You've navigated through market fluctuations, tax reforms, and ever-changing investment opportunities. You've also seen firsthand how technology has disrupted how traditional financial advisors operate, particularly with the invention of robo-advisors.
These automated platforms are a great option for clients who are looking to optimize their investment accounts for a low fee and 24/7 availability.
In this article, we’ll discuss the difference between employing robo-advisors vs. human financial advisors and why a hybrid approach may be your best option.
What Exactly Is a Robo-Advisor?
A robo-advisor is an automated platform that uses algorithms to manage your client’s investment portfolios.
If you’re looking for something low-maintenance, a robo-advisor can be one solution. It helps your clients manage their investments on their own.
When your clients sign up for a robo-advisor, they’ll need to fill out a questionnaire to determine their risk tolerance, investment goals, and current financial situation.
Using this data, and its algorithm, the robo-advisor automatically builds and rebalances your investment portfolio based on the answers from this questionnaire.
The computer algorithm generates a diversified investment portfolio that’s determined by the robo-advisor’s underlying investment strategy.
Don’t expect to beat the stock market when you use a robo-advisor. Many platforms use the Modern Portfolio Theory and diversification to optimize your client’s investment portfolios. Robo-advisors lean toward low-cost financial products, such as index funds, mutual funds, and exchange-traded funds (ETFs) to minimize the risks.
On top of rebalancing, other common features you can find in robo-advisor platforms are tax-loss harvesting, goal tracking, and integration with your bank so you can send funds straight to the robo-advisor. This makes robo-advisors the perfect fit for clients who are looking for a more hands-off approach toward their investment decisions.
Employing Robo-Advisors vs. Financial Advisors
Robo-advisor apps are a great option for clients who adopt a passive investing strategy.
Because it’s automated, your clients can get basic investment management at a fraction of the cost. Some platforms have a flat fee, while others take a small percentage—generally at a lower cost than you’d find from a human financial advisor.
On average, a human advisor can charge between 1% to 2% of assets annually. While with robo-advisors—including both the management fee and the expense ratio of your funds—the fee ranges from 0.3 to 0.6 percent of assets annually.
Moreover, your clients often won’t need to have a minimum balance to open an account with a robo-advisor. This lowers the barrier to entry to investing, allowing smaller accounts to invest as well. That said, this varies greatly depending on the platform. Make sure to do your research before deciding which platforms would be the best robo-advisor for your client’s financial situation. For example, you can open a Betterment account without a minimum balance. But the minimum balance for a Wealthfront and Vanguard account is $500 and $3,000 respectively.
Human advisors often require a minimum investment to make the engagement profitable for both sides. Just like with robo-advisors, this varies greatly depending on who you ask—from a few thousand dollars to $100,000 on average. If your clients are consulting advisors specializing in wealth management and estate planning, they may even require up to $1 million minimum.
Your clients can also manage their investments without human interaction.
They can adjust their portfolio at 2 a.m., and they won’t need to contact you to do it. This 24/7 availability is part of the charm.
For clients who find it difficult to schedule face-to-face meetings with traditional advisors due to work commitments or other time constraints, robo-advisors are a convenient alternative, at least for a portion of their total portfolio. Imagine a client who works night shifts or travels frequently; they can still review their portfolio or make adjustments at any time, right from their smartphone.
At the same time, the support provided by robo-advisors is quite limited. Some provide access to human advisors at an added fee. But for most, the financial support—and emotional support for that matter—is limited to self-serve education programs.
And, while it excels at investment management, you can’t get support for more complex financial needs from a robo-advisor.
While you don’t need in-depth financial knowledge to start investing with robo-advisors, you do need to have a clear understanding of your financial goals and situation. Your clients still need you to do everything else—for example, identifying their financial goals, fixing their money habits, creating a sustainable plan to achieve their goals, and providing more specialized needs depending on their situation.
Finally, the glaring advantage of human advisors is the fact that you’re human. You’re able to understand more nuanced needs—complex financial needs created by unexpected situations—cater to those needs with empathy, provide support to motivate your clients, and make sure they stick to the plan.
A Hybrid Approach to Financial Advising
As the financial landscape evolves, a new trend is emerging: the hybrid approach.
This model combines the best of both worlds—robo-advisory technology and human expertise. Employing robo-advisors frees you up to take care of the more complicated needs your clients might have.
The robo-advisor component provides data-driven insights that can optimize portfolio performance. These algorithms can quickly analyze market trends and adjust investment strategies accordingly, something that would take a human advisor more time to accomplish.
On the other hand, you can address any questions they might have, such as tax optimization, investment advice, and navigating significant life events like marriage, divorce, or retirement.
