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Monday, June 27, 2016

The Brexit Freeze, Roboadvisor Style

News summary by MFWire's editors

As Brexit shook markets on Friday, the biggest independent roboadvisor in the business froze trading for more than two hours. RIAs were notified, but individual investors weren't. And the whole thing sheds light on how one prominent roboadvisor handles market volatility, a question that many fundsters and other financial services insiders have been mulling over for some time.

Reuters, RIABiz, and the Wall Street Journal report that Betterment suspended all trading from 9:30am to noon on Friday. The New York City-based roboadvisor has $4.8 billion in AUM, is its own broker-dealer, and self custodies.

A Betterment spokesman frames the freeze as standard operating procedure for the company and tells RIABiz and the WSJ that Betterment normally doesn't trade in the first 30 minutes (9:30-10am) of the day and has suspended trading at other times before, like last August and around Federal Reserve rate announcements. He also notes that the freeze was "in no way a capacity issue."

The WSJ's coverage focuses on Betterment's individual investor clients and highlights several of them, none of whom were aware of the freeze. In fact, the investors didn't even seem to realize that Betterment can do this kind of thing, though the Betterment spokesman notes that the company's policy around such freezes "is clearly disclosed" in its agreements with investors. So many investors, unsurprisingly, aren't reading the fine print.

"Clients say they weren't aware of the halt, raising questions around how robo advisers communicate with clients during market volatility," the WSJ writes.

Meanwhile, Betterment's RIA allies, at least those who spoke with RIABiz, seemed worried by the warning that Betterment sent them about the freeze, which some described as lacking in any explanation. Celent analyst Will Trout writes that "this preemptory announcement ... does raise the question of sloppy hands," since Betterment is its own B-D. And Michael Kitces, co-founder of XY Planning Network, worries that the freeze policy is "so open-ended."

"Even if no advisor would have wanted to sell this morning, the fact that they couldn't greatly upsets them," Kitces writes.

The Betterment spokesman counters that the freeze is "about best execution, which is about minimizing transaction costs." He emphasizes that "Betterment customers are in it for the long haul," so short term volatility is beside the point.

Oh, and RIABiz notes that Betterment's call seems to have been good from a market-timing perspective; markets fell further Friday afternoon than they had in the morning, so investors who tried to bargain-hunt in the morning could've ended up even more hurt. 

Edited by: Neil Anderson, Managing Editor


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