Don't trust the robots... They're out to get you.

Human investment advisors have a long history of self-interested decision-making.

They might make an unnecessary flurry of trades to collect more commissions... or collect steep management fees for merely buying the S&P 500 Index.

Robots were supposed to change all that. And no, I don't mean big, clunking machines that motor along behind you when you visit the bank.

I'm talking about the "robo-advisors" that began popping up as the smartphone revolution kicked off in the late 2000s.

Robo-advisors are algorithms designed to allocate money among different asset classes like stocks, bonds, and cash. They offer a simple, low-cost, set-it-and-forget-it way to invest. And investors have responded.

As recently as 2017, robo-advisors had $1.1 billion worth of assets under management. Now, that figure is $1.8 trillion.

The idea is that they can make investors the most money possible, accounting for risk, without the expense (for either a financial institution or a client) of paying a human for this expertise.

But the robots aren't always as benevolent as you might expect. And if you're not careful, your portfolio could be their next victim...

Consider the robo-advisor called Schwab Intelligent Portfolios, which the broker Charles Schwab launched in 2015.

Investor cash poured in. And Schwab's robots would lend it out to an affiliated bank, collect interest, and pay just a portion of that interest back to the clients... all while telling the clients that the Intelligent Portfolios were getting them the best possible deal.

The difference between the two interest rates – what Schwab received for lending out clients' money and what clients actually received from Schwab – was the robots' secret profit.

Turns out, though, even robots aren't above the law. A couple years ago, Schwab had to pay $187 million to settle a lawsuit with the U.S. Securities and Exchange Commission ("SEC") over its robo-advisors' underhanded dealings.

From an SEC statement...

The Securities and Exchange Commission today charged three Charles Schwab investment adviser subsidiaries for not disclosing that they were allocating client funds in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions.

Gurbir Grewal, director of the SEC's enforcement division, called Schwab's conduct "egregious."

Maybe you think that after this $187 million penalty, Schwab is now falling over itself to get clients the best possible interest rates. It's not.

My colleague Whitney Tilson has been on a cash crusade with Schwab in recent months...

Whitney is a former hedge-fund manager who was responsible for up to $200 million. Now, he's the lead editor of Stansberry Research's flagship newsletter, Stansberry's Investment Advisory.

Earlier this year, he found one chart comparing the federal-funds effective rate with the national average interest rate for savings accounts.

Remember, the fed-funds rate is what banks charge each other to lend cash overnight. Essentially, it acts as a floor for interest rates throughout the economy.

So this chart shows the risk-free interest rate versus what banks are actually paying you for your savings. The difference is shocking. Take a look...

This got Whitney questioning whether his cash hoard at Schwab was earning the market rate...

Sure enough, as Whitney put it, "I was earning a piddly 0.5% interest!"

It didn't take Whitney long to get his cash out of there. He moved it to another broker that was paying interest around 5%.

As you'd imagine, earning 0.5% on your cash versus 5% makes a big difference. On $100,000, we're talking about $4,500 per year... for doing no work and taking on no added risk.

Lots of companies like Charles Schwab will make money off the little guy any way they can. Plenty of financial institutions are looking to fleece you every chance they get.

And this is easy to do... especially when it comes to cash parked in an investment account. When folks are busy considering which stocks to buy or how to prepare their portfolios for retirement, who spends more than two minutes a year thinking about their cash position?

Cash is often the most overlooked part of a diversified portfolio. But your cash deserves your attention.

In fact, a review of your cash holdings may be one of the most important things you do this year.

As a saver and investor, you likely have tens of thousands (maybe hundreds of thousands) of dollars in cash. That's a good thing. But you need to keep it safe, liquid, and earning a yield to fight inflation.

Don't be satisfied with earning 0.5%. Instead, you need to think about where you're putting your cash... how much more it can do for you... and how big your cash position should be, based on your needs.

And don't let your portfolio get left behind by blindly following the advice of a robo-advisor.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

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