Automated investment services, known as robo-advisors, are designed to give ordinary investors sophisticated portfolio management at a low cost.
What these investors might not know is how much control robo-advisors can have over their portfolios, especially when markets are volatile.
The robo-advisor Betterment illustrates the point.
After results of the Brexit referendum showed that the U.K. had voted to leave the European Union, the investment tool halted trading on June 24 from the opening bell of the U.S. stock market until about noon Eastern time. (The S&P 500 fell 3.2 percent that day.) Betterment, which manages $5.1 billion, did not inform its retail clients until after the halt had ended. And it didn't have to either.
Robo-advisor accounts are discretionary. That means they have the ability to invest client assets however they see fit. The same goes for human financial advisors. However, clients can call their human advisors and override their decision if they want.
Betterment argues that trading halts are a feature, not a bug of its service.
"We are not a platform for day traders seeking immediate execution," said Arielle Sobel, a Betterment spokeswoman. "Our client agreement outlines our trading policy as a discretionary advisor. We also consistently educate existing and potential customers that our platform is built for long-term focused investors, not day traders." In fact, Betterment experienced an increase in new customers after the Brexit trading halt, Sobel said.