Robo-advisors and financial advisors are two of the most popular investment management options. While a robo-advisor typically uses automated algorithms to manage investments, a financial advisor can provide personalized advice based on your needs.
The first robo-advisor was launched in 2008, and by 2025, it will manage $16 trillion in assets. The amount of funds controlled by robo-advisors is growing by 20% annually. Robo-advisors worldwide now manage over $2.4 trillion in assets.
The rapid growth of robo-advisors has led many to question if they still need a human financial advisor.
Which Is Best, a Robo-Advisor or a Financial Advisor?
Those looking for general advice or assistance with more complex matters may prefer a human financial advisor with experience. Robo-advisors are usually best for those who want help managing investments but don’t need a lot of advice from a professional.
The best choice of advisor for you depends on what you prefer: a fully automated low-cost investing service or the more expensive personal service provided by a human financial advisor.
There are, of course, many other considerations that we will tackle in this article. We will start with a head-to-head comparison.
Table: Robo-Advisors vs. Financial Advisors Comparison
|Pros & Cons||Robo-Advisor||Financial Advisor|
|Costs / Fees||Lower Fees||Higher Fees|
|Performance / Returns||Similar||Similar|
|Detailed Performance Reporting||✔||✖|
|Tax Loss Harvesting||✔||Inconsistent|
|Regular Portfolio Rebalancing||✔||✖|
Robo-Advisors vs. Financial Advisors: Costs & Fees
Different types of costs accompany any investment you make. Let’s take a look.
- Hedge Fund Fees >2% + 10% of Profits- Actively managed Hedge Fund with star fund managers can cost from 3% of Assets Under Management per year.
- Mutual Fund Fees >1% – Mutual Funds are actively managed funds offering ETFs or specific portfolio mixes.
- Index Tracking Funds <0.5% – Index Tracking Funds are low-cost, non-managed funds that attempt to track the performance of a particular stock market index, like the S&P 500, for example.
Whichever of the above funds you invest in, you must pay those fees. If you hire a “fee-only” financial advisor who advises you to invest in mutual funds and ETFs, you must pay the fund fees and the fee to the financial advisor. If you have an advisor who works on commission, it could be even more expensive in the long term as they might deduct a percent of your portfolio’s profit.
Finally, robo-advisor fees vary from advisor to advisor. For example, M1 Finance claims 0% fees, making money from customers using its borrowing and credit card services.
Alternatively, Vanguard charges a 0.3% management fee, and you will also have to pay the mutual fund and index fund fees for the ETFs it recommends, which could work out more expensive than other options.
Robo-Advisors vs. Financial Advisors: Minimum Balances
Minimum balances vary between robo-advisors, with some, like Vanguard, requiring an initial investment of $50,000 compared to M1 Finance, requiring only $10,000. Likewise, a commission-based financial advisor may require a minimum investment to make it worthwhile, even advising you. However, if you choose a “fee-only” advisor, they can recommend funds within your starting budget.
Robo-Advisors vs. Financial Advisors: Personal Relationship
The winner here is clear: with a pure Robo-Advisor, there is no personal relationship. However, if you want to have the benefits of a robo-advisor with some element of telephone-based human contact, you may want to look at a Hybrid Robo-Advisor.
Robo-Advisors vs. Financial Advisors: Performance & Returns
This may surprise you, but the vast majority, over 90% of funds and fund managers fail to beat an index-tracking fund or the index on which the fund is based. This means that whatever investment you choose, the chances are you will not beat the market, especially over any five years. Choose an index tracking fund if you are looking for top performance.
Robo-Advisors vs. Financial Advisors: Portfolio Performance Reporting
Whether you choose a “fee-only” or “commission-based” financial advisor, the reports on your portfolio’s performance will be rudimentary. The winner in this round is the robo-advisor, as everything is automated, from your preferences to the funds that are bought and sold. Also, you will have access to detailed reporting on their services.
Robo-Advisors vs. Financial Advisors: Tax Loss Harvesting
While both human and robo-advisors may provide a tax-loss harvesting service, I prefer the reliability of a fully automated computer system performing this task. The robo-advisor will have full access to all the transactions throughout the year and offset any losses automatically at the end of the year. For a human, this can be a time-consuming, complex task prone to errors.
Robo-Advisors vs. Financial Advisors: Dividend Reinvesting
Some robo-advisors will fully invest your accrued dividends or automatically distribute them to your income account. The advantage here is that companies such as M1 Finance can reinvest your dividends into partial fractions of shares; this ensures all of your capital is invested.
Robo-Advisors vs. Financial Advisors: Portfolio Rebalancing
While having a human financial advisor does have its benefits, rebalancing a portfolio efficiently is not one of them. A “fee-only” or “commission-based” advisor is only incentivized to rebalance a portfolio upon request. They usually have to spend time working with the investment firm managing the fund to rebalance; this is a costly affair that will not benefit the advisor.
The robo-advisor is usually programmed to ensure your portfolio is balanced. Because it has integrated buying and selling mechanisms to trade directly with the fund provider, there is zero effort involved in the transaction.
Robo-Advisors vs. Financial Advisors: Flexibility
If you want to change your investment portfolio with a human advisor, you will usually need to call them, make an appointment, and review the paperwork. With a robo-advisor, you can usually change the portfolio’s structure within a few mouse clicks; this is a huge benefit.
Robo-Advisors vs. Financial Advisors: Security & Regulation
In terms of regulation, all robo-advisors are regulated and overseen by the SEC and are required, like any other investment firm, to have SIPC insurance on the accounts.
Security and Transparency matter for robo-advisor. You must evaluate some other areas of performance, including security and transparency. Strangely, transparency is one of the most important areas of robo-advisor performance, but many people ignore it. Transparency means the advisor lists all features, capabilities, and strategies.
For example, the manager lists all the equities in a portfolio and explains every strategy used. Management should tell you when they make a change or add a feature. Also, they should provide clear explanations and justifications for any feature in plain English.
Robo-Advisors vs. Financial Advisors: Personal Service
When deciding between robo-advisors and financial advisors, consider what you need from an advisor. If you want personalized advice and are willing to pay higher fees, a financial advisor may be right. If cost is your priority, a robo-advisor may better suit your needs.
Robo-advisors can’t offer the same personalized human touch as a real financial advisor, but that doesn’t mean you’re getting a bad deal. Robo-advisors still employ knowledgeable and experienced advisors who can answer your questions via phone or email.
Additionally, robo-advisors often provide more comprehensive services than traditional advisors, such as tax minimization strategies, automatic asset rebalancing, and access to low-cost investments.
Finally, robo-advisors are generally more cost-effective than their traditional counterparts – making them a great option for investors looking to save money on fees and commissions.
Summary: Which Is Best?
Ultimately, it is down to you. There are advantages and disadvantages to both services. If you value consistency, transparency, and slightly lower costs & fees, then a robo-advisor will be a good choice. If you need the human touch and can find a “fee-only” financial advisor you can trust, that would be the right choice.