Robo-advisor vs. financial advisor: Which one is right for you?

Robo-advisors are digitalized financial planning and investment services that use computer algorithms to manage investment portfolios. They require little to no human supervision and use information about financial goals provided by the user (investor) to manage their investment portfolio. As a user, you can essentially set your investment parameters (e.g., investment time horizon and investment risk tolerance) and allow the computer model to do the rest. 

The development of robo-advisors over the last decade has greatly influenced the choices and costs of investment management services available to investors. Robo-advisors allow for a more hands-off investment approach at a generally lower cost compared to traditional financial advisors. However, it is important to consider the pros and cons of such a service when determining what works best for you.

Robo-advisors may be an ideal option for those with less complex financial situations or those who simply want help with investment portfolio management. Here are some pros and cons to consider when opting for a robo-advisor.

• Lower costs: Robo-advisors tend to have lower fees than traditional financial advisors, ranging from 0.25% to 0.50% of the portfolio (or potentially less). While these fees are the industry standard, some platforms can charge more depending on the services chosen, while others may also charge monthly fees or additional service fees.

• Simplicity and convenience: Opening a robo-advisor account is fairly simple, and platforms are generally user-friendly, allowing investors to set up an account in just 15 minutes. It is also a convenient investment method for those who want a more hands-off approach.

• Lower account minimums: Robo-advisors often have lower to no minimum investment requirements, making them a more accessible option for new investors with fewer assets. 

• Transparency: Computer algorithms used by robo-advisors are quite transparent, allowing clients to understand how their assets are being managed. Using algorithms also helps reduce potential conflicts of interest or biases from traditional human advisors.

• Automatic rebalancing: Many robo-advisors have the option of automatic portfolio rebalancing, so clients won’t have to worry about doing it themselves and can rest assured that their asset allocation stays aligned with their investment strategy.

• Limited services: Unlike traditional advisors, robo-advisors only offer services related to investment management. Therefore, they cannot help with more complex financial situations such as tax planning, estate planning, or retirement planning. 

• Lacks human touch: Since robo-advisors use algorithms, this service lacks personalized advice a human advisor can provide. Robo-advisors won’t be able to accurately guide client decisions based on how different areas of their life are connected and influenced (e.g., buying a house, wanting to fund a 529 plan, making the most of their employee benefits).

• Limited investment options: The asset classes offered by robo-advisors are often limited to a diversified list of exchange-traded funds (ETFs) and index funds. Investors who are more hands-on will not have the option to trade individual stocks or bonds but will be limited to the options offered by the robo-advisor.

Traditional financial advisors, also known as financial planners, are professionals who provide guidance and advice on personal financial management, including investments, tax planning, wealth management, retirement planning, and estate planning, to help clients meet their financial goals. 

Financial advisors work with clients to identify and clarify their financial goals and help them establish a personalized plan to achieve these goals. They can also offer specialized services, such as retirement financial advice, or generalized financial management.

It may take a bit more research to choose a financial advisor, and it is also important to consider the advantages and disadvantages of this type of service when considering working with a robo-advisor versus a financial advisor.

• Broader services offered: Traditional financial planners offer a broad range of services related to financial management, providing a more well-rounded strategy that goes beyond portfolio management.

• Personalized planning: Since traditional financial planners allow for a deeper, human connection, they are able to build a deeper understanding of client goals. This allows advisors to better tailor the client’s financial plan based on the client’s unique circumstances. They can also better help clients adapt and manage their goals based on changing life stages.Knowledge and expertise: Financial advisors also offer services in specialized fields, such as setting up a trust or mitigating taxes on an inheritance, guiding clients on broader financial topics.

• Higher costs: Working with a financial advisor usually comes with higher costs (with an average of 1% of assets under management), and price structures may vary between fee- and commission-based (sometimes both), so it is important to stay informed.

• Potential biases: Personal biases or conflicts of interest between an advisor and their client can potentially cause mistrust in the relationship or cause the client to miss out on certain opportunities.

• Higher minimums: Financial advisors generally work with higher-value portfolio management, making it a less viable option for new investors with fewer assets.

When comparing robo-advisors vs. financial planners, one of the most notable differences is that robo-advisors are more cost-effective and require less hands-on management, whereas financial advisors offer broader, more in-depth financial management at a higher cost. While they are both financial management services, robo-advisors are tailored more towards portfolio management (with limitations on investment options) vs. human financial advisors, who cover financial topics beyond portfolio asset management. 

The level of human interaction is another notable difference between a robo-advisor and a financial advisor. Robo-advisors function on computer-based algorithms, with minimal human interaction, whereas a financial advisor offers human connection. Some robo-advisors also offer a hybrid approach, combining the services of both advisor types.

Essentially, robo-advisors are a great cost-effective option for investment management, while financial advisors offer a more personalized, comprehensive financial management approach.

When deciding on a financial advisor vs. a robo-advisor, it is important to understand what your financial goals are. The best option will be the one that most closely meets your needs. While both services have their pros and cons, it’s important to choose one that will help you achieve your goals. 

Here’s a summary of the key features of both advisor types:

As your life circumstances evolve over time, there may be situations where you could benefit from a robo-advisor, and other times when a financial advisor could be a better fit. If you are more concerned with having your key investing tasks managed, then you might consider a robo-advisor, but if you have some more specialized financial needs, then it might be wiser to choose a financial advisor for those specific goals. While it is not always robo-advisor versus financial advisor, it can also be beneficial to use a hybrid approach at times.

Here are some situations showing which advisor can potentially be a better fit, to help you understand how to make the right choice for you.

Understanding your options and personal needs when looking for a financial advisor can help you be more informed and choose your advisor type wisely. It is important to do your research before making any major financial decisions, and before choosing who you will trust your assets with. 

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.