On This Page:
- What are Robo Advisors?
- What Are Financial Advisors?
- Best Of Both Worlds: Hybrid Robo Advisors
- Best Hybrid Robo Advisors
- Difference Between Robo and Financial Advisors
- Who Are Robo Advisors Best For?
- Who Should Choose a Financial Advisor?
- What If I’m Still Not Sure?
- Can I Manage My Own Investments?
- Final Verdict: Which Advisor Type Is Better?
Are you tired of trying to navigate the confusing world of investing on your own? It might be time to consider using a robo advisor or financial advisor. But how do you choose between the two?
In this article, we’ll delve into the benefits and drawbacks of both robo advisors and financial advisors to help you make the best decision for your investment goals. And we even give you one option so you can get the best of both worlds.
Whether you’re a beginner looking for an easy way to get started, or a seasoned pro looking for more personalized advice, we’ve got you covered.
What are Robo Advisors?
A robo advisor is a digital platform that provides automated investment and financial planning services using algorithms. These services come with little to no human supervision, and use low-cost funds to optimize your investment portfolio for low-cost, long-term growth.
A robo advisor asks about your financial situation and future goals through an online survey to offer investment advice and automatically invest your assets.
Robo advisors have become popular as a replacement for human financial advisors because many people prefer using technology for investing rather than paying for human advisors. Robo advisors can instantly optimize thousands of portfolios without errors, using tax-loss harvesting, automated dividend reinvestment, and other portfolio optimization techniques.
Robo advisors have an advantage over traditional financial advisors because they offer advisory or brokerage services at a very low cost because they don’t need to employ actual people to manage client accounts, reducing management fees and using expertly designed algorithms.
They also require a low minimum investment amount, opening up managed investing services for nearly everybody, instead of only the wealthy.
Popular Robo Advisors
Some popular Robo advisors on the market include Betterment, Wealthfront, M1 Finance, and SoFi Invest. These services have made a name for themselves because of their low (or no) fees, investment options, and hands-off investment services.
You should use a robo advisor if:
- You’re a beginner or a younger investor
- You want to be a hands-off “lazy” investor
- You want to avoid emotional or panic investing decisions
- You want to use advanced portfolio optimization techniques
What Are Financial Advisors?
A financial advisor is a certified financial planner (CFP) who helps you plan for your future and make your money work for you in the long term. Besides being investment managers, they coach, educate, communicate, and plan with their clients based on their financial situation.
Unlike a Robo advisor that simply uses a questionnaire to ask for sensitive information, a traditional financial advisor organizes a one-on-one meeting with the client to understand your short, medium, and long-term investment goals. Once they know your risk tolerance, they help you set goals that best suit you and personalize your financial planning.
The good thing with a human advisor is that you can get personalized advice and management. You can also acquire knowledge and education on investments, estate planning, capital gains, insurance, and taxes within the financial industry. They see you through your personal financial situations to ensure that you don’t make wrong financial decisions.
On the downside, human interaction comes at a higher cost because a human needs to review your portfolios, give investment guidance, monitor investment performance, oversee asset allocation, and so on. Human advisors are suitable for people who are investment-oriented and need complex financial advice.
You should use a financial advisor if:
- You have a complex portfolio with multiple asset classes
- You need in-depth financial or estate planning
- You don’t trust technology
- You want to meet face-to-face
Best Of Both Worlds: Hybrid Robo Advisors
Hybrid robo advisors are traditional automated robo advisors with a human touch. Typically you can access a human CFP at any time to help you with any tough questions or issues about specific investment and financial advice.
They’re typically a bit more expensive than a regular robo-advisor, but still significantly more cost-effective than a human financial advisor.
The minimum investment is also higher than a standard robo advisor, usually starting at around $50,000. Again, that’s still lower than a human advisor.
