Robo-advisors vs. financial advisors: Which option delivers better value?
Choosing how to manage your investments is one of the most important financial decisions investors face today. The decision often comes down to robo-advisors vs. financial advisors.
Robo-advisors began as a way to democratize investing for the masses. Until the early 21st century, if you wanted help managing your investments, you typically had to speak with a financial advisor for guidance.
This guide explains the key differences between robo-investing vs. human investing, including fees, services, and ideal users to help you identify which is best for your needs.
Understanding robo-advisors vs. financial advisors: The basics
A robo-advisor uses an algorithm to automate and manage your investments. The platform uses the answers you provide to a series of questions to assess your goals, risk tolerance, and timeline and then constructs a portfolio designed to match those inputs.
As a result, there is minimal, if any, human interaction. The platform manages tasks such as portfolio rebalancing, ensuring it stays in line with your needs.
Because the process is largely automated, robo-advisors typically offer lower fees and lower investment minimums than traditional advisors. However, robo-advisors generally provide limited financial planning guidance beyond portfolio management.
Financial advisors, by contrast, typically offer a more holistic approach to financial planning.
Many advisors evaluate the full scope of your finances, including retirement planning, taxes, insurance, and estate planning, to create a personalized strategy.
Robo-advisors focus primarily on automated investing, while financial advisors typically deliver more comprehensive financial planning and personalized advice.
At a glance: Robo-advisors vs. financial advisors
Robo-advisors
- Automated investment management
- Lower fees
- Limited financial planning
- Minimal human interaction
Financial advisors
- Personalized investment strategies
- Comprehensive financial planning
- Higher fees
- Direct human guidance
Fee structures: Robo-advisors vs. financial advisors
Fees may seem small on paper, but small amounts over decades of investing can add up substantially. In essence, the more you’re paying for your investment management, the less you have working in the stock market for you.
Lower fees are one of the biggest reasons investors consider robo-advisors over financial advisors.
Robo-advisors generally charge lower fees than traditional advisors. Among the more popular robo-advisors, it’s common to see annual advisory fees ranging from about 0.25% to 0.50% of assets under management (AUM), and some may charge less if you have a higher balance.
For example, if you have a $100,000 portfolio with a robo-advisor, you can expect to pay roughly $500 annually for the service.
A $50,000 portfolio would incur $250 in management fees.
It’s fair to expect other expenses, such as:
- Underlying fund expense ratios
- Required cash allocations
- Premium service fees
Financial advisors are typically more expensive. Most advisors use an AUM percentage or an hourly fee. It’s fair to expect a human advisor to charge a fee of around 1% of AUM. In a $100,000 portfolio, that equates to $1,000 annually, or $500 annually on a $50,000 portfolio.
Some advisors charge:
- Flat planning fees
- Hourly consulting rates
- Retainer models
For example, a 1% fee on a $100,000 portfolio equals $1,000 annually.
Fee-only advisors are often considered preferable because they typically act as fiduciaries and must prioritize client interests.
Services: What robo-advisors and financial advisors provide
Identifying what is offered is another key difference when comparing a financial advisor vs. robo-advisor.
You’re paying for the algorithm to do the heavy lifting of investing for you. It creates a portfolio based on a set of portfolios it has built, rebalances it for you, and monitors your goals at a basic level. Some robo-advisors may offer tools like tax-loss harvesting or themed portfolios, but these features aren’t always free. Some platforms may also provide limited customer support, but it’s not a human advisor relationship.
Financial advisors can do much more than their robo counterparts. A human advisor can create a custom portfolio, but that’s just one piece of the puzzle. Financial advisors can help with tax strategy, estate planning, and insurance needs. Think of it as tailored financial planning that can answer a variety of “what-if…” scenarios.
Who should use a robo-advisor vs. financial advisor?
There is no inherently better option when comparing robo-advisors vs. human advisors. The right fit depends on your assets, complexity, and life stage.
When robo-advisors make sense
Robo-advisors are often a good fit for investors who:
- Are new to investing
- Want a low-cost, automated portfolio
- Have relatively simple financial goals
- Prefer managing their investments through a digital platform
Using a robo-advisor is wise for a person with straightforward goals and limited complexity. Robos are ideal when you’re new to investing and have a singular goal, such as beginning to save for retirement or building funds for a down payment on your first house.
For newer investors, being mindful of fees is key. Robo-advisors let novice investors act on that and keep fees to a minimum. Users of robo-advisors may not need advanced tools like tax-loss harvesting or complex tax planning, so there’s no need to pay for them.
Such investors want something automated that will do the work for them with little required on their part.
Finally, the ideal robo-advisor client is someone who’s tech-savvy. Everything is done online, so comfort level with an app experience is helpful. In short, robo-advisors are best for young professionals just beginning to invest or passive investors who need minimal help.
