Robo-advisor Betterment made a controversial decision to temporarily halt trading for a few hours the morning following the Brexit vote. The landmark referendum and vote by the United Kingdom to leave the European Union roiled financial markets. Here is an example: the SPDR S&P 500 exchange traded fund (ETF), which tracks the S&P 500 Index, experienced volatility and closed at the following levels on the dates surrounding the Brexit vote:

Date

Adjusted Closing Price

June 23, 2016

$210.81

June 24, 2016

$203.24

June 27, 2016

$199.60

June 28, 2016

$203.20

June 29, 2016

$206.66

June 30, 2016

$209.48

July 13, 2016

$214.93

On June 24, 2016, the day after the Brexit vote, SPY closed at $203.24 down from $210.81 the prior day. The next Monday, June 27, 2016, SPY bottomed out at $199.60 only to rebound to $214.93 by July 13, 2016. (For related reading, see: The 5 Largest Large-Cap ETFs.)

Following the Brexit vote, on Friday morning, June 24, 2016, Betterment delayed trading for several hours. According to an Investment News article the trading halt was done in an attempt to protect Betterment’s clients from expected market volatility. 

The company sent an email to its institutional clients sharing the decision to suspend trading on Friday morning during the period of increased market volatility; this trading suspension meant that withdrawal and deposit transactions would not be executed and requested trades would resume later that day. Retail clients were not informed of Betterment’s decision to suspend trading. (For more, see: How the Brexit Could Affect U.S. Investors.)

There were a variety of questions regarding Betterment’s decision to suspend trading. Some clients were disappointed that they couldn’t add money to their account during times of lower market prices, according to an article by RIABiz. Some advisors felt they were put in an awkward situation being forced to explain this unusual situation to their clients. Furthermore, Betterment bills itself as an automated investment advisor, yet amid the Brexit aftermath humans decided that investors wouldn’t be able to trade during a specified period of time.

Betterment on Brexit

Betterment's Director of Behavior Finance and Investing Dan Egan wrote a blog post, “Brexit and Your Betterment Account: Why It’s Important to Keep Calm and Carry On,” in which he explained Betterment’s relationship with U.K. and international investments. The post desccribed how global and U.S. markets are closely correlated. Egan also explained that the Betterment portfolio has an approximately 6% exposure to U.K. stocks.

Although general in nature, the post didn’t directly address Betterment’s trading halt on the morning of June 24th. Instead, Egan explained one of Betterment’s policies to smooth out the volatility of the Betterment stock and bond portfolios, which is that the firm currency hedges its international bonds. (For more, see: How to Protect Your Portfolio from Brexit Fallout.)

What Trading Halt Means for Investors, Robo-Advisors

Other robo-advisors didn’t feel the need to suspend trading, which makes Betterment's decision even more curious. Furthermore, questions about Betterment’s compliance with the Securities and Exchange Commission (SEC) were also raised, especially in light of the company’s lack of communication to retail investors. In fact, as the next several weeks demonstrated, the markets did an excellent job integrating the Brexit shock and rebounding to prior price levels, adding further questions as to whether Betterment’s decision was necessary.

Betterment's Response

Betterment responded to the criticism in a post stating that the firm normally waits 30 minutes before trading every day as the market open is a poor time to trade. Additionally, the company stated it was influenced by concerns to avoid a flash crash similar to that of August 24, 2015 when worries over China and its economy and markets caused ETFs to sell at great discounts to their net asset values. (For related reading, see: Wealthfront Versus Betterment.)

“Our purpose, as always, was to leverage our expertise to act in the best interest of our customers. It’s also important to note that our objective was not to avoid a falling market (though certain assets in the Betterment portfolio did fall, while certain others rose). Markets will sometimes fall—enduring such fluctuations is the risk we bear in exchange for market returns,” Boris Khentov, Vice President of Operations, wrote in the post.

The Bottom Line

Several issues were raised after Betterment decided to wait a few hours to allow trading the morning after the Brexit vote. One consideration was the incongruity of a robo-advisor’s choice to intervene in trading decisions. Other issues revolve around the relationship between Betterment’s institutional Registered Investment Advisor (RIA) clients, the RIA’s individual clientele and the Betterment platform. Finally, questions were raised about the legality of Betterment’s decision. In sum, with the recency of the robo-advisory model, many more questions will be asked about investing precedents of the automated or robo-advisor class. (For more, see How Does Betterment Work and Make Money?)