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 portfolios | Minimum investment | Annual percentage or fee | |
|---|---|---|---|
| Vanguard | Includes a personal human adviser for the best of both worlds | $50,000 | 0.30% |
| Charles Schwab | Investor ratio | $0 | 0% |
| Betterment | Add-on human adviser option | $10 | 0.25% |
| Wealthfront | Advanced Indexing for accounts of $500,000+ | $500 | 0.25% |
| Assets management human adviser | Human management | $0 | 1.25% to 1.75% |
| Fee-only human adviser | Human management | Varies | $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
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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.
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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
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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 an expert in financial planning and investment strategies, I can provide a comprehensive understanding of the concepts discussed in the article "Robo advisor vs. financial adviser: What’s the difference?" The key distinction lies in the comparison between robo-advisors and human financial advisers.
Robo-Advisors:
Robo-advisors are fully automated computer algorithms designed to trade and balance portfolios on behalf of investors. They operate based on preset parameters such as financial goals and risk tolerance.
Benefits:
- Minimal human error: Robo-advisors lack emotional responses, avoiding panic selling or impulse buying.
- Lower fees: Automation allows for reduced costs compared to human advisers.
- No awkwardness: Interaction is purely algorithmic, eliminating personal conflicts.
Drawbacks:
- Lack of personalization: Automated advisers cannot understand individual preferences or sit down for discussions.
- Inability to handle complex portfolios: Not suitable for large, intricate investment portfolios.
Financial Advisers:
Human financial advisers provide personalized financial planning services, including investment advice, debt management, budgeting, tax management, and estate planning.
Benefits:
- Comprehensive advice: Beyond investments, financial advisers assist with various financial responsibilities.
- Time and money savings: Advisers can save time and money, especially for those unfamiliar with investing or tax management.
- Strategy creation: They help formulate long-term financial strategies for retirement or education plans.
Drawbacks:
- Costs: Financial advisers often charge fees based on a percentage of the portfolio or flat fees for management and consultations.
- Manual portfolio adjustments: Human advisers require time and discussions to rebalance portfolios.
Fees:
Fees for both robo-advisors and human advisers vary based on the company and can include percentage-based fees, annual or initial investment fees.
Choosing Between Robo-Advisors and Financial Advisers:
- Robo-advisors are suitable for basic portfolios on a budget, with lower fees.
- Financial advisers are better for larger portfolios, complex planning, and personalized advice.
- A combination of both may be advantageous as portfolios grow and financial goals diversify.
Frequently Asked Questions:
- Fees depend on the company, including management fees and annual fees for various funds.
- Automated advisers can manage simple financial accounts like 401(k)s, IRAs, index funds, mutual funds, and ETFs.
- Financial advisers are preferable for six-figure portfolios or complex financial planning.
In conclusion, the choice between robo-advisors and financial advisers depends on individual preferences, portfolio size, and the complexity of financial goals. It's essential to consider the pros and cons of each option to make an informed decision tailored to specific financial needs.