When financial advisors deliver better value
Financial advisors are often better suited for investors who:
- Have larger portfolios or multiple investment accounts
- Need help with retirement income planning
- Want guidance on taxes, estate planning, or insurance
- Prefer personalized financial advice
Financial advisors provide real value for individuals who need customized support through various situations. These people are often high-net-worth (HNW) individuals with complex financial situations, or investors considering multiple goals.
Such moving parts require personalized, expert guidance that a robo-advisor simply can’t offer. Human advisors can help investors with a comprehensive approach that manages advanced tax or estate considerations, especially for individuals approaching or living in retirement.
Such people may benefit from the hand-holding a human advisor can offer as they navigate major life transitions. This may involve behavioral coaching through downturns, so clients don’t make costly mistakes with their portfolios.
Human advisors are best for HNW individuals who are near or in retirement, who may or may not also own a business, and are seeking guidance on how to make everything work well for them and their heirs. The higher fees vs. a robo-advisor can be well worth it to make sure everything works best.
Do robo-advisors outperform financial advisors?
While robo-advisors can outperform financial advisors, there is no consistent evidence that one approach reliably outperforms the other.
Ultimately, it may not always be the goal of robo-advisors to beat something like the S&P 500. Robo-advisors typically take a passive approach to investing by automating deposits and investments to maintain diversified exposure to the market, particularly for newer investors accumulating assets.
Financial advisors may perform better compared to robo-advisors, but it’s no guarantee. Both options can create reasonable portfolios, but staying the course is often what matters.
Each robo and human advisor acts differently, and performance can depend on the approach taken by an algorithm or a human. Combined with risk-adjusted returns and market conditions, there’s no apples-to-apples comparison to definitively say one option outperforms the other.
Risk management approaches
Risk is inherent in investing in the stock market, and managing it wisely is vital. Robo-advisors use questions to guide their approach to risk. Your answers dictate what pre-created portfolio the algorithm places you in. Over time, the algorithm rebalances your portfolio to ensure it stays on track.
Such an approach offers some peace of mind as it doesn’t panic. It can also hinder you, as algorithms don’t understand nuance. If the portfolio doesn’t align with where you’re truly at, it could misallocate your portfolio.
Human advisors can understand nuance. They can ask probing questions that may lead them to make slight tweaks to optimize your portfolio, taking into account age and life changes. Human advisors also offer behavioral risk management that robo-advisors do not. This helps you avoid making emotional decisions that might erode value.
Pros and cons of robo-advisors vs. financial advisors
Both financial advisors and robo-advisors offer real value, but each comes with trade-offs. Selecting the right one can greatly benefit your assets.
Robo-advisor pros and cons
Robo-advisors can be a significant help to the right investor, but they can be limiting to some. Here’s what to keep in mind when considering a robo-advisor.
Pros:
- Lower cost relative to human advisors
- Low account minimums making them accessible to many
- Automated tax-loss harvesting
- Emotion-free investing
- Everything is automated
Cons:
- Limited customization
- No comprehensive financial planning
- Limited tax strategy
- It may be more expensive than DIY investing in stocks
- Limited, if any human support
Financial advisor pros and cons
For the right person, a financial advisor can be well worth the added cost. Alternatively, the cost may be too prohibitive for some. Here’s what to consider when researching financial advisors.
Pros:
- Tailored advice
- Comprehensive planning
- Behavioral coaching
- Potential of expert advice in complex situations
- They understand nuance
Cons:
- Higher fees
- You need to find the right fit
- Quality can vary
- Potential conflicts of interest
The rise of hybrid robo-human advisory services
Until recently, it was an either-or situation for people considering robo-advisors vs. financial advisors. You had to select one or the other. In recent years, hybrid robo-human advisors have grown, giving investors access to a blend of the two.
Hybrid robo-human advisors operate much like a traditional robo-advisor. The algorithm manages much of your portfolio day-to-day. It makes the investments for you and rebalances as necessary.
The tweak is that investors have access to human advisors, allowing them to ask questions and voice concerns over their portfolio. If you and the advisor determine a change is needed, they can make those changes for you to ensure the portfolio aligns with your goals. It’s best to think of it as a best-of-both-worlds approach that lets you find a middle ground for managing your investments.
Popular hybrid robo-human advisors commonly charge for the service, with some offering tiered pricing. While less than a human advisor, a hybrid model is more expensive than most robo-advisors.
Tech-savvy people who don’t want to totally eschew a human approach and value having a sounding board are good fits for a hybrid model. Many of the best online brokerages offer hybrid robo-human advisors, including Vanguard, Schwab, Fidelity, and Betterment.
How to choose between a robo-advisor and a financial advisor
A robo-advisor is a good choice for novice investors who are tech-savvy and just beginning to invest. Robo platforms offer helpful resources to develop a sound discipline and grow your assets. As your goals and needs change and complexity grows, a human financial advisor can be a trusted ally who can help you optimize your portfolio to meet life’s new and upcoming challenges.
