The Big Red Button: Robo-Advisors in a Bear Market

The next bear market will present new challenges to robo-advisors, forcing them to build around the value of human connection and customizable investments.

For the past five years, the robo-advisor has had a good run. Since the aftermath of the financial crisis, algorithmically-managed “robo-advisors” have grown their assets by 250% each year. The robo-advised portfolio was popularized by challenger startups like Betterment and Wealthfront, but incumbents have followed suit in the past two years with their own robo products. Robo-advised assets are near $100 billion today, and are expected to skyrocket to $8.1 Trillion by 2020.


While the robo-advisor industry was taking off, so was the stock market. From its bottom in March 2009, the S&P 500 has seen steady returns averaging over 12% annually, and continues to hit all-time highs on a regular basis. For passive investors, the market has provided no reason to panic in the past six years. The second-longest bull market in history has made it easy for younger, less affluent clients to dismiss the value of a human advisor and invest their savings with a low-fee robo-advisor.

Because they have built a young client base, robo-advisors will have an especially tough time holding onto assets when the market turns south. Consider:

  1. Young clients saving for retirement have high-risk portfolios with considerable downside potential.
  2. Young clients have never endured a market downturn. They have only experienced the latest six-year recovery, watching their money grow no matter where it was invested.

The Moment of Truth

The true value of a financial advisor is not “beating the market,” it’s keeping clients calm during a downturn. When the markets are booming, a financial advisor’s job is pretty easy. When the market tanks, panic sets in and the phone starts ringing. The robo-advisor has yet to prove it can replace a human advisor when times are tough.

To Liquidate or Not to Liquidate

In the robo-sphere, there is no clear consensus on how to manage anxious clients. Betterment and Wealthfront both discourage their clients from switching their risk profile and only allow them to change it once a month. However, when the Brexit vote caused investors to panic this June, Betterment froze trading for its clients for three hours. While this may have prevented some clients from selling low, it also caused some to lose trust in an algo product that doesn’t allow for human override.


Most robo-advisors restrict tweaking your portolio.

Other robo-advisors, like Hedgeable and E*TRADE’s Adaptive Portfolio, also employ active strategies for risk management. Instead of holding put, these robo-products reallocate funds to less risky assets when volatility kicks in. While this feature may be enough to calm some investors, it is still algo-controlled and unlikely to satisfy investors looking for a big red “override” button.

The Human Touch Returns

Some time in the future, long-term investors may trust algorithms enough to not bother intervening on their own. Right now, investors are still warming up to the idea of not being able to tweak their portfolio on their own. Until this behavioral pattern changes, robo-advisors will need tools that capture their clients’ trust during times of volatility, even if it leads to lower returns in the short term.

bad tradeFor less confident investors, having someone to call might be enough. More sophisticated investors may demand more autonomy in a downturn, such as the ability to override and tweak their default portfolio. In the end, robo-advisors will need to prioritize the loyalty of their sophisticated clients over their commitment to passive-only investing.

Right now, the portfolio override button is like the steering wheel on the self-driving car. It’s comforting to know it exists, even though you are more likely to crash if you use it.

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