Robo adviser betterment slow to explain policy on trading halts

More than two months after Betterment LLC suspended all trading for 2½ hours during the post-Brexit market turmoil, users of the robo adviser’s institutional services say they haven’t received clarification over the policies.

Financial advisers and other institutional customers were told on June 24, in the aftermath of the U.K.’s vote to exit from the European Union, they would receive more information within weeks that explained the firm’s policies around trading halts and other service disruptions, according to an email viewed by The Wall Street Journal.

But no such guidance has been coming from Betterment, several advisers who use the platform said.

“It’s a little disheartening,“ said Eric Roberge, a Boston-based fee-only adviser who manages money for some clients through Betterment’s institutional service. In addition to the email to advisers, Mr. Roberge said, Betterment also assured him by phone soon after the halt that the firm would distribute more specifics on how the disruptions worked.

Betterment spokesman Joe Ziemer said the firm is close to distributing more information to advisers, but he didn’t have the exact timing. He added the firm has been discussing the policies with some advisers in recent weeks.

Mr. Ziemer added that Betterment last month updated its Form ADV filed with the Securities and Exchange Commission to provide greater detail around its trading discretion. Betterment clarified that it reserves the right to delay or manage trading in response to market instability “at any time without notice.” It also said it would notify users if a delay stretched beyond an hour, “although it is under no obligation to do so.”

The lack of follow-up puts advisers who use Betterment in a tough position since they would also be on the hook for any client issues during a service disruption, said William Trout, a senior analyst at research and consulting firm Celent. Both the adviser and Betterment have a fiduciary obligation as an investment adviser to act in clients’ best interests, but Mr. Trout says advisers are in the “hot seat“ since they are closer to those clients.

“Transparency is one of the defining features of robo advice. Betterment seems to have fallen short,” said Mr. Trout. “It’ll wear at the fabric of trust with advisers.”

While Mr. Roberge said he isn’t currently considering leaving the service, the lack of transparency “leaves the door open for another robo adviser company to show up with a more detailed explanation of what they do and how they do it.”

For now, Mr. Roberge said he plans to limit the number of clients he manages through the platform by, for example, not using it for people who are newer to investing and may require more frequent portfolio changes during a volatile market. “It would be a sticky situation, especially when I don’t know how it works,” he added.

Betterment launched its institutional business in 2014 to team up with traditional advisers who want to offer a digital advice component to investors. The firm has about 300 financial advisers using its robo service; that is dwarfed by the more than 175,000 individual users who rely on the firm’s algorithms to manage their investment accounts.

Investors, both through traditional advisers and on their own, have been drawn to Betterment and similar robo-advisory firms because of their ability to keep costs low by directing clients into baskets of cheap exchange-traded funds calibrated to their individual goals and risk tolerances. Founded in 2008, Betterment has grown to manage more than $5 billion in investor assets.

However, the company faced a backlash after the post-Brexit trading halt from users and at least one regulator. Massachusetts Secretary of the Commonwealth William Galvin told the Journal in July that Betterment users “were put at a great disadvantage” and the action set a precedent “where people are desperate to get liquidity and they can’t.”

Brian McNiff, Mr. Galvin’s spokesman, said the state regulator is looking into the situation, including what Betterment says to investors and advisers.

Betterment has suspended trading before, but only a handful of times, generally just before and after announcements of Federal Reserve interest-rate policy. The firm hadn’t made any announcement to users regarding the service disruptions then.

As policy, Betterment also avoids trading in the first 30 minutes of the market’s open and the last 30 minutes of its close to avoid the possibility of volatile pricing.

Betterment Chief Executive Jon Stein told the Journal in July he stood by the company’s post-Brexit decision to halt trading, but was holding internal discussions around how it could better communicate with clients, including advisers.

“Transparency to those advisers is our primary goal,” Mr. Stein said then. “We’re being super-proactive with them.”

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