The first Robo Advisor was launched in 2008, and now Robo Advisors manage $220 billion in assets. The amount of funds controlled by Robo Advisors is growing dramatically by 20% per year. In fact, Robo Advisors worldwide now manage over $1.4 trillion in assets.
The rapid growth of Robo Advisors has led many people to ask:
Robo Advisor vs. Financial Advisor Who Is Best?
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.
Robo Advisors vs. Financial Advisors Pros & Cons
|Pros & Cons||Robo Advisor||Financial Advisor|
|Costs / Fees||Lower Fees||Higher Fees|
|Performance / Returns||Similar||Similar|
|Access To Detailed Performance Reporting||✔||✖|
|Tax Loss Harvesting||✔||Inconsistent|
|Regular Portfolio Rebalancing||✔||✖|
Robo Advisors vs. Financial Advisors Costs & Fees
There are different types of costs that 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 simply 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 will have to pay those fees. If you hire a “fee-only” financial advisor and they advise you to invest in mutual funds and ETF’s, you will have to pay the fund fees and the fee to the financial advisor. If you have an advisor that 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, as it makes 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 ETF’s 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 worth their while even advising you. However, if you choose a “fee-only” advisor, they will be able to 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 take a 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 that the fund is based upon. This means that whatever investment you choose, the chances are you will not beat the market, especially over any five-year period. If top performance is what you are looking for, choose an index tracking fund.
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 all the services they provide.
Robo Advisors vs. Financial Advisors Tax Loss Harvesting
While both human and Robo Advisors may provide a tax-loss harvesting service, I much 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 all of your accrued dividends or distribute them to your income account automatically. 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 actually 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 on your 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 actually 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 make changes to your investment portfolio with a human advisor, you will usually need to call them, make an appointment, and go through the paperwork. With a Robo Advisor, you can usually within a few mouse clicks change the portfolio’s structure; 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 Advisors. There are some other areas of performance you must evaluate, 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 clearly 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.
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 Advisors will be a good choice for you. If you need the human touch and can find a “fee-only” financial advisor you can trust, then that would be the right choice.