently and in the best interest of its clients. He added that Betterment normally does not trade in the first and last half-hours of the market, and the decision to extend that period was made from a number of indicators.
"U.S. equity index futures, which trade overnight, revalued substantially," Ziemer said in an email. "European markets, which opened at 3 a.m. EST, were roiling. As our team monitored this activity overnight, it became apparent that the U.S. market open would be extremely rocky and unpredictable—in other words, a poor environment for long-term investors.
"Among other things, we monitored bid-ask spreads in the ETFs we use in our portfolios. We looked for the reappearance of normal market maker participation and a stabilization in order book dynamics. We waited for a reversion to stable short-term price action." Ziemer continued. "At that time, we determined that conditions had generally normalized, and commenced trading on our automated platform, at which point, all outstanding transactions were processed."
Betterment was active on social media, urging concerned users to remain calm and sharing blog posts about how to handle market volatility.
@FatherMcGruder we recommend a more conservative stock allocation for safety net to hedge against market fluctuations. Let's DM to discuss.— Betterment (@Betterment) June 24, 2016
The company wasn't spared from a hefty amount of negative press. Retail customers told the Wall Street Journal that they were concerned about Betterment's lack of transparency and being unable to make their own decisions about their money. Members of the wealth management industry were less kind, with advisors who use Betterment Institutional criticizing the decision, while others say it proves the value of human advice.
"This could be a pivotal moment for digital-only providers," said Jay Hummel, the managing director of strategic initiatives and thought leadership for Envestnet, a B2B technology company for financial services. "The last couple of days are showing the shortfalls of a digital-only strategy as the only advice. I believe this was going to come at some point in time.
"Certainly, if you put your end investor hat on, when you can't do something in the market in the way you want to, it would obviously cause me some concern."
Tim Welsh, the president and founder of Nexus Strategy, said the move shows Betterment has little faith in its algorithm and ability to give advice through volatility. Additionally, by making a human decision to override the algorithm, Welsh said Betterment undermined its premise of taking out the emotional aspect of bad investing.
"What happens if they were wrong? What if the market went the other way?" Welsh said. "What a hypocritical aspect for their ‘transparent' argument that they have made investing simple, when clearly they have put in abilities to stop the trading, suspend it, and update it."
At a recent gathering of wealthtech companies in Dallas, Betterment's action was a popular topic, with many wondering out loud (though unwilling to be on the record) what it cost investors, what sort of actions would trigger a future halt, and if regulators would look into it.
On Thursday, Betterment CEO Jon Stein defended his company's action on CNBC, but admitted that the firm should have done a better job communicating to clients.
As for other client outreach, Betterment did not comment.
Betterment's largest competitor, the Silicon Valley-based Wealthfront, used Twitter to share articles from Yahoo Finance and a 2015 blog post updated to be relevant to Brexit. It was not as active responding to individual users as Betterment was, but it did publicly state that it did not suspend its own trading.
The company did not respond to multiple requests for comments on how it was interacting with clients during the volatility. On Wednesday, Wealthfront shared another 2015 blog post on the value of tax-loss harvesting during volatility.
Hedgeable used the UK's decision to double down on its capabilities to offer downside protection to its clients. Mike Kane, the self-described Master Sensei as Hedgeable, wrote an article examining the performance of its aggressive portfolios verses the other two robos.
"The above graphic shows the impact of that downside protection, comparing the long-term strategic holdings with the holding on June 24," Kane wrote. "You will notice almost no current exposure to international equities, as opposed to the roughly 50 percent exposure held by both Betterment and Wealthfront."
For a $50,000 portfolio from a young, aggressive investor, Kane said Hedgeable's downside protection would equate to $1,895 savings versus Betterment, and $1,755 savings versus Wealthfront on June 24 alone.
Bo Lu, the co-founder and CEO of FutureAdvisor, told WealthManagement.com in an email that his company communicated regularly with clients in the weeks preceding the Brexit referendum to help provide context about the vote ahead of time. After the vote, Lu said FutureAdvisor distributed personalized communications throughout the day.
"Client inquiries via phone, email and other channels on Friday were around 20 percent higher than an average morning, but evened out in the afternoon," said Lu, adding that most inquiries were either consultative or looking for the opportunity to buy. "The combination of regular personalized communication and context setting that digital advice enables, coupled with the ability to preemptively communicate at scale allows for greater client confidence during market events."
Similar to FutureAdvisor, the digital-hybrid Personal Capital said it regularly communicates with clients about world events and how they could affect portfolios. Mark Goines, Personal Captial's vice chairman, said the firm emailed clients after the U.K.'s decision to help them make sense of the decisions and its impact on the market and their long-term holdings.
"We are strongly advising our clients not to be reactionary to this event," Goines said. "Our clients hire us to manage a long-term investment strategy and the short term volatility caused by the Brexit decision does not change their long term goals."
Mike Sha, the CEO and co-founder of SigFig, told WealthManagement.com that his company monitored markets as well as bid/ask spread to avoid incurring unnecessary transaction costs in client account, but chose not to halt trading.
"Despite prices being down on Friday, trading and execution was still orderly, markets were operating efficiently, and bid/ask spreads were low," Sha said. "U.S. markets likely benefited from the fact that they had plenty of time to incorporate the news, opening well after European markets had already been trading for hours after the news broke."
Sha said SigFig proactively communicated to customers to keep them abreast of the news and how Brexit could affect their portfolios while encouraging them to stay focused on the long term and maintain a diversified portfolio that's appropriate for their risk. He added that "nearly all" of SigFig's clients stuck the the plan developed by the algorithm, and the number of investors who deposited funds outnumbered those who withdrew. Several days after the market downturn, less than 1 percent of accounts changed their allocation on SigFig.