The projections for the growth of robo-advisors are ambitious to say the least. However, this is a normal reaction for a growing trend. In many cases, the analyst is not looking at long-term patterns, assuming that the investment environment will remain the same for many years. This doesn’t mean robo-advisors are a bad option. It depends on your goals. Where do you fit in?

Robo-Advisor Popularity

A few of the most popular robo-advisor services today are Wealthfront, Betterment, Personal Capital and FutureAdvisor. Charles Schwab Corp. (SCHW) offers its Intelligent Portfolios service. (For more, see: Schwab's New Robo-Advisor Service Explained.)

A big reason for robo-advisor popularity is affordability. For instance, 90% of Wealthfront’s 30,000 clients are below the age of 50 and 60% of those clients are below the age of 35. This points to the Millennials, a generation that is still in the early stages of building wealth. Most Millennials can’t afford the fees of a traditional financial advisor who also typically require a minimum amount of assets to invest. (For a list of robo-advisors, click here.)

Wealthfront has a minimum investment of $5,000. If that total is below $10,000, then the service is free. After $10,000, there is just a 0.25% fee. Betterment works a little differently, with no minimum investment required and a 0.35% fee if the total investment is below $10,000. If the investment is between $10,000 and $100,000, there is a 0.25% fee. If the investment is north of $100,000, the fee is 0.15%. (For more, see: Wealthfront Versus Betterment.)

But let’s skip right to Schwab and its Intelligent Portfolios. This service requires a $5,000 investment, but there is no fee. That being the case, it’s going to be difficult for Wealthfront, Betterment, and its peers to compete over the long haul. As we all know, nothing beats free. And if you’re wondering how Charles Schwab makes money on this service (you have to read the fine print), it’s through its proprietary exchange-traded funds (ETF)  and third-party ETFs. But this is still a top option for an investor interested in robo-advisor services. In addition, Intelligent Portfolios will diversify your account across stocks, fixed income, real estate, commodities and more.

Another reason for the popularity of robo-advisors is tax-loss harvesting, which automatically minimizes tax obligations on your profitable trades and maximizes tax reductions on your losing trades. And, best of all, it’s all done by a computer, requiring zero effort on your part. (For more, see: Does Tax Loss Harvesting Really Work?)

Robo-Advisor Risk?

Millennials have seen the worst of it during their lifetimes, including the Dotcom Bubble and 2008 financial crisis. Many are risk adverse and wary of the stock market. Unfortunately, the same pattern that helped create the last crisis is likely taking place again (record low interest rates). Only this time, the problem is global. And instead of just corporations being overextended and unable to pay their debts when growth stalls, you can now add countries to that list. 

Is a bear market is approaching? Even if it isn’t on the horizon, it’s only a matter of time. It’s important to realize that while robo-advisors can rebalance portfolios all they want, those portfolios are going to be almost 100% long (excluding cash positions). It will be impossible for those robo-advisors to deliver a positive return. Millennials will see their investments head south and robo-advisors may wane in popularity. (For more, see: Robo-Advisors and a Human Touch: Better Together?)

Paying for a good financial advisor might be money well-spent in a bear market. Unlike a robot, a human can look at trends, keep up with all the up-to-the-minute headlines and make sense of them in a way that only a human mind can. At least there is potential of navigating a bear market when you have a human financial advisor. When you use a robo-advisor and the markets head south, your investments are likely to head south as well.

The Bottom Line

Spending money on a top-tier financial advisor that truly understands the economy and markets will be your best bet going forward. If you’re using a robo-advisor, you’re betting on a bull market, which is unrealistic. However, if you’re young and willing to wait it out for decades in order to save for retirement, then a robo-advisor can be a viable solution. (For more, see: What's Next for the Robo-Advisor Space?)

Dan Moskowitz does not have any positions in SCHW.

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