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Does Betterment’s Line on Its Post-Brexit Halt Make Sense?

June 30, 2016

Betterment is still explaining its Brexit-fueled decision to stay out of the market last Friday morning.

The robo advisor’s decision to suspend trading in the first half of the trading session in response to volatility linked to the U.K.’s vote to leave the European Union initially raised eyebrows because it acted without informing its retail customers.

And to make matters worse, it occurred on a worrisome day when far bigger traders like Fidelity and TD Ameritrade also had hiccups.

In its defense, Betterment has claimed — in, for instance, this write-up in RIABiz — it didn’t “suspend” trading on Friday, it merely declined to begin transacting until it deemed markets sufficiently calm.

As a spokesman for Betterment — which only manages $4.8 billion — told the publication, “We are a discretionary advisor and we made the decision to not start trading until around noon in the best interest of our clients.”

In other words, Betterment says you can’t suspend that which you never started — and anyway its customers don’t use it like a discount brokerage to buy and sell stocks tactically, and it’s not set up to accommodate such activity.

But this makes Betterment’s explanation of its decision seem strange. As we reported, the Wall Street Journal says the robo “took the step to protect investors from paying the higher transaction costs associated with buying and selling securities during times of extreme market volatility.”

Zeroing in on the bit about “higher transaction costs,” an FA-IQ commenter sees a disconnect in this rationale. As the reader points out, Betterment’s website says the company’s “single management fee covers everything you need including transactions, trades, transfers, rebalancing, advice, account administration, etc. Unlike other companies, Betterment does not charge you transaction fees to buy and sell securities.”

(Getty)

In this context, then, the reader wonders how its clients would have ended up paying more on Friday.

We took this question to Betterment, and got this response.

“When we say transaction costs, we mean something broader than what is traditionally meant in the retail brokerage context,” company spokesman Joe Ziemer writes in an email exchange with FA-IQ. “The only concepts typically discussed with a traditional brokerage customer are transaction-based commissions and fees which, as you correctly point out, Betterment customers do not pay. Betterment is not a brokerage — we are a fiduciary advisor, and we take a holistic approach to managing our customers’ portfolios, in the best interest of our customers.”

Ziemer continues: “Our usage of ‘transaction cost’ encompasses bid-ask spreads, which are a basic cost of capital market participation, even if the act of trading itself were to cost nothing upfront. The wider the spread, the more “expensive” it is to transact. For this reason, when we select ETFs for our customers’ portfolios, we consider both the level and stability of bid-ask spreads at which they generally trade, because all else being equal, tighter spreads mean lower costs of transacting. These are not costs paid to Betterment, but costs shouldered by our customers nonetheless. As a fiduciary advisor, we consider customer costs holistically, and seek to minimize them at every turn.”

So, asked and answered? Or do you smell a rat?