robo vs financial advisor

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

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Between Robo advisors and financial advisors, which one is right for you? It is a loaded question, and each has its pros and cons, but one of them may be the better option for you and your finances.

Your choice depends on what you need and the amount of money you plan to invest. Robo advisors especially have seen a surge of usage due to the technological advancements in fintech.

A Robo advisor is an online automated financial advisory service, and it uses artificial intelligence to manage funds for its clients.

Though they have their limitations, they figure out how much you can risk and suggest the investments accordingly. Choosing between a Robo advisor or financial advisor can be challenging, but various factors like cost, personal goals, and personalized advice come into play.

We will look at what makes one better than the other. That way, you will have an easier time deciding where to place your trust and money.

What are Robo Advisors?

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

Robo advisors are digital platforms that provide automated, algorithm-driven investment and financial planning services. These services come with little to no human supervision, and low-cost funds from various passive investments enabled the birth of Robo advisors. 

A Robo advisor collects information from clients about their financial situation and future goals through an online survey. They then use this data to offer investment advice and automatically invest client assets.

In recent years, these advisors have become popular as a replacement for human financial advisors. The reason is that many people prefer using technology for investing rather than paying for human advisors. These advisors can handle your investment portfolio quickly. Moreover, Robo advisors can instantly optimize thousands of portfolios without making 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. The low price is possible because they don’t need to employ actual people to manage client accounts, reducing management fees and using expertly designed algorithms.

Most Robo advisors also make investing easy by automating how much you contribute to your account weekly or monthly. Additionally, some will offer automatic dividend reinvesting or allow you to set up automatic transfers into your account.

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 younger investor
  • You have under $100,000 to invest
  • You want to be a hands-off “lazy” investor
  • You want to avoid emotional or panic investing decisions
  • You want to use tax-loss harvesting or direct indexing

What Are Financial Advisors?

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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 investment goals, whether short, medium, or long-term. Once they understand 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 annual fee because a human needs to review client portfolios, give investment guidance, monitor investment performance, oversee asset allocation, review clients’ opinions, and so on. Human advisors are suitable for people who are investment-oriented and need financial advice.

Some act as advisors for those trying to make the most out of their retirement income, while some focus on helping you build wealth and make investments to get the most out of your money in the shorter term. To achieve this, they offer independent financial advice depending on various factors. Many financial planners offer both services, but some specialize in one.

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

A Middle Ground: Hybrid Robo Advisors

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There is another way if you are not entirely comfortable with letting technology take the wheel but don’t want to fork out for a financial advisor. Many Robo advisor services are now offering you access to advisors as well.

How Do They Work?

Robo advisors choose and manage your assets, but you can also contact a financial expert for advice. Most of your consultations will be over voice or video calls, but you can rest easy knowing there is someone you can call in case of an emergency or need answers to some questions or some financial or investment guidance.

Minimum Account Balance

The minimum account balance is a thing with Hybrid robo advisors as well. You will not qualify for a financial advisor with $500. You have to take this figure up to at least $10,000 before getting a dedicated advisor with your Robo advisor account. 

Popular Robo-Hybrid Advisor Services

Some Robo-advisors offer hybrid services, including Vanguard Personal Advisor Services (our top pick), Betterment, Personal Capital, and SoFi Invest. These services allow you to have your portfolio run by the Robo advisor while connecting you with a financial advisor that can guide you along the way.

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.

Cost

A major deciding factor while choosing between the two is their fees. Robo advisors are significantly less expensive than human financial advisors. Generally, a financial advisor will charge you 1% of the assets under their management, and these charges are on top of the investment fees you will be paying for your assets.

On the other hand, Robo advisors can charge you anywhere from 0.25% to 1.0%. Some, such as M1 Finance, SoFi Automated Investing, or Schwab Intelligent Portfolios, don’t charge anything at all. Yes, they have a 0.00% fee for their services.

While 1% (or even 0.50%) 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 and who don’t necessarily need specific personalized investment advice might want to use a robo advisor.

Minimum Account Balance

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. Some have no minimum investment amount at all.

On the other hand, human advisors require you to have assets of a specific value. Minimum portfolios tend to be around $100,000, while some advisors need you to be worth $1 million before considering 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 just 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 in the industry. This option is excellent for folks who are new to investing or would like to take a laid-back 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 lay out budgeting strategies for you. 

Tax Loss Harvesting

The market as we know it is a volatile being. Good investment advisors can use this volatility to their advantage. One way to do so is tax-loss harvesting for taxable accounts. This term refers to selling a low-value investment and immediately purchasing another related asset that is similar in value. That way, you can cut down on your taxes without changing your portfolio.  

Human advisors may have difficulty keeping track of all the investments increasing and decreasing in value. However, this is a piece of cake for a Robo advisor.

No Emotions Involved

Since a Robo advisor is an algorithm, it doesn’t have emotions. In finance, that’s a good thing because a human investment advisor can mess up by panicking if the investments were to devalue unexpectedly. They can potentially make rash decisions, while a Robo advisor will never make this mistake. Instead, it will change your portfolio to align with your goals and maximize profits.

A significant drawback with the no emotions involved thing is that there is no one there to stop you from panicking. Suppose a fund was to lose its value suddenly. In that case, you could panic and pull all your funds out without considering your long-term investment strategy. A human advisor can help you during such situations. That’s their job, after all.

Investment Portfolio

A traditional advisor might go for more significant investments to concentrate your funds in fewer areas. This approach makes them vulnerable to risks. Robo advisors tend to look for portfolios made with your goals in mind. Thus, they will spread out your funds to diversify your portfolio. Furthermore, they keep rearranging them to resist volatility and ensure that your gains match the market.  

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 such conditions, a traditional advisor is more suited to the task. They bring in their expertise and ability to formulate comprehensive financial strategies. 

Beat the Market

Human finance advisors can try to get fancy with stocks and investments by jumping on the “next big thing” or trying to predict the market. However, that approach can have a rather disastrous outcome if it backfires (as it often does). While some can and do “get rich quick” off of 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 simply 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, many 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 also need to be considered. A robo advisor only takes into consideration certain types of investment accounts.

Traditional advisors are a great choice if you can get past the initial minimum investment hurdle. If something goes wrong, you can contact your advisor, and you can rest assured knowing they can help you out. In case of a market downturn, they can go over your investing strategy with you.

Can I Manage My Own Investments?

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

Through online investing, you can invest in stocks, bonds, ETFs, real estate, cryptocurrency, and much more. However, this method is not something we recommend unless you’re well-versed in investing, as it’s very easy to make mistakes that could cost you a lot of money. 

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 just 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 financial success in the future.

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

If you have an extensive portfolio with multiple asset classes that you can’t or don’t want to manage yourself, you should get a dedicated financial advisor. 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.