The Pros and Cons of Robo Advisors (2024)

From driving our cars to cleaning our houses; you may not realize it, but the future of robot assistance is already upon us. But what about helping us prepare for retirement? Here’s how to know when you should use a robo advisor or a human financial advisor.

Americans are investing in greater numbers than ever before. In the first half of 2021, new brokerage accounts opened by individual investors have already roughly matched the total created throughout 2020, hitting more than 10 million, according to estimates from JMP Securities. And now many of these investors are turning to automated investing with robo advisors, which saw a surge in new account openings in the early months of the pandemic.

What is a Robo Advisor?

A robo advisor is a digital platform that provides automated investing services (which are usually algorithm-driven). While some provide human guidance as a supplementary service, the objective is to take the human emotion out of investing decisions; taking a numbers-driven approach to help create an investment strategy by looking at an investor’s risk tolerance and financial goals.

The generic pros of robo-advisors are that they usually give you a low-cost, hands-off approach with often no minimum balance requirements. Robo Advisors are also infamous because they tend to follow indexed strategies which are best suited for some investors.

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.

Here’s a look at how Johnson Wealth & Income Management can help you deeper navigate the pros and cons of Robo Advisors.

The Pros of Robo Advisors

A Hybrid Approach

Probably the best way to ease into the prospect of using a robo advisor is to access one through a financial advisor.

This hybrid approach is becoming common for traditional financial planning practices to have robo advisors create various portfolios of index fund ETFs, according to typical risk profiles from conservative to aggressive. This takes the task of choosing assets off their hands, so that the financial advisor may spend more time with their clients addressing individual tax, estate, and financial planning issues, customized to their specific needs. If paired with a human advisor, this trend could give the consumer an opportunity for lower-cost investment management while retaining the personal touch of an advisor.

Robo-Advisors Aren’t One-Size-Fits-All

There are robo advisors for different types of clients. If your primary concern is rock-bottom fees, there are several robo-advisors with broadly diversified low-fee exchange traded fund portfolios. Some robo-advisors claim rebalancing and tax-loss harvesting in their arsenal.

Beyond these automatic features, you may want a robo-advisor that offers more comprehensive financial planning. These robo-advisors may get your financial house in order by looking at your spending, saving and other aspects of your financial life, with investing as part of the picture. For example, you may be able to link your financial accounts with the robo-advisor and get a full “real time” view of your finances, where your money is going and where it could go instead.

Cost Implications

Why does anyone ever turn to automation rather than paying a human to do it? Simple: It costs less. Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations.

The Cons of Robo Advisors

No Face-to-Face Meetings

If you’re someone that wants a relationship with your financial advisor, then most robo-advisors aren’t for you. Robo Advisors don’t have an office where a client walks in and talks directly to an advisor. This type of personal contact is relegated to the traditional financial advisory models.

You’re more than just an investment portfolio. You have many goals, both for the near and long term. While many robo advisors now allow you to set and edit your goals using their financial planning software, you also have money-related issues and concerns that may benefit from a chat with a human being.

Robo Advisors won’t talk you off the ledge after a significant market drop, whereas human financial advisors are there to ease your fears and explain how the investment markets work. A financial planner works to help integrate your finances, taxes, and estate plans. What’s more, your financial advisor may have a diverse pool of other professionals to help with many specific aspects of life beyond just “money” concerns.

Noone to Manage Emotional Decisions

As it has done in recent weeks, when the market drops by a large percentage rapidly, some investors panic. Just because your robo advisor won’t start panic-selling, what’s to stop you from making rash decisions? With a human advisor, you call them up in a panic and they can help reassure you. As your Fiduciary, your advisor must put your best interest above their own. A financial advisor who’s a fiduciary has an ethical duty to recommend the best investments for you. A robot simply cannot provide the same principels.

Limited Flexibility & Personalization

Robo advisors are designed for the masses. They base their decisions on investing profiles for people like you — not you personally. When you encounter a major life-event (inheriting money, buying a house, getting a divorce etc), careful planning, adjusting and taking thoughtful action needs to occur in order to help ensure a positive outcome. Over time, many discussions are required during this process, and having a human professional helps you adjust and adapt as needed – and can make all the difference in the world in your success. Robo advisors on the other hand, operate solely on algorithms, making them inherently less flexible and personalized.

Final Thoughts

When considering ways to manage your investments, robo advisors may be able to help retirees maximize their nest egg through smart investing. When choosing between a robo advisor and human financial advisor, it isn’t necessarily a question of one or the other. Financial advisors can use robo advisors to enhance their practice by leaning into technology while making it more powerful through the human touch.By working together, robo advisors and financial advisors can each focus on what they do best.

