robo vs financial advisor

Robo Advisors vs. Financial Advisors: Which Should You Choose?

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Are you tired of trying to navigate the confusing world of investing on your own? It might be time to consider using a robo advisor or financial advisor. But how do you choose between the two?

In this article, we’ll delve into the benefits and drawbacks of both robo advisors and financial advisors to help you make the best decision for your investment goals. And we even give you one option so you can get the best of both worlds.

Whether you’re a beginner looking for an easy way to get started, or a seasoned pro looking for more personalized advice, we’ve got you covered.

What are Robo Advisors?

Robo Advisors vs. Financial Advisors: Which Should You Choose? 1

A robo advisor is a digital platform that provides automated investment and financial planning services using algorithms. These services come with little to no human supervision, and use low-cost funds to optimize your investment portfolio for low-cost, long-term growth.

A robo advisor asks about your financial situation and future goals through an online survey to offer investment advice and automatically invest your assets.

Robo advisors have become popular as a replacement for human financial advisors because many people prefer using technology for investing rather than paying for human advisors. Robo advisors can instantly optimize thousands of portfolios without errors, using tax-loss harvesting, automated dividend reinvestment, and other portfolio optimization techniques.

Robo advisors have an advantage over traditional financial advisors because they offer advisory or brokerage services at a very low cost because they don’t need to employ actual people to manage client accounts, reducing management fees and using expertly designed algorithms.

They also require a low minimum investment amount, opening up managed investing services for nearly everybody, instead of only the wealthy.

Popular Robo Advisors

Some popular Robo advisors on the market include Betterment, Wealthfront, M1 Finance, and SoFi Invest. These services have made a name for themselves because of their low (or no) fees, investment options, and hands-off investment services.

You should use a robo advisor if:

  • You’re a beginner or a younger investor
  • You want to be a hands-off “lazy” investor
  • You want to avoid emotional or panic investing decisions
  • You want to use advanced portfolio optimization techniques

What Are Financial Advisors?

Robo Advisors vs. Financial Advisors: Which Should You Choose? 3

A financial advisor is a certified financial planner (CFP) who helps you plan for your future and make your money work for you in the long term. Besides being investment managers, they coach, educate, communicate, and plan with their clients based on their financial situation.

Unlike a Robo advisor that simply uses a questionnaire to ask for sensitive information, a traditional financial advisor organizes a one-on-one meeting with the client to understand your short, medium, and long-term investment goals. Once they know your risk tolerance, they help you set goals that best suit you and personalize your financial planning.

The good thing with a human advisor is that you can get personalized advice and management. You can also acquire knowledge and education on investments, estate planning, capital gains, insurance, and taxes within the financial industry. They see you through your personal financial situations to ensure that you don’t make wrong financial decisions.

On the downside, human interaction comes at a higher cost because a human needs to review your portfolios, give investment guidance, monitor investment performance, oversee asset allocation, and so on. Human advisors are suitable for people who are investment-oriented and need complex financial advice.

You should use a financial advisor if:

  • You have a complex portfolio with multiple asset classes
  • You need in-depth financial or estate planning
  • You don’t trust technology
  • You want to meet face-to-face

Best Of Both Worlds: Hybrid Robo Advisors

Robo Advisors vs. Financial Advisors: Which Should You Choose? 5

Hybrid robo advisors are traditional automated robo advisors with a human touch. Typically you can access a human CFP at any time to help you with any tough questions or issues about specific investment and financial advice.

They’re typically a bit more expensive than a regular robo-advisor, but still significantly more cost-effective than a human financial advisor.

The minimum investment is also higher than a standard robo advisor, usually starting at around $50,000. Again, that’s still lower than a human advisor.

