Robo-advisors vs. financial advisors: How to decide which is best for you

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Robo-advisors have soared in popularity over the last decade, with the automated investing advisors quickly growing assets under management, many into the billions. But how do they compare with traditional financial advisors?

Perhaps surprisingly, after an initial period of shunning these upstarts, the industry has begun to embrace them, merging traditional financial advice with the automation of robo-advisors.

But each approach has its positives and negatives. Here’s how to decide which is best for you.

Robo-advisor vs. financial advisor: What they do

Let’s take a look at each kind of advisor to see what they do and what advantages they offer to investors.

Robo-advisors

You may be familiar with names such as Betterment and Wealtfront. They’re two of the most popular independent robo-advisors, and they’ve become quite popular over the last 10 years. They’re the ultimate in “do it for me” investing solutions, and you can set them up and go.

Robo-advisor sounds tremendously complex, maybe even a little bit dangerous. After all, it seems risky to entrust your money to a computer program. And that’s really what a robo-advisor is – a computer algorithm that invests your money based on your answers to a few questions, such as when you need the money, your tolerance for risk and how much you have to invest.

Then using good investment practices – such as asset allocation and diversification – the robo-advisor automatically builds you a portfolio to fit your needs using perhaps up to a dozen exchange-traded funds that hold stocks, bonds, cash and potentially other kinds of assets.

Robo-advisors offer a number of benefits for individual investors. They tend to be relatively cheap, charging a management fee of about 0.25 percent of your assets annually, or $25 for every $10,000 invested. That level is basically the industry standard, though some robos offer a higher level of service (such as access to human advisors) for a slightly higher cost.

The funds you’re invested in also charge an expense ratio, a fee paid to the fund management company. Typical funds might charge 0.05 percent to 0.35 percent annually ($5 to $35 for every $10,000 invested). You’ll pay these fees regardless of which robo-advisor you choose.

Adding the two fees together, you might pay around 0.3 to 0.6 percent of your assets annually for a robo. Usually that’s the extent of the fees, and it means you’ll have a pretty clear idea of your costs. All additional services are usually included in the management fee. Many robos offer automated services that would be tough for a human to replicate, such as daily tax-loss harvesting. They may also automatically rebalance your portfolio when it deviates from the preset target allocations.

Another positive is that it’s easy to open a robo-advisor account online. With a few financial details, you can fill out the form and have the account ready to go in about 15 minutes. In fact, most robo-advisors don’t even have a minimum balance to open an account. Many robos allow you to open a standard taxable account, an IRA account or a joint account, among others.

Then you can add money to the account regularly, and the robo-advisor takes care of everything else, distributing your money among the funds. You don’t have to worry about much else.

While independent players such as Betterment, Wealthfront and Ellevest receive a lot of the recognition, larger brokerage firms such as Charles Schwab and even bigger financial firms such as Bank of America’s Merrill and Citibank offer this kind of managed portfolio.

Financial advisors

Financial advisors can run the gamut from glorified sales people paid by a fund management company to fee-only fiduciaries who truly put your interests first. Human financial advisors can give you all kinds of counsel, from the relatively mundane (basic banking) to the highly complex (estate planning and trusts). The skills and expertise vary from advisor to advisor, of course.

A financial advisor does what a robo-advisor is set up to do, but can do so much more. In fact, unless they’re real stock analysts or portfolio managers, they’re likely using the same fundamental tools as a robo-advisor to build your investment portfolio. A good advisor is also well-versed in all the core financial needs that most people likely have – insurance, investing, retirement accounts, banking, wills and basic estate planning, as well as general planning.

As robo-advisors have become more prevalent, human advisors have often become more focused in order to compete. Where human advisors can really excel are the specialized tasks that require detailed expertise – the highly unusual or specific tax advice to help you optimize your situation and other legal advice such as that for estates and trusts.

Some advisors may focus on issues that are specific to certain niches, such as small business owners, dentists or athletes. Then they specialize in the issues that are likely to emerge in those fields. Not only do they provide the investment advice, they also offer other core expertise.

Typically, a human advisor might charge 1 percent of assets as an annual fee, and that’s on top of any other fees you might be paying for ETFs or mutual funds. Or some advisors may charge an hourly fee, while still others — who bill themselves as advisors — charge nothing because they’re paid by a fund company or insurance company, for whom they act largely as a salesperson.

Which type of advisor is better for you?

The type of advisor that is better for you depends on what your financial needs are. For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so – potential savings for you.

Feature Robo-advisor Financial advisor
Cost Percentage of assets managed Percent of assets managed, hourly fee
Scope of service Investing, goal planning Potentially a full range of financial services
Ease of start-up and maintenance Very quick, online only, adjustable at any time May involve initial consultation, meetings over time
Where it excels Tedious and mundane tasks, where automation makes investing easier Tasks that require specialized or unique expertise
Superpower Daily tax-loss harvesting The best advisors motivate you toward your goal

Plus, the ease of starting and managing the account can’t be overstated. It’s all online and easily accessible at any time of the day.

A robo-advisor is also adept at some of the other tasks that a human would find dreadfully tedious, such as daily tax-loss harvesting, which involves the buying and selling of securities potentially day-after-day in order to secure a tax break.

For all such mundane tasks, a robo-advisor is a solid pick. In fact, your human advisor is likely already using some version of a robo-advisor to guide the construction of your portfolio. Now even many huge wealth managers may welcome the freedom offered by investing algorithms because it frees up advisors to focus on specialized services that add more value for clients.

And that’s where the unique skill sets of human advisors come in. If you need anything off the beaten financial path – such as help constructing a trust or how to handle an inherited IRA (where the rules are highly complex and messing up could cost you) – you want to speak with a competent financial advisor with demonstrated expertise in that specialized field.

But another huge advantage of a great human advisor may be more apparent during times of market turmoil such as in 2020. A great advisor keeps you to the long-term plan that makes you money and also helps motivate you to do the right thing, even if you don’t always feel like doing it. However, sometimes it can be hard to find an advisor who has your best interest at heart.

Here’s how to find the right advisor and why you must search out the person who’s going to do right by you, including exactly how to avoid the mistakes that trip up so many investors.

Of course, it’s not an either-or choice. You can use a robo-advisor for your key investing tasks, while you call in an advisor for the specialized or one-off tasks that require expertise. But the key point remains: pick the right type of advisor for the job you need done.

Bottom line

A robo-advisor can be an excellent choice to manage your money, especially as you’re just getting started on your investing journey and your needs are relatively simple and straightforward. As your needs become more complex, it makes a lot of sense to consult a financial advisor who is invested in your own success so that you receive the best advice.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor