Robo Advisors vs. Financial Advisors: Which is Best?
Updated on Nov 02 2018
The 21st century brings change to just about every aspect of life, including the financial marketplace. Robo advisors vs the traditional financial advisors are one such change and, like anything, you need to be diligent to choose the right advisor for the right situation.
Robo advisors are fully automated online investment platforms and offer an alternative financial advisor option for investors. Robo advisors are not perfect for all circumstances, though, so it’s important to educate yourself on what type of advisor makes sense for a given scenario.
Choosing a financial advisor is not a one-size-fits-all situation. Here’s how to tell when a robo advisor or traditional investment advisor is the better choice for your unique needs:
When to Use a Robo Advisor
Robo advisors work well in the following investment situations:
1. When the Investment Fees Impact Your Performance
Investment fees can affect your investment performance over time. Typically, investment advisors charge from 1% to 3% of the value of the portfolio, and robo advisors charge less than 1%, and sometimes as low as 0.15% yearly. If you feel comfortable enough with the investment allocations available in the robo advisor portfolio, a robo advisor may help you save money in fees.
2. When You Don’t Need Direct and Personal Contact
A traditional advisor can offer peace of mind when it comes to meeting and having personal contact. If you are comfortable letting your robo advisor manage the investments with little or no contact from you, a robo advisor may be a good fit. Keep in mind that you won’t have a human advisor to talk to if the stock market crashes, which is when most people want to speak to an advisor or broker directly.
3. When You Don’t Meet the Minimum Requirements for a Traditional Advisor
Many traditional investment advisors have an account minimum balance requirement. For example, you have to have at least $200,000 in your portfolio before many will work with you. Most financial advisors also have minimum balance requirements. Robo advisors, on the other hand provide professional investment management services with as little as $5,000, and sometimes even no minimum balance. For this reason, robo advisors have become popular with new and young investors.
4. You’re Willing to Hand Over Investment Control
A robo investing platform handles all your investment activities. You fund your account and the robo advisor handles the investment side. If you desire more open communication, a robo advisor may not be ideal.
When to Use an Advisor
Many people still prefer traditional investment advisors, even though robo advisors are growing in popularity. Here’s when an investment advisor may be right for you:
1. You Prefer Human Contact
If you don’t feel comfortable handing over your investments to a robo advisor platform because you prefer direct human interaction, a traditional investment advisor is probably right for you. In addition to managing your investment portfolio, benefits that come from a traditional advisor include being available to discuss your questions and concerns as often as you’d like.
2. You Aren’t Comfortable Transacting Business Online
Many people are not comfortable conducting all business online. All investments and business communications with robo advisors are on the web, so it’s important to be okay with this form of business.
3. You Want More Control Over Your Investments
Robo advisors are hands-off, which can be limiting if you prefer more control and interaction with your advisor. Your investment portfolio is based on an online questionnaire to determine your risk tolerance. You will not be able to customize your porfolio or hold individual stocks.
4. You Disagree with the Investment Allocation Robo Advisors Use
Robo advisor allocations are fully automated and don’t offer a lot of flexibility. Your portfolio will be assigned an asset allocation based on the risk assigned during your initial questionnaire, and then you will have little flexibillity or control to change the portfolio.
5. The Majority of Your Money is in an Employee-Sponsored Retirement Plan
Employer-sponsored retirement plans are directly managed by an investment trustee, so you cannot put the assets under the control of a robo advisor. So, your 401k or other sponsored plans will be separate from your portfolio managed by the robo advisor, which is not always ideal for big-picture portfolio management. If most of your investment funds are through your employee-sponsored retirement plan, a robo advisor may not be ideal for you.
Choose the Financial Advisor That Works Best for You
Robo advisors have benefits, but don’t work in every situation. It’s important to assess which type of advisor works best for you individual investing needs. Since investing is a long-term committment, it’s important to choose the option that will not only give you peace of mind, but will also help shape your financial success.
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