While there are several positive points to consider when it comes to using robo advisors, it’s always best to do your research beforehand and contact your trusted advisor at Johnson Wealth Income Management about your concerns.

For more information on our financial advisory services, contact us here today.

All written content on this site is for informational purposes only. Opinions expressed herein are solely those of Johnson Wealth & Income Management and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. Investing involves risk. There is always the potential of losing money when you invest in securities. Asset allocation, diversification and rebalancing do not ensure a profit or help protect against loss in declining markets. All information and ideas should be discussed in detail with your individual advisor prior to implementation. The presence of this website, and the material contained within, shall in no way be construed or interpreted as a solicitation or recommendation for the purchase or sale of any security or investment strategy. In addition, the presence of this website should not be interpreted as a solicitation for Investment Advisory Services to any residents of states where otherwise legally permitted to conduct business. Fee-based financial planning and Investment Advisory Services are offered by Sound Income Strategies, LLC, an SEC Registered Investment Advisory firm. Johnson Wealth & Income Management and Sound Income Strategies LLC are not associated entities. Johnson Wealth & Income Management is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities. © 2021 Sound Income Strategies.

The Pros and Cons of Robo Advisors (2024)


The Pros and Cons of Robo Advisors? ›

In addition to creating an automated portfolio, robo-advisors can also offer their customers the following benefits: Lower fees compared with a traditional financial advisor. Lower capital required to start. The ability to avoid human error and bias.

What are the pros and cons of robo-advisors? ›

Often less expensive than working with a professional financial advisorMore costly than doing it yourself
Easy to start and may have a low account minimumCould take a narrow view of your investments or financial situation
Includes ongoing managementLimited personalization
Aug 10, 2022

What are 2 advantages of using a robo-advisor two correct answers? ›

In addition to creating an automated portfolio, robo-advisors can also offer their customers the following benefits: Lower fees compared with a traditional financial advisor. Lower capital required to start. The ability to avoid human error and bias.

What is one of the biggest downfalls of robo-advisors? ›

Limited human interaction: Robo-advisors do not offer the same level of human interaction as traditional financial advisors. This can be a disadvantage for investors with more complex financial needs or investment goals.

What are the problems with robo-advisors? ›

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.

Can you trust robo-advisors? ›

Robo-advisors, like human advisors, cannot guarantee profits or protect entirely against losses, especially during market downturns—even with well-diversified portfolios. Because most robo-advisors only take long positions, when those assets fall in value, so will the portfolio it has constructed.

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).

What is a disadvantage of using a robo-advisor? ›

Limited Flexibility. If you want to sell call options on an existing portfolio or buy individual stocks, most robo-advisors won't be able to help you. There are sound investment strategies that go beyond an investing algorithm.

Are robo-advisors worth it? ›

Robo-advisors can be a great solution for many investors. They offer investment management at a reasonable cost, letting you focus on doing more of the things you love instead. A robo-advisor sets up an investing plan and manages it, and all you need to do is add money to the account.

Do robo-advisors beat 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.

Can you lose money with robo-advisors? ›

Investing always carries some level of risk, and Robo-Advisors are not a guarantee against investment losses. While Robo-Advisors are designed to prudently invest, they are not immune to market fluctuations or investment losses.

Do robo-advisors do better than humans? ›

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 retirees use robo-advisors? ›

A robo-advisor can help ease the burden of managing your portfolio as you transition to retirement—and help you figure out how to tap your assets in tax-smart ways.

When should you stop using a robo-advisor? ›

For hands-off investing with minimal fees, a robo-advisor could suffice. They can be a great choice for newer, younger investors. But for advanced planning and strategy, a human touch may still be required for advice you can trust.

How much does a robo-advisor charge? ›

Funds' expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more.

Can you withdraw money from a robo-advisor? ›

You can withdraw your balance at any time, subject to minimum account requirements. Typically, the withdrawal process takes between 3-5 business days to be completed. If you wish to keep your Robo-Advisor account active, you'll be unable to withdraw any amount that would result in your balance dropping below $100.

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

The choice between a robo-advisor and a human financial advisor depends on individual preferences, needs, and circ*mstances. Robo-advisors offer cost-effective, efficient investment management with minimal human interaction, making them suitable for younger or less wealthy investors comfortable with technology.

Do robo-advisors have high fees? ›

Funds' expense ratios: The robo-advisor will invest your money in various funds that also charge fees based on your assets. The fees can vary widely, but across a portfolio they typically range from 0.05 percent to 0.25 percent, costing $5 to $25 annually for every $10,000 invested, though some funds may cost more.

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