Robo or Traditional Financial Advisor: Is one better?
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At this point in time, there should be little doubt technology innovation continues to change the way we live our lives.
But who would have thought the investment community would reach the point where automation plays a big part in helping us investors develop our portfolios?
When not wanting to manage your investments yourself, you can stick with a traditional financial advisor, use a robo-advisor, or some combination of the two.
A traditional financial advisor works directly with clients to help them meet their short- and long-term financial goals.
They make recommendations on specific investments and insurance products and may provide tax advice.
Investors can choose fee-only advisors or pay, on average, 1% to 2% of assets under management for ongoing portfolio management.
Robo-advisors are not robots. They're software platforms powered by algorithms to automate and manage your investments.
Robo-advisors charge low management fees (0 – 0.25% of assets under management), don’t require large account balances, and make investing easy.
Still confused about choosing between a robo-advisor or a traditional financial advisor?
Read on to learn more about their differences and the pros and cons of each type of advisement. Plus, how you can decide what investment support is right for you.
Robo-advisors vs. Personal Financial Advisors
According to the National Financial Educators Council (NFEC), lacking the know-how to handle your finances comes at a high cost.
But a recent survey reported that 75% of Americans DIY their funds.
Results from the same survey show that only 17% of people use a personal financial advisor.
The use of robo-advisors has increased over the years, but the robo-advisor industry isn’t mainstream yet.
Unsurprisingly, millennial adults who are very welcoming of and comfortable with new technologies are one of the groups likely to use robo-advisors.
Today, it seems there's plenty of room for both robo-advisors and traditional advisors in the investing community.
Since everyone has unique circumstances, the idea that there's more than one option for getting investment advice addresses a variety of needs.
Let's look at some of the differences between robo-advisors and traditional financial advisors.
Portfolio Value Requirement
Perhaps the most critical distinction is the significant difference in the financial requirements qualifying an investor for each alternative.
To qualify to receive investment advice from a traditional advisor, you may need an investment portfolio of at least $100,000.
To get the attention of a high-income financial planner at a high-net-worth wealth management firm, you may need $1,000,000 or more in investable assets.
Clearly, these numbers are quite prohibitive to many investors, especially to beginning investors.
If you have at least $500 to invest, you can choose a robo advisory service like Wealthfront.
It's even possible to find robo-advisors with no minimum investment requirements such as Betterment, M1 Finance, or Wealthsimple.
There is also no minimum investment requirement for the robo advisory service at Ellevest.
Ellevest caters to women by creating portfolios addressing trends of lower incomes and longer lifespans.
When women (or men) invest with Ellevest, they can also choose to invest in companies promoting the advancement of women.
Advisor Service Fees
There is a significant difference in the service fees for robo investment advisory and traditional investment advisory.
Traditional advisors typically charge 1% – 2% of the value of the investor's investment portfolio on an annual basis.
Robo advisors generally charge 0% – 0.5% of an investor’s portfolio value annually. You could also pay a robo advisor yearly fee.
When you simply look at the service fees charged for investment advising, it’s clear that you can save a lot of money using a robo-advisor.
Just because it’s cheaper doesn’t mean it is the right choice for you, though.
Personal Contact with Advisor
When you choose to work with a traditional advisor, you’ll be meeting with a person.
Advisors are typically educated and trained to understand a wide range of investment strategies and how those strategies can be used to help investors make money.
They’ll try to build a trusting relationship with you so that you will be a long-term client.
You will usually have one-on-one meetings with your financial advisor.
You'll be asked many questions and also have an opportunity to ask questions of your advisor.
After learning about investment strategies and options, you will participate in investment decisions.
Your investment advisor's effectiveness is enhanced by their ability to understand your investment goals and gauge your true risk tolerance.
Related: Financial Professional Designations: What Do All Those Letters Mean?
None of that is available from a robo advisor.
Your responsibility begins and ends with you funding your investment account and filling out an investment questionnaire used as parameters by your robo advisor.
You won’t have an opportunity to ask questions or participate in making investment decisions.
It's worth noting that a smart computer system will assemble your investment portfolio.
It will utilize a program to make investment decisions based on investment goals and risk tolerance you identify.
Some hybrid options are part human and part robo-advisor. These options usually require higher investment balances and higher fees than merely using a robo-advisor.
If you're seeking financial advisement but don’t meet minimum investment requirements (or want to avoid paying 1% or more in fees), hybrids might be a good option for you.
Pros and Cons of Robo-Advisors
There are many benefits of using robo-advisors, including the investor-friendly minimum requirements and cost savings on service fees already discussed.
Robo-advisors are an excellent option for people who have little investment knowledge or for those who don’t have the time or interest to monitor their investment portfolio.
If this sounds like you, all you need to do is answer the questionnaires honestly, put your money in and let it grow.
There are some disadvantages to using robo-advisors too.
Should your portfolio not perform to your expectations, there's no one for you to question.
You can’t pick up the phone and call your financial advisor to find out what’s happening or discuss.
In essence, your financial welfare is in the hands of a computer.
That's not all bad because the computer system holds complete responsibility for how your portfolio performs.
Robo-advisors have a solid track record and use sensible risk-management strategies.
Pros and Cons of Traditional Advisors
The traditional advisor option is perfect for someone who desires some level of hands-on involvement in the investment process.
- are a high-net-worth or “accredited” investor
- want comprehensive financial planning, or
- have a complicated financial situation,
you’ll likely want to work with a traditional advisor too.
Your interactions with your advisor allow them to get a real sense of your mindset as they tailor an investment portfolio to meet your financial goals.
When changes are needed, you can talk with your advisor and alter your asset allocations relatively quickly.
Of course, there are some drawbacks as well.
As mentioned, that $100,000 or more portfolio value requirement might make this option prohibitive based on your financial circumstances.
Beyond that, there will still be issues you have to address even with human intervention.
With a traditional advisor arrangement, you have some level of culpability for your portfolio's performance.
You also have to pay a significant fee even if your portfolio loses money.
Deciding if a Robo or Traditional Financial Advisor is Best for You
The above discussion lays out two very different ways you can get advice and help with successfully managing your investment portfolio.
When you cannot meet the requirements of a traditional advisor, your decision comes down to “DIY” investing through any online brokerage account or seeking the help of a robo investor.
When money is not the issue, the decision comes down to how much time and effort you want to put into making investment decisions.
You'd probably get more enjoyment and satisfaction by working with a traditional advisor if you have time and some knowledge of investments and how they work.
When you have little interest in (or time for) the investment process, the robo advisor's algorithms handling the investment portfolio management process may be a better option for you.
At the same time, you'll be able to save a lot of money on service fees.
If you have any further questions about these two choices, you'll want to start by contacting a traditional advisor. Why? Robo advisors can't answer questions.
Next: What Are The Best Robo Advisors For Socially Responsible Investing?
Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.
Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.