Robo-advisors and traditional financial advisors both help investors to construct portfolios for investing and growing their savings. The biggest difference between the two is in who — or what, as the case may be — is providing the financial advice.
In general, financial advisors are people who provide personal, one-on-one advice to clients, while robo-advisors are largely digital investment advisors that rely on algorithms and computer data to drive customer investments. There are also significant differences in the costs of each, their investment approaches and the type of services offered.
Robo-advisors and financial advisors both ultimately provide the same basic service — professional recommendations about how to best invest your money. There are some distinct differences, however. Robo-advisors tend to offer more general, less personalized services limited to investment advice, while traditional financial advisors often offer additional services and a human touch. Here are some other ways the two types of advisors differ:
In general, robo-advisors are less expensive than financial advisors because they usually provide more limited services and less direct human interaction in exchange for lower fees. On average, the fee for a balance of $50,000 is 0.36% with a robo-advisor — or about $180 per year. That’s considerably lower than the cost for human advisors, who charge an average fee of 1.17% — or $585 for that same balance.
In many cases, robo-advisors offer accounts with lower minimum account balance requirements than traditional financial advisors. Many top-rated robo-advisors have no account minimum requirement or a nominal one (think $10 or less), though minimums for robo-advisors can be as high as $100,000. The account minimums for traditional financial advisors vary more widely and are generally higher. While some advisors have $0 account minimums, other people only take on clients with at least $10 million in assets, and there is a lot of variation in between.
When evaluating the two options, many people wonder: “How do robo-advisors work?” It may seem a bit intimidating to remove the human factor from financial advice, but that works well for many people. Robo-advisors generally base your investment approach on a questionnaire you complete online that evaluates your goals, tolerance for risk and other factors. Then, using an algorithm, the company builds a portfolio for you, usually constructed of ETFs or similar investments.
A financial advisor, on the other hand, offers more personalized services. The advisor may meet with you in person or over the phone to evaluate your risk tolerance, goals and other factors to determine the best makeup of your portfolio. While your portfolio may contain ETFs, human advisors typically provide a variety of other investment offerings, as well. Financial advisors are also more likely to offer additional services such as budgeting, education planning, retirement planning and creating plans to pay down debt.
In general, various studies estimate that professional advice may result in an increase in a portfolio’s value of between 1.5% and 4%. However, returns aren’t guaranteed for either type of advisor. If your money is invested in a diverse portfolio of assets that aligns with your goals, rather than trying to “beat the market,” your average returns are likely to be similar in the long-term with a robo-advisor or a financial advisor. While you can compare the returns of various advisors from previous years, that doesn’t mean you can bank on the same returns in ensuing years due to market volatility.
When it comes to choosing between a robo-advisor and a traditional advisor, it’s important to weigh the pros and cons of each. Both types of advisors can help you invest your money with a goal to grow it with interest over time. Unless you’re highly educated about investing and have the time and dedication to research and manage your funds yourself, advisors are helpful. Which one stacks up better for you, however, will depend on your own unique circumstances and personal preferences.
In general, robo-advisors are simple to use and great for beginner investors who want to jump into investing without too much hassle or commitment. But there are pros and cons of robo-advisors, including the following:
A traditional financial advisor offers the human touch some investors may prefer. They often offer a wide range of services in addition to basic investment advice, which may be helpful depending on your personal circumstances. There are, however, pros and cons all investors should consider before choosing a financial advisor:
You can’t go wrong choosing either a financial or a robo-advisor, since either way you’re investing money that will likely grow over time and help you build a solid financial future. However, depending on your unique circumstances and preferences, one may be a better choice for you.
Beginning investors or those people with limited funds may find a robo-advisor to be the best bet, since fees and account minimum requirements are typically lower. Those people investing with greater sums of money or who want to have more choices and more individual attention paid to their investments, will likely be more satisfied using a financial advisor. It’s also important to consider the significant differences between individual robo-advisors and traditional advisors.
If you’re torn between the two types of advisors, another option is an online financial planning service, which has a mix of the benefits of robo-advisors and human advisors. These services, along with hybrid models from robo-advisors, offer a bit more human interaction, but it’s mostly done through phone calls, e-mails or live chats, rather than the in-person assistance typically offered by traditional advisors.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.