Robo-Advisors Vs. Financial Advisors: How To Decide Which Is Best For You | Bankrate (2024)

Robo-advisors have soared in popularity over the last decade, with the automated investing advisors quickly growing assets under management, many into the tens of billions of dollars. But how do they compare with traditional financial advisors?

Perhaps surprisingly, after an initial period of shunning these upstarts, the industry has begun to embrace them, merging traditional financial advice with the automation of robo-advisors.

But each approach has its positives and negatives. Here’s how to decide which is best for you.

Robo-advisor vs. financial advisor: What they do

Let’s take a look at each kind of advisor to see what they do and what advantages they offer to investors.

Robo-advisors

You may be familiar with names such as Betterment and Wealthfront. They’re two of the most popular independent robo-advisors, and they’ve become quite popular over the last 10 years. Robo-advisors are the ultimate in “do it for me” investing solutions, something you can just set up and then leave alone.

Robo-advisor sounds tremendously complex, maybe even a little bit dangerous. After all, it seems risky to entrust your money to a computer program. And that’s really what a robo-advisor is – a computer algorithm that invests your money based on your answers to a few questions, such as when you need the money, your tolerance for risk and how much you have to invest.

Then using good investment practices – such as asset allocation and diversification – the robo-advisor automatically builds you a portfolio to fit your needs using perhaps up to a dozen exchange-traded funds that hold stocks, bonds, cash and potentially other kinds of assets.

Robo-advisors offer a number of benefits for individual investors. They tend to be relatively cheap, charging a management fee of about 0.25 percent of your assets annually, or $25 for every $10,000 invested. That level is basically the industry standard, though some robos offer a higher level of service (such as access to human advisors) for a slightly higher cost. Other robo-advisors may charge a monthly fee or even offer a free service.

The funds you’re invested in also charge an expense ratio, a fee paid to the fund management company. Typical funds might charge 0.05 percent to 0.35 percent annually ($5 to $35 for every $10,000 invested). You’ll typically pay these fees regardless of which robo-advisor you choose.

Adding the two fees together, you might pay around 0.3 to 0.6 percent of your assets annually for a robo. Usually that’s the extent of the fees, and it means you’ll have a clear idea of your costs.

All additional services are usually included in the management fee. Many robos offer automated services that would be tough for a human to replicate, such as daily tax-loss harvesting. They may also automatically rebalance your portfolio when it deviates from the preset target allocations.

Another positive is that it’s easy to open a robo-advisor account online. With a few financial details, you can fill out the form and have the account ready to go in about 15 minutes. In fact, most robo-advisors don’t even have a minimum balance to open an account. Many robos allow you to open a standard taxable account, an IRA account or a joint account, among others.

Then you can add money to the account regularly, and the robo-advisor takes care of everything else, distributing your money among the funds. You don’t have to worry about much else.

While independent players such as Betterment and Ellevest receive a lot of the recognition for their robo offerings, larger brokerage firms such as Charles Schwab and even bigger financial firms such as Bank of America’s Merrill Edge and Citibank offer this kind of managed portfolio, too.

Financial advisors

Financial advisors can run the gamut from glorified sales people paid by a fund management company to fee-only fiduciaries who truly put your interests first. Human financial advisors can give you all kinds of counsel, from the relatively mundane (basic banking) to the highly complex (estate planning and trusts). The skills and expertise vary from advisor to advisor, of course.

A financial advisor does what a robo-advisor is set up to do, but can do so much more. In fact, unless they’re real stock analysts or portfolio managers, they’re likely using the same fundamental tools as a robo-advisor to build your investment portfolio. The best financial advisors are also well-versed in all the core financial needs that most people likely have – insurance, investing, retirement accounts, banking, wills and basic estate planning, as well as general planning. Use Bankrate’s free financial advisor matching tool to find a financial advisor near you.