Hybrid robo-advisors are usually a bit more expensive than robo-advisors, but you get unlimited access to human advisors so you can ask for investment advice and generic input.
Be cautious, though: It’s advertised as unlimited, but the engagement is vastly different than consulting a human advisor.
Often, complex financial tasks aren’t included in your engagements—your clients will have to look for a human advisor for more personalized advice.
Human-operated advisory services act as a partner to improve clients’ financial lives, whatever they need.
If you also offer management services and suggest investment options as well, you need to be a fiduciary—which automatically lends a degree of trust to your financial services.
As a human advisor, you’ll take the time to get to know a client’s current situation, goals, and preferences so you can create a personalized plan.
Beyond acting as an investment advisor, you can help you with more complex requests as well, such as retirement planning, wealth management, and personal finance planning.
That said, a hybrid model gets your clients the best of both worlds at an affordable rate. They can enjoy the convenience and cost-effectiveness of automated portfolio management while still having the option to consult a human advisor for financial advice.
For example, a client could use the robo-advisor for basic asset allocation and then consult a human advisor to discuss the financial implications of starting a family.
This balanced approach caters to both the emotional and rational aspects of financial decision-making, offering a more comprehensive and nuanced experience.
You can offer your clients a more versatile and adaptive financial planning solution. This model allows you to leverage technological advancements to provide more efficient service while preserving the personalized touch that makes your role as a human advisor invaluable.
Add Advanced Technology to Your Artillery With Asset-Map
While robo-advisors seem like a competitor, in reality, they could be a useful tool in your arsenal. Just like other tools, robo-advisors are something you can use to make sure that your clients get the best possible experience when working with you.
As part of your tech stack, robo-advisors free you up for more valuable tasks like building a relationship with your clients, executing complex strategies, and making sure that your clients are on track with their financial goals.
Add another tool to your arsenal with Asset-Map. Robo-advisors help your clients automatically allocate their assets. Asset-Map helps you get a visual view of your client’s assets.
Get a demo today and see how Asset-Map helps you manage your client’s financial assets, making client conversations that much better.
I bring a wealth of expertise in the field of financial advising and investment strategies, having navigated through market fluctuations, tax reforms, and the evolving landscape of investment opportunities. My firsthand experience extends to witnessing the impact of technology, particularly the disruptive force of robo-advisors, on the traditional practices of financial advisors.
Now, let's delve into the concepts covered in the article you provided:
Robo-Advisors: A robo-advisor is an automated platform utilizing algorithms to manage investment portfolios. It offers a low-maintenance solution for clients, who fill out a questionnaire to determine risk tolerance, investment goals, and financial situation. The robo-advisor then builds and rebalances the investment portfolio based on this data, typically leaning towards low-cost financial products like index funds, mutual funds, and ETFs.
Robo-Advisors vs. Financial Advisors: Robo-advisors are suitable for clients adopting a passive investing strategy, providing basic investment management at a lower cost compared to human financial advisors. The fees for robo-advisors range from 0.3 to 0.6 percent of assets annually, while human advisors may charge between 1% to 2%. Robo-advisors offer 24/7 availability, no minimum balance requirements (depending on the platform), and the ability for clients to manage their investments without human interaction. However, their support is limited, and they may not address more complex financial needs.
Hybrid Approach to Financial Advising: The hybrid model combines robo-advisory technology with human expertise. This approach allows robo-advisors to handle data-driven insights and optimize portfolio performance, while human advisors address more complex needs like tax optimization, investment advice, and navigating significant life events. Although a bit more expensive, hybrid robo-advisors offer unlimited access to human advisors, providing a balanced approach that caters to both emotional and rational aspects of financial decision-making.
Role of Human Advisors: Human advisors bring a personalized touch to financial planning, understanding clients' current situations, goals, and preferences. They can offer services beyond investment advice, including retirement planning, wealth management, and personal finance planning. The fiduciary responsibility adds a level of trust to their services. The hybrid model allows clients to enjoy the convenience of automated portfolio management while still having the option to consult a human advisor for more personalized financial advice.
Asset-Map as a Tool: The article suggests using robo-advisors as a tool in the financial advisor's arsenal, freeing up time for more valuable tasks like building relationships with clients and executing complex strategies. Asset-Map is introduced as another tool that provides a visual view of a client's assets, enhancing the overall client experience.
In conclusion, the article advocates for a balanced approach, combining the efficiency of robo-advisors with the personalized touch and expertise of human financial advisors to offer clients a more comprehensive and nuanced financial planning experience.
