Should you sign up for a financial robo-advisor?

How do you raise half a billion dollars in three weeks? If you’re Charles Schwab, the answer is through something called Intelligent Portfolios.

Intelligent Portfolios are Charles Schwab’s entry into what you might call the Robot Wars: the series of battles between various “robo-advisors” for the privilege of being able to invest your money on your behalf.

Robo-advisors differ from normal financial advisors in three main ways: they manage your portfolio primarily through automated software (rather than having humans pick stocks and bonds for you), they’re much cheaper than traditional financial advisors, and they custom-build an efficient portfolio for you based on your very own personal risk profile. (“Efficient”, here, is a technical term: it means a portfolio on the “efficient frontier”, where you get the lowest amount of risk for any given return, or conversely the highest return for any given level of risk.)

Up until now, the robo-advisor category has been dominated by two startups: Betterment and Wealthfront. Both have raised millions of dollars in venture capital, but neither has anything like the deep pockets of Charles Schwab, which blanketed much of New York’s transit system, including Grand Central Terminal, to mark its own launch.

The power of that kind of marketing, combined with a known and trusted brand, has been awesome: people very rarely move their life savings from one place to another, yet Charles Schwab has been able to persuade a lot of them to do just that in the space of a couple of weeks. The achievement is even more impressive given the run-up that we’ve seen in the stock market of late: by moving their money from an old account to a new Charles Schwab account, the new Schwab customers have probably locked in substantial capital gains—and cost themselves the associated capital gains taxes.

So, are Schwab’s new investors being smart about their money? There’s been a bit of a storm in a teacup about the Charles Schwab offering, with Wealthfront CEO Adam Nash, in particular, leading the charge against them.

Nash’s main charge is that in order to arrive at its headline-grabbing zero percent management fee, Charles Schwab has been forced to load up its robo-advisor product with a whole slew of hidden fees. Most egregiously, somewhere between 6% and 30% of every portfolio will be held in cash, which will in turn be deposited in Charles Schwab Bank. That’s great for Charles Schwab Bank, but less great for the investors, who will be earning almost no interest on that cash.

Charles Schwab’s official response to Nash is decidedly disingenuous. They talk about how active investors often have a cash allocation, and about how all investors should have a cash allocation—both of which are true. But active investors always have the option of drawing down their cash allocation to zero, and individual investors similarly have the ability to draw on their cash holdings if they ever need to do that in an emergency. If you have cash as part of a Schwab Intelligent Portfolio, however, you can’t liquidate it: the only thing you can do is sell a small part of everything, including all the stocks and bonds and other ETFs in the portfolio. Putting cash in a black box like this is simply dumb: you get no noticeable returns from doing so, and you also lose all the liquidity benefits that cash normally comes with.

That said, Nash’s own post can’t entirely be taken at face value, either. He treats the opportunity cost of cash as 6%, which is to say he assumes that if you didn’t have that money in cash, you’d have it in something yielding 6% per year instead. And while he might well be right that cash almost never appears on the efficient frontier of a scientifically-constructed portfolio, cash-like instruments like short-dated Treasury bills do appear, and they, just like cash, also tend to yield something very near to zero. If Schwab simply replaced its cash option with short-term Treasuries, the risk profile of the portfolio would not change much, and neither would the overall returns. But by using federally-insured cash instead of Treasury bills, Schwab gets to bring the price of its product down to zero.

Half of me is tempted to advise that, given the sniping between Charles Schwab and Wealthfront, the smart thing to do would be to just go use Betterment. They certainly have advantages: they don’t have a $5,000 minimum balance, they make it easy to save for non-retirement goals, and their broker-dealer license allows them to trade on your behalf more efficiently, by pooling all the trades of the day instead of trying to buy and sell for everybody individually in the open market.

Another part of me wants to say that none of this matters much. Ultimately, all of these robo-advisers do pretty much the same thing, and whichever one you use, you’re likely to end up in pretty much the same place. None of them is a bad choice, and all of them are better than high-fee alternatives.

But the main advice I have for most young people looking at these products is simpler still: why are are you looking at these products?

A good general rule for young people is: invest your money only if there’s nowhere more pressing to deploy it. Do you have credit card debt? Then use your money to pay off your credit cards, don’t try to invest it. Do you have student loans carrying an interest rate of more than about 5%? Then use your money to pay off your student loans, don’t try to invest it. Do you have any other debt at all, besides a first mortgage, like a car loan? Then, again, pay down your debts before starting to invest. Once you’ve done all that, your next task is to start building up an emergency fund in a savings account.

Once you’ve paid off all your debts, gotten yourself a cushy emergency fund with about six months’ worth of expenditures in it, and accumulated several thousand dollars in cash over and above the emergency fund—then you can start thinking about robo-advisors. If you’re the kind of person who’s happy entrusting your cash to a website, rather than an individual, then doing so is likely to get you higher returns for lower fees. But only take that step if you’re OK with seeing the value of your investments go down rather than up, and if you don’t plan on using that money any time soon.

One of the seductive dreams of America is the idea that you can make your money work for you, and that you can get rich just by investing the right way and sitting back. But real life doesn’t work like that. The best way to get rich is to either inherit your wealth, or to work for your money. Investing works best for people who are already rich. (Which is one reason you see companies calling themselves things like “Wealthfront.”) If you’re not already rich, then just keeping your money in a savings account is fine. Indeed, it’s often downright sensible.