Here are our favorite hybrid robo advisors on the market right now:

Best Hybrid Robo Advisors

Best Overall
Vanguard Personal Advisor Services
  • $50,000 account minimum
  • 0.30% Annual Fee
  • Personalized financial plan
  • Access to Human Advisors
  • Best Hybrid Robo Advisor
Best Financial
Betterment Premium
  • $100,000 Account Minimum
  • 0.40% Annual Fee
  • Human Financial Advice
  • Excellent Banking Features
  • Socially Responsible & Crypto Investing
Most Comprehensive
Personal Capital
  • $100,000 Minimum
  • 0.49% - 0.89% Annual Fee
  • Dedicated Advisor
  • Personalized Portfolio
  • Excellent Financial Tools
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Difference Between Robo and Financial Advisors

robo vs financial advisor

After understanding what these advisors are, you need to consider what makes them different from each other. There are several factors that you need to consider.

FeatureRobo AdvisorsFinancial AdvisorsHybrid Robo Advisors
CostUsually between 0.20% – 0.50%. Some are even free.Starting at 1.00%0.30% – 1.00%
Minimum BalanceTypically as low as $100-$500, with some offering no minimum and some as high as $50,000.Most financial advisors require a minimum balance of $100,000.Starting at $50,000
AccessibilityAvailable online 24/7Available in person or over the phone during business hoursAvailable online and may also offer in-person or phone consultations
PersonalizationLimited personalization, with investment recommendations based on a set of predetermined criteriaCan offer more personalized recommendations based on individual needs and circumstancesCombination of automated and personalized recommendations
Investment strategiesGenerally offer passive investment strategies, such as index fund investingCan offer a broader range of investment strategies, including active managementA combination of passive and active investment strategies
Ease of useEasy to use and accessible to investors with little investment knowledge or experienceCan require more investment knowledge and experience to understandCombination of automated and personalized services catering to different levels of investment knowledge and experience
Human interactionLimited or no human interactionOffers the opportunity for in-person or phone consultations with a financial advisorCombination of online and in-person or phone consultations with a financial advisor
CustomizationLimited customization options outside of portfolio preferences and risk toleranceCan offer more customized recommendations and portfolio managementCan offer a combination of automated and personalized customization options
Robo Advisor vs. Financial Advisor vs. Hybrid Robo Advisor Comparison Chart

Cost

Robo advisors are much cheaper than human financial advisors. Financial advisors usually charge at least 1% of assets under management, plus investment fees, while robo advisors usually charge 0.20% – 0.50%. Some don’t change any fees at all. This can significantly affect the overall cost of using a financial advisor.

While 1% may not sound like much, that amount adds up over the years. And since any savvy investor should be familiar with compound interest, those sensitive to high fees who don’t necessarily need complicated personalized investment advice will want to use a robo advisor.

Minimum Account Balance

The minimum account balance is the asset threshold you must have before signing up for a service. With most Robo advisors, you don’t need to have a lot of money. You can use most robo advisors even if your funds are less than $1,000, and some have no minimum investment amount at all.

On the other hand, human advisors require you to have at least $100,000 in investable assets, while some advisors need you to be worth $1 million before taking you on. These requirements can put financial management services out of the reach of most of us. 

Automated Asset Management

With robo-advisors, you only have to specify your goals and risk tolerance. The algorithm manages your portfolio with these goals in mind, automatically balancing and diversifying your portfolio based on best practices. This option is excellent for folks who are new to investing or want to take a hands-off approach. 

However, if you wish to be more active in how your funds are used, you might want to get a financial advisor, bringing a human element to the table. They will help you see your mistakes and plan your budgeting strategies. 

Tax Loss Harvesting

Good investment advisors can use market volatility to their advantage. One way to do so is tax-loss harvesting for taxable accounts. This involves selling a low-value investment and immediately purchasing another related asset that is similar in value. That way, you can reduce your taxes without changing your portfolio much.  

Human advisors can do this, but robo advisors make it a completely automated process.

Additionally, some robo advisors such as Wealthfront offer even more advanced forms of tax loss harvesting such as Direct Indexing for customers with more than $100,000 in AUM.

No Emotions Involved

Since robo-advisors are algorithms and don’t have emotions, they have an advantage in finance because human investment advisors may panic and make rash decisions if investments devalue unexpectedly. Robo advisors will never make this mistake and will instead align portfolios with goals and maximize profits.

