Robo-Advisors vs. Financial Advisors

A robo-advisor is an automated, low-cost alternative to a human financial advisor. Essentially, it’s a bot that leverages sophisticated computer algorithms to manage your investments.

It does so by gathering foundational information from you via an online questionnaire. This informs the robo-advisor of your investment objectives and tolerance for risk.

Then, it uses the information to establish a customized investment strategy for you. Typically, the strategy will reflect one of many predefined asset allocation profiles, which are based on an assortment of passive, fund-style investment vehicles.

Robo-advisors can be a great way to manage your investments in a passive, low-cost and highly automated manner. However, investment management is currently the extent of the robo-advisory service offering.

Conversely, the best human financial advisors offer a full gamut of financial services, including guidance on budgeting, banking, managing debt, optimizing insurance coverages, minimizing tax burdens, planning for retirement, managing investments and structuring appropriate legal frameworks or estate plans.

Generally, a robo-advisor is best for individuals that are comfortable with non-human interactions and have minimal need for financial guidance beyond investment management. Oftentimes, this relates to younger individuals with minimal wealth and fairly uncomplicated lifestyles. It also relates to financially savvy individuals that want some low-cost help with their investments.

When shopping for a good robo-advisor, look for well-established firms with substantial assets under management (AUM) and low management fees. Generally, this means AUM of at least $20 billion and a baseline management fee of approximately 0.20% to 0.45%.

A full-service financial advisor is superior to a robo-advisor when you want human involvement or need guidance for more complicated situations.

Full-service advisors are more expensive than robo-advisors, but the diversity of their service offerings can help you significantly improve your financial position. A competent financial advisor can help you establish a comprehensive financial plan that reflects consideration for your current situation and your retirement goals.

The key is to choose a highly trusted and competent advisor.

There are lots of competent financial advisors in the market, but there are also many unscrupulous ones. A great way to sift through the landscape is via the CFP® Board, a non-profit organization that sets and enforces standards for the widely respected Certified Financial Planner™ (CFP®) professional certification. Unlike some financial advisors, all CFP® professionals are held to a strict standard of fiduciary duty.

It’s best to find a few CFP® professionals nearby and interview them. In doing so, be sure to focus on those that charge a competitive fee. Usually, this takes the form of a “fee-only arrangement” based on the percentage of assets under advisory. As a general rule-of-thumb, you can anticipate an advisory fee of 1% on assets of $1 million or less, but you should expect an increasingly favorable rate for larger portfolios.

Beyond the fee structure, be sure to consider the demeanor of the financial advisors you meet. The best advisors are patient and empathetic with an inclination to explain and teach. They exude passion and are truly concerned about their clients.

Ultimately, your assessment should be based on as much objective information as possible, but the value of “going with your gut” cannot be understated. Your instincts matter, and an advisory relationship should feel right. You’ve worked way too hard to accumulate your money, and anyone you trust with it needs to make you feel understood, well-informed and confident. Be sure to find an advisor that makes you feel comfortable.

Editor Samantha Connell contributed to this article.