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There has been heated discussion on the question whether a robo-advisor is actually an advisor at all.
A robo advisor is an online platform that has several algorithms in place that make investment decisions.
However some robo advisors don’t actually offer any real financial advice at all.
What they do offer are portfolio recommendations. Once you are clear about your portfolio preferences, the robo advisor will then recommend opportunities to invest or save money.
Check out this article – What is a robo advisor – Frequently Asked Questions
Are you not sure if to chose a traditional human advisor or opt for the automated investing a robot can offer?
Great, then let’s take a closer look at the advantages and disadvantages robo advisors have over classical financial advisors.
Robo-Advisor vs Financial Advisor: What’s the difference?
Let’s define each before we go into detail:
Personal financial advisors help you manage the various aspects of your finance. You will hire an advisor to do anything from investing to estate planning and more.
Typically, an advisor is someone who you will meet locally, at his or her office. However nowadays an online meeting instead of a meeting in person is getting more and more common as well.
A lot of companies actually offer virtual access to financial advisors for less than you’d pay a traditional in-person advisor. This is already where a comparison to a lot of robo advisors can be drawn:
Why you may wonder? Because the majority of the biggest robo platforms also offer human support.
Two examples are Betterment and Personal Capital as they both pair their customers with a dedicated financial advisor. Conferences are held via skype, zoom or phone, and the services include investment management.
Robo-advisors are services which use algorithms to build and manage investment portfolios. Therefore, very little human interaction is required.
Upon signing up, you answer a variety of questions so the program can determine what kind of investments you are interested in and then you just let the algorithm do its work.
The biggest advantage here is that they’re a low-cost option, this makes a lot of sense especially when all you want is investment management instead of a complicated financial planning.
Costs & Fees
As a general rule of thumb, one can say that the more human touch required, the higher the cost for financial advice.
The fees for robo advice usually range from 0.25% to 0.50% of the amount managed per year. However there are also platforms like M1 Finance for example, which will take on clients at a 0.00% fee.
Now let’s look at personal financial advisors:
They also charge a percentage of your assets — the average is between 1% to 1.25% per year. It is fair to mention, however, that this range can be higher for small accounts and lower for big accounts.
There are financial advisors who charge an hourly fee or a flat-rate and require lower or no minimums to begin.
Speaking of traditional financial advisors, fee structure and professional qualifications are probably the most important questions to consider before hiring a financial advisor.
But then there are also higher level advisers who will require new clients to have a balance of at least $200,000 in order for them to get financial attention.
Obviously no good advice will ever be completely for free and online financial planning services also structure their fees in different ways, but they are generally cheaper than a traditional financial planner.
Some online services charge a monthly or annual fee that increases with the amount and complexity of the financial advice you need. Others will just charge you a percentage of your account balance.
A great example is Betterment. They offer financial-planning and base the the fee on the amount of time that you require speaking to one of their staff.
The following comparison table shows the differences between robo-advisors, online planning services and traditional financial advisors:
Advantages of Robo-advisors
A lot of people may not trust a robot to do their investments and think of it as too risky.
This is a common misconception.
The robo-advisor industry is actually built on passive investing: The biggest part of the robo portfolios are usually made up of ETFs and mutual funds. For example, the S&P 500 index of large companies or the Nasdaq 100, which typically contains technology stocks.
This is a pretty conservative approach, rather than beat the market, which is extremely hard to do, these portfolios intend to match whole market gains over time.
At this point it is also important to mention that you should be cautious about financial advisors who attempt to beat the market. A high-level financial advisor can of course beat the market but they can also do worse. In fact, the odds of your average financial advisor to beat the market in the long run are slim.
Advantages of personal financial advisors
While robo-advisors can certainly be a good option, investors shouldn’t be completely opposed to hiring a financial advisor.
Now you may wonder, why even bother with a human financial advisor?
Where a human financial advisor really thrives is when we are talking about the overall assessment of your financial situation.
This could be anything from when to have baby, how to buy a new house or how to start your own business.
Robots are perfect when it comes to portfolio management, they can automatically buy and sell assets and rebalance your portfolio.
However they are not good at helping you getting the big picture.
For many, a traditional in-person advisor is outside of their budget. That is why an online planning service can manage your investments for less.
The funny part is, some traditional advisors are now actually using robo-advisors themselves. The B2B business for robo advisor is thriving.
The robo-advisor revolution has changed the landscape. There are more choices and, importantly, the cost for investment management has gone down significantly.
Here’s is a little summary of what to consider when choosing between a robo-advisor and a human financial advisor:
The choice depends entirely on what kind of help you need.
If you need someone that can help you with all things finance from planning to build a new home to quitting your job etc… then a human advisor is the way to go. Another reason to opt for a financial planner would be to if your investments are extremely diversified and impossible to manage under the umbrella of one online platform. Just know that you will have to pay a ton of money in fees.
A robo-advisor is better for a hands-off approach and the fees are a lot lower. It is not fair however, to speak of robo advisors in such general terms. There are different services for different needs. M1 Finance for example is a platform that encourages you to learn about the different options. It allows for a ton of customization and can not in the least be considered a “hands-off tool”.
When making your final decision, please also keep in mind, especially if you’re just starting out, that you can set up the service of a robo-advisor first and then hire an advisor later once you are truly in need of sophisticated financial planning.
Use the following Quiz and find out which robo advisor is best for you.
If you have any questions, please comment below.
Michael is a senior writer at The Robo Investor. He earned his master’s at the Craig Newmark School of Journalism at CUNY, and is currently taking CFP courses at the University of Scranton. He has been an avid finance enthusiast ever since he started investing at the age of 23. Meet the Team