FORT LAUDERDALE, Florida — With digital operational problems having hobbled a number of wealth management firms during the height of Monday’s market downturn, executives gathered at the T3 Advisor Conference asked aloud if the entire industry was in need of a technology overhaul.

“Until then, everything was up, everything was easy, and systems were not being pressure tested,” says Brian Shenson, former vice president of advisor technology at Schwab. “All of a sudden, there’s a huge spike of volume in trading and a huge spike in user interest, and then crashes. I wonder if firms got a little complacent.”

There was no shortage of industry predictions that digital advice would be tested in a market downturn. The top two independent digital advisors, Betterment and Wealthfront, were so inundated by visitor traffic that many users found their websites inaccessible as the Dow plunged 1,175 points, or 4.6%, on Monday — the largest one-day point drop in history.

And they weren't the only ones to encounter technical problems. Large discount brokerages, including Vanguard, Fidelity, Schwab, T. Rowe Price and TD Ameritrade also acknowledged varying degrees of service outages to websites and mobile apps, as customers complained on social media about not being able to access accounts.

Shenson, who now runs his own consulting firm in the Bay Area, says the widespread issues of capacity suggested to him that a number of wealth management providers need to reevaluate their assumptions about servicing demand, particularly during a downturn.

“I wonder if firms aren’t being as proactive as they could be in recalibrating their baseline for spike activity,” Shenson says. “You’ve got all these new accounts coming online, you’ve got volume growth. What will a spike day look like now? You’ve got to constantly reforecast for spikes.”

The issues affecting firms on Monday were not due to cloud computing providers, says Robb Baldwin, CEO of Gainesville, Florida-based custodian TradePMR, which relies on Amazon Web Services and conducted its own day-after investigation.

The downward stock market move was sparked by U.S. wage data on Friday.
Bloomberg News

“All firms do everything in their power to prepare for a worst-case scenario,” Baldwin says. “The large spikes in attempts by clients to log in, trade, get answers about accounts and move money all at once were more momentous than any of us had estimated.”

Baldwin says the technical issues that firms experienced Monday should spark an industry-wide discussion about the infrastructure it has relied on as it transitions to all-digital platforms, much like firms did after the first flash crash in 2010.

“How much infrastructure will firms need to scale to the cloud going forward?” he asked.

Advisors also need to rethink their risk estimations and how they communicate that to clients, adds Joe Elsasser, president of advisor software provider Covisum.

“The more central technology becomes to the overall client experience, the more important it will be for firms to be prepared for a run on the bank,” Elsasser says. “A crisis is when everyone wants service.”

A number of advisors are still using risk methodologies that predict market drops like what occurred on Monday are very rare occurrences, Elsasser notes. “Eventually our industry has to move toward heavy-tail models. The old models are wrong too often.”

Some executives spotlighted the outages experienced by Wealthfront and Betterment, suggesting securities regulators should scrutinize their actions.

“To have their websites crash during a period of sharp market volatility... precluding these consumers from having access to their money and control over their accounts, is completely intolerable,” says Ric Edelman, chairman and co-founder of Edelman Financial Services. “If Merrill Lynch had attempted to pull that stunt, the SEC would have already shut them down."

Edelman was "name calling and spreading fear," says Wealthfront spokeswoman Kate Wauck. "[Edelman] probably had a hard time justifying his 2% fee this week and clients must not be falling for his sales pitch anymore." Betterment declined comment.

Other executives however adopted a more forgiving perspective. Monday’s experience will definitely help digital-first firms become better prepared for another market dip, says Kendrick Wakeman, CEO of analytics firm FinMason.

“The newer companies now have a taste of dealing with big demand and knowledge of what happens when the market goes down, and they will rethink their scalability,” he says. “For established firms, they might need to operate more in the cloud.”

The structures of robo advisors are actually more complex than even most advisors realize, says Eric Clarke, CEO of Orion, noting that major robo advisors are acting as the RIA and doing record keeping in omnibus accounts back at the clearing firm.

“These systems can get severely stretched as online activity increases and as market volatility increases,” Clarke says.

The behavior displayed by many investors on social media demonstrates another unforeseen difficulty as firms convert do-it-yourself investors to advice, even digital advice, Clarke adds.

“With do-it-yourself investors, when there’s widespread panic in the market, they tend to panic,” Clarke says. “They’re going to be more apt to jumping on those websites, wanting to trade those accounts.”

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