Robo-advisors: information is key to help clients weather market volatility

Robo-advisors are expected to weather rocky markets and say educating clients and helping them think through withdrawals are a key tool. However, having a younger demographic is also important, as they have a more self-directed and rational approach. Mike Kane, CEO robo-adviser Hedgeable, said there's no difference in communication between digital platforms and non-digital platforms other than the fact that robos are able to get information out to clients more quickly.

When it comes to market volatility, robo-advisers are expected to ride out rocky markets with the help of online tools.

Online investment platforms, which for the most part offer clients passive investment portfolios, say their clients can handle market ups and downs, and they are ready to work with skittish market participants. Educating clients and helping them think through withdrawals are key tools, but it also helps that their clients are different than the norm.

Robos have younger clients, who are steadier than the usual human adviser’s clients, said Will Trout, an analyst at Celent.

“Their outlet is less of a guidance-focused, hand-holding approach and more of a self-directed approach,” Mr. Trout said. “They will look at things a little more rationally than investors 20 or 30 years older.”

“The biggest value-add coming from the robos in times of turbulence is their sort of nerves of steel, or lack of nerves” he added.

Robos are seeing those steel nerves work, too. Online investment portfolio providers say they didn’t see much of a change in client behavior on Monday, when U.S. stocks plummeted after a global selloff.

Rich Hagen, president of TradeKing Advisors, an online investment platform, said it was a “fairly normal day.”

“The smart people are using today to just check in on things,” he said. Robos like his are offering diversified portfolios with time horizons and risk assessments.

“They aren’t here to day trade or to time the market,” Mr. Hagen said.

Mr. Hagen and other robo-adviser leaders say their platforms have helped educate clients when it comes to market volatility. It is no different than when a client meets with a traditional adviser in an office, he said, where clients and advisers discuss the market and client investments and goals.

Mike Kane, chief executive of robo-adviser Hedgeable, which offers downside protection instead of tax-loss harvesting, said there’s no difference in communication between digital platforms and non-digital platforms.

“We think that’s a common misconception,” he said.

In fact, robos are able to get information out to clients more quickly with technology, he said.

“We send out push notifications. We can do that 24/7,” he said. Because of this instantaneous interaction, the robo sees little turnover or client account churning.

Dan Egan, director of behavioral finance and investments at robo-adviser Betterment, which in November passed the $3 billion mark in assets under management, said Betterment has tools to help clients think more clearly before reacting to market volatility. One tool is a tax impact preview, which shows clients before a transaction is confirmed the estimate of how much they need to pay in taxes because of a withdrawal or allocation change.

Another is an investing journal for clients, where an investor will log why they withdrew. In many cases, it shows the firm that clients are withdrawing because they need the money at that moment, not because of market timing.

During the market correction in August, which was many robo-advisers’ first tests in a downturn, first test in a downturn, Mr. Egan said Betterment clients handled their accounts very well.

“Market volatility always happens,” Mr. Egan said. “We think a little bit of market volatility is a good thing and helps people learn what seems scary on Friday may be forgotten about the following Wednesday.”