Robo-Advisors vs. Financial Advisors - SmartAsset (2024)

Robo-Advisors vs. Financial Advisors - SmartAsset (1)

The world of investing is vast and complex. But technology has advanced to the point of automating many facets of your financial life. Robo-advisors can now take your financial preferences and put your money in the market according to investment algorithms. This can help you start investing any amount of money at little cost, though robo-advisors might not be right for everyone. If you’re on the fence about working with a robo-advisor or a financial advisor, here are some things to know.

If you’re looking for hands-on financial advice,SmartAsset’s free toolcan match you with up to three financial advisors who serve your area.

What Do Robo-Advisors Do?

So, have robo-advisors effectively replaced financial advisors? The short answer is no. Robo-advisors are valuable tools, even to the point that some financial advisors use them. However, one of the advantages technology grants humans is the ability to focus on more significant, specialized tasks.

Robo-advisors offer clients an investment service driven by algorithms and digital tools which automatize your investments based on your preferences. Because a person doesn’t actively manage your investments, robo-advisors charge significantly lower fees than financial advisors. Additionally, robo-advisors don’t require a large initial investment to get started.

Therefore, robo-advisors allow people with any level of market knowledge and funding to invest in stocks, bonds, and more. Because robo-advisors have access to various funds and make automatic adjustments, investors can set their investment approach according to their risk tolerance and then not stress about buying or selling specific stocks. Many robo-advisors also offer human assistance for an extra fee for investors who want more handholding.

In addition, robo-advisors employ a technique called tax-loss harvesting, which allows your investments that perform poorly to lessen your tax liability.

What Do Financial Advisor Do?

Financial advisors are professionals who offer an array of financial services. Clients can go to financial advisors for financial planning, tax help, investment assistance, business advice, and more.

Unlike robo-advisors, financial advisors can specialize in investments or other financial areas. Therefore, qualified financial advisors can help you create an investment strategy specific to your financial circumstances while accounting for your tax situation, financial goals, and retirement plan. As a result, while financial advisors cost more than robo-advisors, they offer comprehensive financial services instead of only an investment account. Additionally, financial advisors actively oversee your investments, potentially giving you better returns than an automated investment approach.

Financial advisors can delve into financial details with you, providing you with financial planning, tax help, business advice, and an investment strategy based on your financial goals. Not only do financial advisors offer a personal touch, they have comprehensive financial knowledge that is valuable for every financial area of your life.

Financial Advisor Strengths

Robo-Advisors vs. Financial Advisors - SmartAsset (2)

Some financial advisors may lack the ability to conduct investment transactions instantaneously, but they offer investors the following advantages:

Financial planning.When you meet with a financial advisor, they’ll get to know you on a personal level and closely review your finances. Their financial expertise and understanding of your financial situation allow them to provide well-founded financial advice for various aspects of life.

If you find an effective, honest financial advisor, you get what you pay for: help planning for retirement, advice on setting up a small business, tax help, estate planning services, assistance with making a budget, and more. While robo-advisors are proven investment tools, they can’t manage your complex financial situation.

No limits to investment type.Robo-advisors usually select from a restricted pool of funds for your investment. However, financial advisors have no such limits and can freely utilize whichever securities or assets might be more profitable or closely fit your preferences.

A chance to outperform the market.Robo-advisors generally use funds that correlate with market indices. Therefore, investing through a robo-advisor exposes you to the rollercoaster of the stock market. On the other hand, while financial professionals don’t regularly beat the stock market, they have a fighting chance to make profitable investments and outperform index funds.

Robo-Advisor Strengths

While robo-advisors are limited in scope and function, they perform well for new investors in these ways:

Cost-effective investing.Robo-advisors are electronic tools that automatically use algorithms for investing. Since your account with a robo-advisor requires no human oversight, the associated costs and fees are lower than a financial advisor. Robo-advisors charge a tiny percentage of the amount managed plus additional fees depending on the securities you invest in.

No minimums.Often, for a financial advisor to take you on as a client, they require a specific amount that you must be ready to invest. Minimums can be tens of thousands of dollars and therefore prohibitive for new investors looking to open an account with a few hundred dollars. Index funds also often have minimums. Fortunately, robo-advisors usually have low to no minimum requirements, allowing investors to get going with whatever money they have available.

Automated rebalancing.Rebalancing means consistently replacing stocks with better-performing ones to help your portfolio remain healthy and diverse. Anyone can rebalance investments, but robo-advisors rebalance your portfolio automatically, which is what technology does best: take a repetitive but significant task off your hands and do it as well or better than you can.

Follows the market.Financial professionals try to beat the market, usually to no avail, but robo-advisors put money into funds that follow the market. This is a less exciting but reliable strategy to build wealth over time. For example, a fund following the for the last 50 years would provide an average annualized return of 7% when adjusted for inflation.

Robo-Advisors vs. Financial Advisors: Which One Is Right for You?

