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Do You Need a Personal Financial Advisor or Will a Robo-Advisor Do?

The decision between the two options often depends on how much cash you have to invest. But human advisors always cost more.
Investing, Investing Strategy, Personal Finance
Do You Need a Personal Financial Advisor — or Will a Robo Do?-story

A personal financial advisor may sound as out of reach as a personal chef, bodyguard or chauffeur — something only the ultrawealthy can afford. But the robo-advisor revolution has changed the landscape of and, importantly, the cost for investment management and advice.

Investors have a broader array of choices, from advisors who personally manage and advise every aspect of their financial life, to automated portfolio management that allows investors to set their options and let the robots do the rest. Companies also offer a hybrid mix of automated investing and human advice on an as-needed basis — but for a price.

Personal financial advisors vs. robo-advisors

Generally speaking, the more human touch required, the higher the cost for investment services, and the higher the account minimum required to start advising.

At the top end, some personal financial advisors charge an annual fee plus investing expenses as a percentage of your assets under management, typically about 1% to 1.5%. As a result, these advisors often require that new clients have an account minimum of $250,000 in assets.

By comparison, robo-advisors — which use algorithms to build and manage a client’s investment portfolios and require little human interaction — charge fees from 0.45% to 0.70% of the amount managed. And many will take on new clients with $0 to open an account.

The downside of robo-advisors: Investment choices are more limited — often a small selection of low-cost index funds or exchange-traded funds — than the asset choices that full-service brokers and advisors may provide. And while many offer financial advice via email, chat or phone consultations, those hybrid services are likely to come at an additional cost.

» Ready to jump in? What you need to know to choose a financial advisor

Where personal financial advisors fall short

Caution is required when choosing financial advisors who attempt to beat the market with their investing picks, also known as active investing.

“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. “To a large extent, passive investing — the strategy to buy and hold a broadly diversified portfolio and don’t mess with it — that [investing philosophy] has won the day.”

Passive investing — the strategy to buy and hold a broadly diversified portfolio and don’t mess with it — has won the day.

Meg Bartelt, Certified financial planner

The robo-advisor industry was built on passive investing: Using low-cost funds linked to a preset index of investments, such as the Standard & Poor’s 500 index of large companies or others. Rather than beat the market, these funds simply match whole market gains over time.

Also, there are no legal definitions of a financial advisor or planner — “I could call myself ‘Money Wizard to the Stars’ if I wanted to,” Bartelt says. So it’s important to know the legal designations that do matter, such as a “registered investment advisor,” “certified financial planner” or “broker.”

How personal financial advisors get paid can vary, from fee-only advisors like Bartelt, who don’t receive commissions on products they sell — and avoid potential conflicts of interest — to those who do get a cut of products they sell to clients. Fee structure and professional qualifications are among the important questions to ask when you hire a financial advisor.

Where personal 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.”

If a full-service financial advisor is outside your needs or income level, most fee-only certified financial advisors have hourly rates to help you create a financial plan, or give financial advice when a major life event is on the horizon.

“Financial advisors are great [at] understand[ing] your attitude on debt, what savings choices are important … and what your financial pain points are,” Bartelt says. “A robo-advisor is not going to help you understand what you value in life.”

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