Millennials’ comfort with robo advisers may hide investing pitfalls

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Millennials are comfortable with using 401(k) robo advisers — 54% of millennials surveyed by student loan and policy research firm LendEDU said that their robo adviser produced better results than they were expecting in 2017, and 42% believed that their robo adviser outperformed the market last year.

But, they may not be prepared to take advice from human advisers in the event of a stock market correction or crash, says James Hamory, analyst with Hoboken, N.J.-based LendEDU.

“This generation is very connected with technology and much more comfortable with handling apps compared to people their parent’s age. It’s not surprising that millennials would be comfortable with an app as opposed to talking to an adviser in a face-to-face setting,” says Hamory.

Indeed, retirement investment firm Betterment Inc., which offers 401(k) robo adviser services, agrees with the assessment that millennials prefer technology over human interaction, according to Joe Ziemer, a vice president. Younger workers “really just want to control the experience and have it more on their terms, so they only want to talk with someone when it’s absolutely necessary,” he says.

This practice, however, may be spurring over-confidence from millennials who believe that 401(k) robo advisers will outperform the market or not be subject to fraud. When asked if they worry about a robo adviser being involved in fraudulent investment and trading practices, 50% responded “No,” while 27.5% responded “Yes” and 22% indicated that they were unsure in the LendEDU survey.

Millennials seem to trust robo advisers more than their human counterparts and not see the risk of rogue trading algorithms and episodes of so-called volatile trading.

Based on our survey, they aren’t aware. I would say that a human adviser offers that human touch to say, ‘I can see the market going this way and we're going to want to change up the portfolio before the crash happens,’” Hamory says. Users expect robo advisers to outperform the market in 2018.

But, Hamory says that this is not what these automated investment tools were designed to do.
“Over the long term, they're supposed to track the market, not underperform it and give a good rate of return with a less risky portfolio,” he says.

High expectations
Younger and first-time investors may expect higher returns from 401(k) robo advisers compared to human advisers, simply because they are not taking into account the history of stock market corrections occurring after periods of high trading volumes and record returns.

“They haven't ever experienced a down market. They came in right after the financial crash and have only seen an up-trending market in the last 10 years,” he says. “When these first-time investors start seeing that they're not making the returns that they thought they were going to make or maybe they're even going into the red a little bit, I think there's going to be a lot of second thoughts” about using robo advisers.

According to the LendEDU study, “close to half of them would consider consulting on human adviser when that happens,” says Hamory.

Even so, Betterment finds a robo adviser is attractive to all demographics because “it has an overall better user experience, offers more transparency and lower fees for the investor,” Ziemer says.

Also see:PayPal launches robo-advising service.”

And, he adds, the technology makes sense to millennials. “They are early adopters and are more comfortable with technology so this is a default option, as in, ‘Of course, I would like to manage my money through a technology-first platform.’ This is the type of user experience they expect. Why should this not extend to financial services?”

Millennials appear to be investing with robo advisers for a shorter period of time compared to investors who work with a human adviser — 77% say they are holding their money in these robo adviser portfolios for five years or less.

“They are looking at sort of shorter-term investments. The purpose of the traditional human adviser, which robo advisers are supposed to be the cheaper, more readily available alternative for, is to generate wealth over the long term, but it doesn't appear that the younger generations are using this technique for that purpose.”

Instead, Hamory speculates that younger investors are using robo advisers to save up for a new home or pay off a student loan.

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