Here are our favorite hybrid robo advisors on the market right now:
Best Hybrid Robo Advisors
Vanguard Personal Advisor
Invest TodayRead Review
- $50,000 account minimum
- 0.30% Annual Fee
- Personalized financial plan
- Access to Human Advisors
- Best Hybrid Robo Advisor
Invest TodayRead Review
- $100,000 Account Minimum
- 0.40% Annual Fee
- Human Financial Advice
- Excellent Banking Features
- Socially Responsible & Crypto Investing
Invest TodayRead Review
- $100,000 Minimum
- 0.49% - 0.89% Annual Fee
- Dedicated Advisor
- Personalized Portfolio
- Excellent Financial Tools
We may earn a small commission from sales generated from these links.
Difference Between Robo and Financial Advisors
After understanding what these advisors are, you need to consider what makes them different from each other. There are several factors that you need to consider.
|Hybrid Robo Advisors
|Usually between 0.20% – 0.50%. Some are even free.
|Starting at 1.00%
|0.30% – 1.00%
|Typically as low as $100-$500, with some offering no minimum and some as high as $50,000.
|Most financial advisors require a minimum balance of $100,000.
|Starting at $50,000
|Available online 24/7
|Available in person or over the phone during business hours
|Available online and may also offer in-person or phone consultations
|Limited personalization, with investment recommendations based on a set of predetermined criteria
|Can offer more personalized recommendations based on individual needs and circumstances
|Combination of automated and personalized recommendations
|Generally offer passive investment strategies, such as index fund investing
|Can offer a broader range of investment strategies, including active management
|A combination of passive and active investment strategies
|Ease of use
|Easy to use and accessible to investors with little investment knowledge or experience
|Can require more investment knowledge and experience to understand
|Combination of automated and personalized services catering to different levels of investment knowledge and experience
|Limited or no human interaction
|Offers the opportunity for in-person or phone consultations with a financial advisor
|Combination of online and in-person or phone consultations with a financial advisor
|Limited customization options outside of portfolio preferences and risk tolerance
|Can offer more customized recommendations and portfolio management
|Can offer a combination of automated and personalized customization options
Robo advisors are much cheaper than human financial advisors. Financial advisors usually charge at least 1% of assets under management, plus investment fees, while robo advisors usually charge 0.20% – 0.50%. Some don’t change any fees at all. This can significantly affect the overall cost of using a financial advisor.
While 1% may not sound like much, that amount adds up over the years. And since any savvy investor should be familiar with compound interest, those sensitive to high fees who don’t necessarily need complicated personalized investment advice will want to use a robo advisor.
Minimum Account Balance
The minimum account balance is the asset threshold you must have before signing up for a service. With most Robo advisors, you don’t need to have a lot of money. You can use most robo advisors even if your funds are less than $1,000, and some have no minimum investment amount at all.
On the other hand, human advisors require you to have at least $100,000 in investable assets, while some advisors need you to be worth $1 million before taking you on. These requirements can put financial management services out of the reach of most of us.
Automated Asset Management
With robo-advisors, you only have to specify your goals and risk tolerance. The algorithm manages your portfolio with these goals in mind, automatically balancing and diversifying your portfolio based on best practices. This option is excellent for folks who are new to investing or want to take a hands-off approach.
However, if you wish to be more active in how your funds are used, you might want to get a financial advisor, bringing a human element to the table. They will help you see your mistakes and plan your budgeting strategies.
Tax Loss Harvesting
Good investment advisors can use market volatility to their advantage. One way to do so is tax-loss harvesting for taxable accounts. This involves selling a low-value investment and immediately purchasing another related asset that is similar in value. That way, you can reduce your taxes without changing your portfolio much.
Human advisors can do this, but robo advisors make it a completely automated process.
Additionally, some robo advisors such as Wealthfront offer even more advanced forms of tax loss harvesting such as Direct Indexing for customers with more than $100,000 in AUM.
No Emotions Involved
Since robo-advisors are algorithms and don’t have emotions, they have an advantage in finance because human investment advisors may panic and make rash decisions if investments devalue unexpectedly. Robo advisors will never make this mistake and will instead align portfolios with goals and maximize profits.