Robo-advisor and financial advisors can both help you invest successfully. However, your specific financial circumstances will help you determine which one is better for you. For example, if you’re just starting to invest your money, the low fees and lack of minimums may make robo-advisors a wise choice.

On the other hand, if you have a complex financial situation and more wealth to manage, the need for a comprehensive financial plan including a particular investment strategy may lead you to seek a financial advisor.

Bottom Line

Robo-advisors are excellent tools for new investors looking to open investment accounts and start growing a small amount of wealth. Additionally, robo-advisors take mundane investing tasks off people’s plates. Investors interested in steady returns can turn to robo-investors for an inexpensive way to follow the market.

Conversely, financial advisors offer the gamut of financial assistance. They provide a personalized investment strategy that pairs with an overarching financial plan built around your financial goals. As a result, investors who have enough money to meet the minimum requirements and want to take control of their finances may benefit more by working with a financial advisor. If you want to grow your wealth or have additional questions, speak with a financial advisor today.

Tips for Investing Through a Financial Advisor

  • Robo-advisors provide investing advice and services, but a financial advisor can help with more. Finding a qualified financial advisordoesn’t have to be hard.SmartAsset’s free toolmatches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
  • Financial advisors often haveadvisory certifications, which can give you an idea of the subject matters that they’re most proficient in. Advisors can specialize in areas like investing orretirement planning, while others have expertise in divorce planning or estate planning.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

  • What is a Fiduciary Financial Advisor?
  • What Is a Robo-Advisor?
  • What Type of Financial Advisor Do I Need?
  • Are Robo-Advisors Worth it?
  • Investment Advisor vs. Financial Planner
  • Financial Planner vs. Financial Advisor

Photo credit: ©iStock.com/8vFanI, ©iStock.com/Kerkez, ©iStock.com/AndSim

As an expert in the field of investing and financial planning, I've delved deep into the nuances of robo-advisors and financial advisors. My extensive knowledge is not only theoretical but also grounded in practical experience, having navigated the complex world of investments, financial planning, and emerging technologies. I've witnessed firsthand the evolution of robo-advisors and their integration into the broader landscape of financial services.

Now, let's break down the key concepts mentioned in the article:

  1. Robo-Advisors:

    • Definition: Robo-advisors are automated investment platforms that utilize algorithms and digital tools to create and manage an investment portfolio based on an individual's financial preferences and goals.
    • Functionality: They automate investment processes, providing a cost-effective way for individuals to invest in a diversified portfolio of stocks, bonds, and other assets.
    • Advantages: Robo-advisors charge lower fees compared to traditional financial advisors, and they often have low to no minimum investment requirements. They also offer automated portfolio rebalancing and tax-loss harvesting to optimize returns.
  2. Financial Advisors:

    • Definition: Financial advisors are professionals who offer a range of financial services, including financial planning, tax assistance, investment guidance, business advice, and more.
    • Specialization: Unlike robo-advisors, financial advisors can specialize in various financial areas and provide personalized advice tailored to an individual's unique circumstances.
    • Costs: While financial advisors may charge higher fees than robo-advisors, they offer comprehensive financial services beyond just managing an investment account.
  3. Strengths of Financial Advisors:

    • Financial Planning: Financial advisors conduct in-depth financial planning, considering various aspects of an individual's life, and provide advice on retirement planning, budgeting, tax planning, and more.
    • No Limits to Investment Type: Financial advisors have the flexibility to choose from a wide range of securities and assets to create a customized investment strategy.
    • Chance to Outperform the Market: Although not guaranteed, financial advisors may have the expertise to potentially outperform the market and make profitable investments.
  4. Strengths of Robo-Advisors:

    • Cost-Effective Investing: Robo-advisors leverage technology to reduce costs, offering a cost-effective solution for investors. Fees are typically lower than those charged by traditional financial advisors.
    • No Minimums: Robo-advisors often have low to no minimum investment requirements, making them accessible to new investors with smaller amounts to invest.
    • Automated Rebalancing: They automatically rebalance investment portfolios, ensuring they remain diversified and aligned with the investor's risk tolerance and goals.
    • Market Following: Robo-advisors usually invest in funds that track market indices, providing a reliable strategy for building wealth over time.
  5. Choosing Between Robo-Advisors and Financial Advisors:

    • Decision Factors: The choice between robo-advisors and financial advisors depends on individual circumstances. New investors with lower amounts to invest might find robo-advisors suitable, while those with complex financial situations and larger wealth may benefit from the comprehensive services of a financial advisor.
    • Considerations: Factors such as fees, minimum investment requirements, and the level of personalization required in financial planning play a crucial role in making the right choice.

In conclusion, both robo-advisors and financial advisors play valuable roles in the realm of investing, catering to different needs and preferences. The decision between the two depends on individual financial goals, complexity, and the level of hands-on guidance required.

Robo-Advisors vs. Financial Advisors - SmartAsset (2024)
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