Millennials are comfortable with using 401(k) robo advisors — 54% of millennials surveyed by student loan and policy research firm LendEDU said that their robo advisor produced better results than they were expecting in 2017, and 42% believed that their robo advisor outperformed the market last year.
But, they may not be prepared to take advice from human advisors 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 advisor in a face-to-face setting,” says Hamory.
Betterment, which offers 401(k) robo advisor 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 advisors will outperform the market or not be subject to fraud. When asked if they worry about a robo advisor 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 advisors 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 advisor 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 advisors 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.
Younger and first-time investors may expect higher returns from 401(k) robo advisors compared to human advisors, 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 advisors.
According to the LendEDU study, “close to half of them would consider consulting on human advisor when that happens,” says Hamory.
Even so, Betterment finds a robo advisor is attractive to all demographics because “it has an overall better user experience, offers more transparency and lower fees for the investor,” Ziemer says.
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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 advisors for a shorter period of time compared to investors who work with a human advisor — 77% say they are holding their money in these robo advisor portfolios for five years or less.
“They are looking at sort of shorter-term investments. The purpose of the traditional human advisor, which robo advisors 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 advisors to save up for a new home or pay off a student loan.