And which one is right for me?
tl;dr: Robo-advisors use computer algorithms to manage your financial portfolio based on preset parameters around risk tolerance, financial need, and type of investments desired. On average, they charge 0.25% to 0.89% of the amount they’re investing for you per year. A Financial Advisor is a person, who is usually trained in financial matters (look for the CFP® designation if you want someone trained in holistic financial planning like investing, insurance, and estate planning). Advisors can be commission-based (meaning they are compensated based on the products they sell you) or fee-based (either a flat fee, hourly fee, or a percentage of the assets you invest with them – average is 1-2%). I’m biased but I think that while there is a time and a place for robo-advisors, if you want a financial partner to help with issues like charitable planning, tax planning, generational wealth building, sandwich generation considerations (caring for children at home and also aging parents) or insurance issues, a human is the better choice. Another benefit to working with an advisor: When life’s big changes come, they already know you and are available to assist through things like death of a loved one, health scares, home purchases, kids going off to college, and more.
pl;ria (perfect length; read it all)
FIRST, LET’S DEFINE EACH
A robo-advisor uses a computer algorithm to manage your financial portfolio. You set your parameters (how risk-averse are you? When do you want to retire? Do you want socially responsible investments?) and then the robo-advisor guides your portfolio along the track and avoids hitting the guardrails. On average, robo-advisor fees range from 25-89 bps, or 0.25-0.89% of assets they help you manage.
Financial advisors are people who specialize in portfolio management, investment tools, and often, in the case of Certified Financial Planners, holistic financial planning. They are people and not algorithms! I’d be remiss to not point out the difference in how different advisors are compensated because it can have a HUGE bearing on the advice they give. Advisors employed by “broker-dealers” (like Schwab, or Wells Fargo) are often commission-based, and are motivated to get you to invest in their products. Not to say their products are bad (full disclosure, I own Schwab mutual funds), but at the end of the day, the commission-based advisor is likely limited in the investment products they offer. There are also fee-based advisors who either charge a flat annual fee, and who will help advise you on financial matters and help you develop your own financial plan, or percentage-based advisors who provide holistic financial planning and counseling and also manage your portfolio, or part of your portfolio, while considering your outside investments. The average percentage-based RIA fee in 2019 was 117 bps, or 1.17% of the money you have under management with them. Finally, there are hourly financial advisors as well, who will charge an hourly fee for the work they do. SmartAsset provides a great breakdown of types of fees and average fees here.
WHICH IS BEST FOR YOU?
It depends on your financial knowledge, and the complexity of your financial planning situation. If you’re a single person saving for retirement and wanting to broaden your portfolio’s investment horizons, a robo-advisor may be good for you. You’re relatively low touch, and just looking to elevate your investments a bit without managing them yourself.
If, however, you have more complex needs and you have financial demands that require prioritization, a financial advisor may be better for you. If you’re trying to figure out how to save for college, how to save for retirement, and how to strategize around your own personal tax situation while also considering the fact that you may be in a situation to care for your parents in the next decade, a financial advisor will be a wonderful partner for you. As a CFP myself, I believe there is something invaluable to having a knowledgeable financial partner who can help you navigate life’s various twists and turns. I personally am able to bring expertise in charitable gift planning and planned giving to my clients. A colleague specializes in liability and insurance complexities. Additionally, my firm has a roster of trusted attorneys, CPAs, health insurance consultants, and access to specialized college funding, long-term care, and social security income analysis programs at the ready. Most financial advisors, whether annual fee-based, hourly fee-based, or percentage fee-based, are able to do an all-hands meeting where they coordinate with your CPA, attorney and any other professionals in your life to ensure everyone is on the same page.
This is a huge oversimplification, but the distinction to me is like calling your health insurance company for help deciphering a bill. Would you rather talk to a human who can interact with you, or an automated system that responds to specific prompts? There is value to both, but different clients will prefer different options.
Another option is a mix. Many people will invest a portion of their money with a financial advisor, while also having outside assets managed with a robo-advisor. This can be a good hybrid option that can avail a financial advisor’s services to you while also keeping a low management fee on a portion of money that you might not need assistance managing.