As robo-advisors have become more prevalent, human advisors have often become more focused in order to compete. Where human advisors can really excel are the specialized tasks that require detailed expertise – the highly unusual or specific tax advice to help you optimize your situation and other legal advice such as that for estates and trusts.

Some advisors may focus on issues that are specific to certain niches, such as small business owners, dentists or athletes. Then they specialize in the issues that are likely to emerge in those fields. Not only do they provide investment advice, they also offer other core expertise.

Typically, a human advisor might charge 1 percent of assets as an annual fee, and that’s on top of any other fees you might be paying for ETFs or mutual funds. Or some advisors may charge an hourly fee, while still others — who bill themselves as advisors — charge nothing because they’re paid by a fund company or insurance company, for whom they act largely as a salesperson.

Which type of advisor is better for you?

The type of advisor that is better for you depends on what your financial needs are. For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so – potential savings for you.

FeatureRobo-advisorFinancial advisor
CostPercentage of assets managedPercent of assets managed, hourly fee
Scope of serviceInvesting, goal planningPotentially a full range of financial services
Ease of start-up and maintenanceVery quick, online only, adjustable at any timeMay involve initial consultation, meetings over time
Where it excelsTedious and mundane tasks, where automation makes investing easierTasks that require specialized or unique expertise
SuperpowerDaily tax-loss harvestingThe best advisors motivate you toward your goal

Plus, the ease of starting and managing the account can’t be overstated. It’s all online and easily accessible at any time of the day.

A robo-advisor is also adept at some of the other tasks that a human would find dreadfully tedious, such as daily tax-loss harvesting, which involves the buying and selling of securities potentially day-after-day in order to secure a tax break.

For all such mundane tasks, a robo-advisor is a solid pick. In fact, your human advisor is likely already using some version of a robo-advisor to guide the construction of your portfolio. Now even many huge wealth managers may welcome the freedom offered by investing algorithms because it frees up advisors to focus on specialized services that add more value for clients.

And that’s where the unique skill sets of human advisors come in. If you need anything off the beaten financial path – such as help constructing a trust or how to handle an inherited IRA (where the rules are highly complex and messing up could cost you) – you want to speak with a competent financial advisor with demonstrated expertise in that specialized field.

But another huge advantage of a great human advisor may be more apparent during times of market turmoil such as in 2020. A great advisor keeps you on the long-term plan that makes you money and also helps motivate you to do the right thing, even if you don’t always feel like doing it. However, sometimes it can be hard to find an advisor who has your best interest at heart.

Here’s how to find the right advisor and why you must search out the person who’s going to do right by you, including exactly how to avoid the mistakes that trip up so many investors.

Of course, it’s not an either-or choice. You can use a robo-advisor for your key investing tasks, while you call in an advisor for the specialized or one-off tasks that require expertise. But you’ll want to pick the right type of advisor for the job you need done.

Bottom line

A robo-advisor can be an excellent choice to manage your money, especially as you’re just getting started on your investing journey and your needs are relatively simple and straightforward. As your needs become more complex, it makes a lot of sense to consult a financial advisor who is invested in your own success so that you receive the best advice.

Robo-Advisors Vs. Financial Advisors: How To Decide Which Is Best For You | Bankrate (2024)

FAQs

Robo-Advisors Vs. Financial Advisors: How To Decide Which Is Best For You | Bankrate? ›

The type of advisor that is better for you depends on what your financial needs are. For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so – potential savings for you.

Should I use a financial advisor or robo-advisor? ›

If you require a high level of personalized service and direct management of your investments, a traditional human advisor might be better suited to your needs. Conversely, if cost and simplicity are your primary concerns, a robo-advisor might be the better choice.

What is an advantage of using a robo-advisor compared to hiring most financial advisors? ›

Robo-advisors are digital investment services aimed at ordinary investors—they are becoming an increasingly popular way to access the markets. On the plus side, robo-advisors are low-cost, often have no minimum balance requirements, and tend to follow strategies suited for new and intermediate investors.