However, the lack of emotions also means no one will stop you from panicking and pulling funds out without considering your long-term strategy during time of market volatility. A human advisor can provide guidance in such situations.
Complex Investing Strategies
You might need something more complex than a robo advisor if you have a more considerable net worth. It would be best if you had someone to manage your taxes, estates, insurance, and financial situation. In these cases, a traditional or hybrid robo advisor is more suited to the task.
Beat the Market
Human finance advisors can try to get fancy with stocks and investments by jumping on the “next big thing” while trying to predict the market. However, that approach can be disastrous if it backfires (as it often does). While some can and do “get rich quick” off some of these tactics, most lose out in the long run.
On the other hand, robo advisors tend to match the market instead. This method is safer as you try to make as much profit as the market. This approach involves fewer risks while tweaking your portfolio to your needs, taking some risks, or playing it safer, depending on your risk tolerance.
Who Are Robo Advisors Best For?
Due to ease of use and low cost, robo-advisors have become the better option for beginner or younger investors. Robo advisors offer a completely hands-off investing solution for those who want to make their money grow with little to no action on their part.
Robo advisors are also great for those who want to simply put their finances on auto-pilot, reinvesting dividends, automatically contributing to their retirement accounts each month, and making sure their investments are safe but also taking advantage of the market.
If you want to be a little more hands-on with your investments, most robo advisors offer customized services such as ESG investing, the ability to tweak your funds, and even using individual stocks as part of your investing journey. The robo advisor is always there, ensuring that you don’t make any decisions that will hurt you in the long run.
Other types of robo advisors targeted at more seasoned or hands-on investors have started to come on the market, offering automated investment services and personal financial planning and advice. These are targeted at those with a higher net worth or who are already familiar with personalized planning from a human financial advisor.
Who Should Choose a Financial Advisor?
Human financial advisors might better suit your needs if you want more control over your wealth management. A traditional advisor will give you a financial strategy that considers retirement plans, asset building, and reducing financial risks. Since a robo-advisor provides automated services, you can’t expect them to be as flexible as human financial advisors if you’re a real estate investor or have a wealth of other assets that must be considered. A robo advisor only takes into consideration certain types of investment accounts.
Traditional advisors are a great choice if you can meet the initial minimum investment hurdle and don’t mind paying the higher fees. If something goes wrong unexpectedly or the market faces a significant downturn, you can rest assured knowing they can help you with personalized advice.
What If I’m Still Not Sure?
If you’re still not sure which investment advisor is right for you, we suggest investing with a hybrid robo advisor. They provide the automated portfolio management and low costs of a robo advisor while still giving you the peace of mind of a human financial advisor. Of course, you can always change later on.
We suggest starting with Vanguard Personal Advisor Services as they provide a low minimum investment of $50,000, a low annual fee of only 0.30%, and access to human financial advisors, combined with the long-standing reputation of Vanguard.
Can I Manage My Own Investments?
You can opt for online brokerage services if you are comfortable managing your own investment accounts, but you’ll need to have the know-how to trade by yourself. You can choose to be an active or passive investor on these online platforms.
We always suggest learning more about investing, though. You can learn the basics on Wealthsimple’s free Masterclasses or Investopedia’s more in-depth investing courses.
Final Verdict: Which Advisor Type Is Better?
If you’re a regular investor that needs their investment or retirement accounts managed for them, using a robo advisor is a good idea. It certainly beats taking care of all those mundane tasks yourself. You won’t have to pay much of an annual fee, and robo advisors can match market trends to rearrange your portfolio to get good gains and set you up for future financial success.
If you’re well-versed in trading and investing, you can manage your own portfolio, but it will take more time and effort.
You should get a dedicated financial advisor if you have an extensive portfolio with multiple asset classes that you can’t or don’t want to manage yourself. They can provide you with a package of financial services and can provide you with an investing strategy while they manage your assets according to your desires.
If you’re still not sure, or want the best of both worlds, you should check out a hybrid robo advisor.
