Wall Street’s latest plan to extract fees from clients comes in the form of “Robo-Advisors” – computerized programs that purport to substitute advice from a live investment advisor. Growth in this sub-segment of the investment advisory business has been rapid, albeit off a small base of assets under management. Robo-Advisors face many challenges to their growth however – one being how their computerized programs execute during times of market stress and dislocation.
One such stressful period was the day after the Brexit vote, when the U.K. surprised investors and voted to leave the European Union. On Friday, June 24, the market experienced fast trading conditions with the S&P 500 declining 3.6%, it’s largest one-day drop in 2016. During the day, Betterment, a leading robo-advisor arbitrarily decided to lock-out clients who wanted to trade in those fast market conditions.
Serious questions remain for the robo-advisory business – among them is how their machines and management teams will respond during heightened periods of market volatility. The actions of Betterment on June 24 will do nothing to ease concerns of potential clients. Indeed, the CFA Institute questions the practice of arbitrarily locking out clients from executing transactions. To read more on the CFA Institute’s criticism of robo-advisors, click here.