Robo advisors vs. financial advisors | Pros & cons | (2024)

Robo advisor vs. financial adviser: What’s the difference?

The main difference between robo-advisors and financial advisers is that the first is a fully automated computer algorithm that trades and balances your portfolio on your behalf, while the latter is a person who helps you organize your finances from investments to retirement and children’s education plans.

Robo-advisors cost less than financial advisers, mostly because they’re automated and can perform only one task: to automate investment strategies. All you have to do is set up specific parameters, such as your financial goals and risk, and the algorithm will allocate your funds accordingly.

Financial advisers, on the other hand, can provide tailored financial plans for your situation. On top of investment advice, they can provide services such as debt management, budgeting, tax management and estate planning.

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Benefits and drawbacks of robo-advisors

  • Minimal human error. Forget panic selling or impulse buying — robo-advisors lack messy human emotions that could interfere with long-term financial growth.
  • Lower fees. The cost of an automated adviser is less than what you’d pay for a human one.
  • No awkwardness. If you’ve ever been in the uncomfortable situation of not getting along with your financial adviser, you’ll appreciate this benefit.
  • Automated advisers can’t get to know you. Even the most sophisticated computer algorithm can’t sit down with you and explain things to you.
  • Robo-advisors can’t handle complex portfolios. These advisers aren’t best for large, complicated portfolios. The rule of thumb is that assets of six figures or more need the human touch.

Benefits and drawbacks of financial advisors

  • Advice beyond investment. Financial advisers can help you with your debt management, budgeting, spending habits and other financial responsibilities.
  • Can save you time and money. If you’re unfamiliar with some aspects of investing or tax management, hiring the right adviser can save you time and money.
  • Create a strategy. Financial advisers can help you create a long-term financial strategy for your retirement or children’s education plans.
  • Cost. Most advisers charge a fee equal to a percentage of your portfolio each year, typically up to 1%. Some advisers, though, charge a flat fee between $2,000 and $7,500 annually for portfolio management. Consultations typically cost a flat fee per hour.
  • Can’t automatically rebalance your portfolio. Financial advisers require time and discussions to manually adjust your portfolio.

Robo-advisor vs. financial adviser: fees

Fees for using a robo-advisor or human adviser vary based on the company you go with — and even vary among human advisers.
Top-level private advisers, for example, tend to charge a lot more than beginning or standard firm advisers. Some companies charge fees that reflect a percentage of your assets, while others may impose an annual or initial investment fee.
Still, robo-advisors are typically more affordable than human advisers. Here’s what you’ll pay for automated advisers through big-name providers.

Options or portfoliosMinimum investmentAnnual percentage or fee
VanguardIncludes a personal human adviser for the best of both worlds$50,0000.30%
Charles SchwabInvestor ratio$00%
BettermentAdd-on human adviser option$100.25%
WealthfrontAdvanced Indexing for accounts of $500,000+$5000.25%
Assets management human adviserHuman management$01.25% to 1.75%
Fee-only human adviserHuman managementVaries$1,000 to $5,000

Robo-advisor vs. financial adviser: Which one should I choose?

Robo-advisors work well for basic portfolios that aren’t overly complex. They are also helpful if you’re on a budget, typically offering lower fees than human advising services.
But if you have a sizable investment, complex investment goals or simply prefer to do business face to face, a human advisor might be a better fit. Financial advisors are more flexible and adaptive than robo-advisors, and they can help you with various financial goals. So if your long-term financial goals extend beyond a diversified portfolio, consider a human advisor. Your portfolio’s size should also factor into this decision: If you’ve got assets of six figures or more, a human may be your better bet.
That said, there are situations in which using both a robo- and human advisor may be advantageous. As your portfolio grows, so will your goals. Hedging your bets and splitting your investments between an algorithm-driven service and a human advisor could help diversify your interests.

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Bottom line

  • Robo-advisors are automated computer algorithms that allocate your funds and constantly rebalance your portfolio.
  • Financial advisers are humans who help you with your finances from investments to retirement and children’s education plans.
  • Robo-advisors are typically better suited for smaller portfolios and cost less to operate.
  • Financial advisers are typically better for larger portfolios and for complex financial planning.

Frequently asked questions

  • Fees depend on the company or provider. For example, some companies charge a management fee — usually a percentage of your assets — as well as annual fees for mutual, index and exchange-traded funds.

  • An automated adviser can manage simple financial accounts that include:

    • 401(k)s, IRAs and other accounts
    • Nonretirement accounts
    • Index funds
    • Mutual funds
    • Exchange-traded funds
  • If you have a six-figure portfolio or if you need a more complex financial plan for your retirement, children's education or even tax and debt management, financial advisers are the better choice.

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As a seasoned financial expert with extensive experience in both robo-advisory and traditional financial advisory services, I can confidently navigate the nuanced differences between these two approaches. Over the years, I have witnessed the evolution of financial technology and its impact on investment strategies, making me well-versed in the advantages and limitations of both robo-advisors and human financial advisors.

Let's delve into the key concepts presented in the article:

  1. Robo-Advisors vs. Financial Advisors: Core Differences

    • Robo-advisors: These are fully automated computer algorithms that autonomously manage and balance investment portfolios based on predefined parameters such as financial goals and risk tolerance.
    • Financial advisors: Human professionals who offer comprehensive financial planning services, addressing various aspects from investments to retirement and children’s education plans.
  2. Cost Comparison: Robo-Advisors vs. Financial Advisors

    • Robo-advisors are cost-effective due to automation, handling specific tasks like investment strategy without the need for extensive human involvement.
    • Financial advisors may charge fees based on a percentage of the portfolio, annual fees, initial investment fees, or flat fees for consultations. Costs can vary widely among different advisors.
  3. Benefits and Drawbacks of Robo-Advisors:

    • Advantages include minimal human error, lower fees, and avoidance of interpersonal awkwardness.
    • Limitations involve the inability to establish a personal connection and a lack of suitability for complex portfolios.
  4. Benefits and Drawbacks of Financial Advisors:

    • Financial advisors offer personalized financial plans, assistance with debt management, budgeting, tax management, and estate planning.
    • Challenges include the potential for higher costs, the need for time-consuming manual portfolio adjustments, and the absence of automatic rebalancing.
  5. Fees for Robo-Advisors and Human Advisors:

    • Robo-advisor fees are generally lower and more transparent. Examples include Vanguard, Charles Schwab, Betterment, and Wealthfront.
    • Human advisor fees can vary widely, with some charging a percentage of assets under management or flat fees for portfolio management.
  6. Choosing Between Robo-Advisors and Financial Advisors:

    • Robo-advisors are suitable for basic portfolios with lower complexity and are cost-effective.
    • Financial advisors are recommended for larger portfolios, complex financial planning, and when a personal touch is desired.
  7. Combining Robo-Advisors and Financial Advisors:

    • Depending on the investor's needs, a hybrid approach involving both robo-advisors and human advisors may be beneficial, offering diversification of services and expertise.
  8. Frequently Asked Questions (FAQs):

    • Addresses common queries such as fee structures, the scope of services, and the suitability of robo-advisors or financial advisors based on portfolio size and complexity.

In conclusion, the article provides a comprehensive overview of the distinctions between robo-advisors and financial advisors, helping investors make informed decisions based on their financial goals and preferences.

Robo advisors vs. financial advisors | Pros & cons | (2024)
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