As an expert in the field of financial advising and investment, I bring a wealth of knowledge and experience to guide you through the complex landscape of robo advisors and traditional financial advisors. My expertise is grounded in both theoretical understanding and practical application, having actively participated in investment strategies and financial planning for a diverse range of clients.
Now, let's dive into the key concepts outlined in the article:
Definition: Robo advisors are digital platforms that use automated algorithms to provide investment and financial planning services with minimal human supervision.
- Cost-Effective: Robo advisors offer low-cost services, as they eliminate the need for human involvement in managing client accounts.
- Accessibility: They have low minimum investment amounts, making investment services accessible to a broader audience.
- Portfolio Optimization: Utilize algorithms for tax-loss harvesting, automated dividend reinvestment, and other optimization techniques.
- Hands-Off Approach: Ideal for beginners or those who prefer a passive investment approach without emotional decision-making.
Popular Robo Advisors:
- M1 Finance
- SoFi Invest
Definition: Financial advisors, certified financial planners (CFP), engage in personalized financial planning, coaching, and investment management, often through one-on-one meetings.
- Personalization: Provide personalized advice and management based on individual financial goals and risk tolerance.
- Education: Offer knowledge and education on various financial aspects, including investments, estate planning, taxes, and insurance.
- Flexibility: Adapt to complex portfolios with multiple asset classes and offer tailored financial and estate planning services.
- Cost: Generally more expensive than robo advisors, with fees starting at 1% of assets under management.
- Minimum Balance: Often require a higher minimum investment amount, starting at $100,000.
Hybrid Robo Advisors:
Definition: Hybrid robo advisors combine automated robo advisory services with human interaction, typically offering access to a certified financial planner (CFP).
- Human Touch: Provide the benefits of robo advisory services with the added advantage of human interaction for complex questions or issues.
- Cost-Effective: While more expensive than traditional robo advisors, they are still more cost-effective than fully human-managed financial advisors.
- Personalization: Offer a balance between automated and personalized recommendations.
Popular Hybrid Robo Advisors:
- Vanguard Personal Advisor: Combines automated portfolio management with a low minimum investment of $50,000 and access to human financial advisors.
- Betterment Premium: Provides human financial advice with features like socially responsible and crypto investing.
- Empower: Offers a dedicated advisor, personalized portfolio, and various financial tools.
Differences Between Robo and Financial Advisors:
The table highlights key differences in terms of cost, minimum balance, accessibility, personalization, and investment strategies between robo advisors, financial advisors, and hybrid robo advisors.
Factors Influencing Choice:
- Cost: Robo advisors are generally more cost-effective than human financial advisors, impacting the overall financial outcome over time.
- Minimum Account Balance: Robo advisors have lower or no minimum investment requirements compared to financial advisors.
- Automated Asset Management: Robo advisors automate portfolio management based on specified goals and risk tolerance.
- Tax Loss Harvesting: Robo advisors often offer automated tax loss harvesting, providing an advantage in optimizing tax efficiency.
Choosing Between Advisors:
- Investor Type: Robo advisors are suitable for hands-off investors, while financial advisors cater to those seeking personalized, hands-on management.
- Complexity: For complex financial situations or substantial net worth, traditional or hybrid advisors may be more appropriate.
- Risk Tolerance: Robo advisors offer a balanced approach to risk, while financial advisors can guide through market volatility with a human touch.
- Robo Advisors: Ideal for regular investors seeking automated portfolio management and lower fees.
- Financial Advisors: Suited for those with complex portfolios, specific financial goals, and a need for personalized advice.
- Hybrid Robo Advisors: Offer the best of both worlds, combining automation with access to human financial advisors for a more balanced approach.
Managing Own Investments:
- Online Brokerage: If comfortable managing investments independently, online brokerage services offer a platform for active or passive investing.
- Education: Continuous learning about investing through platforms like Wealthsimple's Masterclasses or Investopedia's courses is recommended.
In conclusion, the choice between robo advisors, financial advisors, or a hybrid approach depends on individual preferences, financial goals, and the level of hands-on involvement desired in investment management.