What is the biggest disadvantage of robo-advisors? ›

The generic cons of Robo Advisors are that they don't offer many options for investor flexibility. They tend to not follow traditional advisory services, since there is a lack of human interaction.

At what net worth should I get a financial advisor? ›

Generally, having between $50,000 and $500,000 of liquid assets to invest can be a good point to start looking at hiring a financial advisor. Some advisors have minimum asset thresholds. This could be a relatively low figure, like $25,000, but it could $500,000, $1 million or even more.

What are 2 cons negatives to using a robo-advisor? ›

Drawbacks of Robo-Advisors
  • Limited Access to Human Advisors. ...
  • Narrow Investment Choices. ...
  • Might Not Consider All Your Investments. ...
  • Tax-Loss Harvesting Isn't Always Helpful.
Aug 10, 2022

Do millionaires use robo-advisors? ›

Nearly 7 in 10 Millennial millionaires have some money in robos or automated portfolios. Moreover, nearly 20% of Millennial and Gen Z households who know the investment products they own have some money in robos versus only 13% of Gen X and only 2% of Boomer+ households (Boomers and older).

Will robo-advisors replace financial advisors? ›

The Role of Robo Advisors

To my colleague's surprise, the founder responded by declining the debate and saying that robo advisors are not intended to outperform or replace advisors, but rather to offer an option to investors who don't meet advisor minimums.

What is better than a financial advisor? ›

Financial planners, on the other hand, are a better fit for someone looking to map out their financial goals and make a long-term plan. Advisors can help with all of your financial needs, though. Ideally, you'd find someone who has experience working with clients in situations similar to your own.

Do robo-advisors outperform the market? ›

This will vary significantly depending on the risk profile of the portfolio, broader market conditions, and the specific robo-advisor used. Some robo-advisor portfolios may outperform the S&P 500 in certain years or under specific conditions, while in others, they underperform.

Why would you use a robo-advisor instead of a personal financial advisor? ›

Unlike live financial advisors, robo-advisors use computer algorithms to manage investment portfolios and make investing decisions. They typically have lower minimum investment requirements than financial advisors, and they tend to be less expensive.

What are the weaknesses of a robo-advisor? ›

Robo-advisors lack the ability to do complex financial planning that brings together your estate, tax, and retirement goals. They also cannot take into account your insurance, general budgeting, and savings needs.

How risky are robo-advisors? ›

2 Cybersecurity threats. Another risk of using robo-advisors is that they may be vulnerable to cyberattacks that compromise your data and assets. Robo-advisors store and process large amounts of sensitive information, such as your identity, bank accounts, portfolio holdings, and transactions.

Is it worth paying 1% to a financial advisor? ›

“Although the 1% AUM fee is standard, it does not align with the time, energy and expertise required to provide comprehensive financial advice and investment management services at different asset levels,” says Cody Garrett, certified financial planner at Measure Twice Financial.

Do millionaires use financial advisors? ›

Of high-net-worth individuals, 70 percent work with a financial advisor. You can compare that to just 37 percent in the general population.

What percentage of millionaires work with a financial advisor? ›

The wealthy also trust and work with financial advisors at a far greater rate. The study found that 70% of millionaires versus 37% of the general population work with a financial advisor.

Can robo-advisors replace financial advisors? ›

The Role of Robo Advisors

To my colleague's surprise, the founder responded by declining the debate and saying that robo advisors are not intended to outperform or replace advisors, but rather to offer an option to investors who don't meet advisor minimums.

Are robo-advisors cheaper than financial advisors? ›

Because a person doesn't actively manage your investments, robo-advisors charge significantly lower fees than financial advisors. Additionally, robo-advisors don't require a large initial investment to get started.

Is it worth paying for a robo-advisor? ›

For some, the simplicity, accessibility, and lower costs make them a very appealing choice. However, for those desiring more personalized service and sophisticated investment strategies, a human financial advisor may be worth the additional cost.

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