However, the lack of emotions also means no one will stop you from panicking and pulling funds out without considering your long-term strategy during time of market volatility. A human advisor can provide guidance in such situations.

Complex Investing Strategies

You might need something more complex than a robo advisor if you have a more considerable net worth. It would be best if you had someone to manage your taxes, estates, insurance, and financial situation. In these cases, a traditional or hybrid robo advisor is more suited to the task.

Beat the Market

Human finance advisors can try to get fancy with stocks and investments by jumping on the “next big thing” while trying to predict the market. However, that approach can be disastrous if it backfires (as it often does). While some can and do “get rich quick” off some of these tactics, most lose out in the long run.

On the other hand, robo advisors tend to match the market instead. This method is safer as you try to make as much profit as the market. This approach involves fewer risks while tweaking your portfolio to your needs, taking some risks, or playing it safer, depending on your risk tolerance.

Who Are Robo Advisors Best For?

Due to ease of use and low cost, robo-advisors have become the better option for beginner or younger investors. Robo advisors offer a completely hands-off investing solution for those who want to make their money grow with little to no action on their part.

Robo advisors are also great for those who want to simply put their finances on auto-pilot, reinvesting dividends, automatically contributing to their retirement accounts each month, and making sure their investments are safe but also taking advantage of the market.

If you want to be a little more hands-on with your investments, most robo advisors offer customized services such as ESG investing, the ability to tweak your funds, and even using individual stocks as part of your investing journey. The robo advisor is always there, ensuring that you don’t make any decisions that will hurt you in the long run.

Other types of robo advisors targeted at more seasoned or hands-on investors have started to come on the market, offering automated investment services and personal financial planning and advice. These are targeted at those with a higher net worth or who are already familiar with personalized planning from a human financial advisor.

Who Should Choose a Financial Advisor?

Human financial advisors might better suit your needs if you want more control over your wealth management. A traditional advisor will give you a financial strategy that considers retirement plans, asset building, and reducing financial risks. Since a robo-advisor provides automated services, you can’t expect them to be as flexible as human financial advisors if you’re a real estate investor or have a wealth of other assets that must be considered. A robo advisor only takes into consideration certain types of investment accounts.

Traditional advisors are a great choice if you can meet the initial minimum investment hurdle and don’t mind paying the higher fees. If something goes wrong unexpectedly or the market faces a significant downturn, you can rest assured knowing they can help you with personalized advice.

What If I’m Still Not Sure?

If you’re still not sure which investment advisor is right for you, we suggest investing with a hybrid robo advisor. They provide the automated portfolio management and low costs of a robo advisor while still giving you the peace of mind of a human financial advisor. Of course, you can always change later on.

We suggest starting with Vanguard Personal Advisor Services as they provide a low minimum investment of $50,000, a low annual fee of only 0.30%, and access to human financial advisors, combined with the long-standing reputation of Vanguard.

Can I Manage My Own Investments?

You can opt for online brokerage services if you are comfortable managing your own investment accounts, but you’ll need to have the know-how to trade by yourself. You can choose to be an active or passive investor on these online platforms.

We always suggest learning more about investing, though. You can learn the basics on Wealthsimple’s free Masterclasses or Investopedia’s more in-depth investing courses.

Final Verdict: Which Advisor Type Is Better?

If you’re a regular investor that needs their investment or retirement accounts managed for them, using a robo advisor is a good idea. It certainly beats taking care of all those mundane tasks yourself. You won’t have to pay much of an annual fee, and robo advisors can match market trends to rearrange your portfolio to get good gains and set you up for future financial success.

If you’re well-versed in trading and investing, you can manage your own portfolio, but it will take more time and effort.

You should get a dedicated financial advisor if you have an extensive portfolio with multiple asset classes that you can’t or don’t want to manage yourself. They can provide you with a package of financial services and can provide you with an investing strategy while they manage your assets according to your desires. 

If you’re still not sure, or want the best of both worlds, you should check out a hybrid robo advisor.