The robo-advisor revolution has changed the choices and, importantly, the cost of 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 algorithms that automatically build and manage investment portfolios. You set your parameters, such as time horizon and how much risk you'll accept, and the algorithm picks the investments. They typically only provide investment management; they usually don't offer comprehensive financial planning.
- Financial advisors are humans (which feels strange to note, but in the age of robots and AI, it's worth doing so) who help with investment management as well as financial planning, tax strategy, saving for college, estate planning and more. You generally can meet your advisor virtually or at their office.
Robo-advisor vs. financial advisor costs
Fees 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 |
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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
Robo-advisors may be good options for people who don’t want any financial planning (i.e., they only want help buying and selling investments) and who are comfortable with automated service. They rely on software to automatically buy and sell assets and rebalance your portfolio over time.
The robo-advisor industry was built on passive investing, which often involves using low-cost funds designed to match the performance of the S&P 500 index or other broad market indicator.
Where financial advisors shine
Robo-advisors aren't as great at helping you and your family diagnose your personal financial problems and opportunities for improvement, says certified financial planner Meg Bartelt of Flow Financial Planning.
“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.”
Be cautious about financial advisors who try attempt to beat the market with their investing picks, however. “They charge a lot more and usually do no better — and often worse — than robo-advisors,” Bartelt says.
