Robo-Advisors vs. Financial Advisors: How to Choose
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The robo-advisor revolution has changed the choices and, importantly, the cost for investment management and advice. Here's what to consider when choosing between a robo-advisor and a human financial advisor.
Robo-advisor vs. financial advisor: What's the difference?
The main difference between robo-advisors and financial advisors is that robo-advisors are automated and algorithm-based, while financial advisors are human and offer more in-depth financial management.
Robo-advisors are computer algorithms that build and manage investment portfolios. You set your parameters, such as your time horizon and how much investment risk you'll accept, and the algorithm picks the investments. They typically only provide investment management rather than comprehensive financial planning.
Financial advisors or financial consultants are human professionals you hire, on an ongoing or temporary basis, to help with investment management as well as financial planning, tax strategy, estate planning and more. You meet your advisor virtually or at their office to create and go over your financial plan.
Robo-advisor vs. financial advisor costs
Fee structure and professional qualifications are among the important questions to ask before you hire a financial advisor.
Robo-advisors typically charge 0.25% to 0.50% of the assets under management (AUM), which works out to $125 to $250 a year on a $50,000 account balance.
Financial advisors typically charge a percentage of your assets. The median is about 1% per year, though the percentage is often lower for people with higher balances. Some financial advisors charge a flat rate or hourly fee and require lower or no minimums to begin.
Here's a way to visualize the differences between robo-advisors, online planning services and traditional financial advisors:
Robo-advisors | Financial advisors |
|---|---|
Fees: Robo-advisors typically charge 0.25% to 0.50% of assets under management per year. | Fees: Median of 1% of assets managed. |
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Where robo-advisors shine
Be cautious about financial advisors who attempt to beat the market with their investing picks. “They charge a lot more and usually do no better — and often worse — than robo-advisors,” says certified financial planner Meg Bartelt of Flow Financial Planning.
The robo-advisor industry was built on passive investing: using low-cost funds linked to a preset mix of investments; for example, the S&P 500 index. Rather than beat the market, which is extremely hard to do, these funds simply aim to match whole market gains over time.
“To a large extent, — the strategy to buy and hold a broadly diversified portfolio and don’t mess with it — has won the day,” Bartelt says.
Where financial advisors shine
Robots are great at using software to automatically buy and sell assets and rebalance your portfolio over time. They aren't as great at helping you and your family diagnose your personal financial problems and opportunities for improvement, Bartelt says.
“Where a human financial advisor really thrives is addressing the other 90% of your financial life,” she says. “The big questions, like how to buy a house, a car, quit your job and start your own business, or have a baby in the next five or 10 years.”
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