Robo advisor vs. financial advisor: Which is the best fit for you?
May 5, 2022
7 min read
How do you prefer to handle your money? You probably know intuitively based on how you manage your everyday activities. Preferring to call and order pizza versus whipping out your phone for your favorite delivery app might give you a pretty good indication that you prefer a more manual process to automated.
That manual versus automatic distinction can be applied to robo advisors and financial advisors, too. Both provide investment advice, but a robo advisor is algorithm-based with minimal human interaction, while a financial advisor offers the opportunity for one-on-one human consultation for more holistic investment management.
Let’s dig into the differences between robo and financial advisors and how someone might pick between the two.
What is the difference between a robo advisor and a financial advisor?
A robo advisor is a computer-based service that uses an algorithm (monitored by a behind-the-scenes human advisor) that determines your investment makeup based on your simplified personal financial profile — often tied to a particular investment objective or time frame you’ve selected.
A financial advisor is a licensed human who helps manage your finances based on your in-depth personal financial profile, which likely accounts for a more nuanced timeline with multiple goals. Using a robo advisor usually costs less than working with an investment advisor, since the latter provides you with personal time, knowledge and insight.
What is a robo advisor? Robo advisors provide automated portfolio recommendations based on a simplified personal financial profile. It might work like this: You complete a brief questionnaire, and the algorithm assesses your risk tolerance and investment time horizon. While the algorithm does most of the heavy lifting, there are also licensed advisors monitoring the program — you just don’t interact with them.
Using your profile, the robo advisor will invest in a diversified portfolio of funds — a practice called asset allocation. Your robo advisor will manage your money by automatically adjusting your portfolio to align with the investment objective you selected when you opened the account or according to any adjustments you make from time to time.
Benefits of a robo advisor
Are robo advisors worth it? Let's look at what robo advisors have to offer.
They invest your money based on your input. A robo advisor will only invest your money based on what you’ve entered into your personal financial profile (for instance, your goals, timeline and risk tolerance).
Robo advisors cost less. This is because they’re automated via algorithm, requiring less human attention.
You can invest automatically. Robo advisors also offer automated deposits and specialty tracking and reporting. Some may also offer tax-loss harvesting, which involves selling securities at a loss to reduce capital gains and the associated taxes.
It won’t cost you much to get started. Most robo advisors have a low minimum investment amount, often $500 or less, sometimes even $0.
Cons of a robo advisor
Let's take a look at the cons next:
Less flexibility. You likely have multiple investment goals — for example, you might be saving for college, paying alimony and child support, saving for retirement, and paying for a parent’s funeral all during the span of five years. All these considerations can require a more nuanced investment approach, which you might better find in a human advisor, who could give you more comprehensive advice at every stage in the game. A robo advisor can’t manage every twist and turn of your financial path. When you find your financial life’s becoming more complex, you may benefit from a financial advisor more than a robo advisor.
Limited investment options. Robo advisors are typically designed to offer a few types of portfolios based on simplified investment objectives, Being tied to a certain portfolio type limits the amount of personalization you can achieve within the portfolio.
Costs of robo advisors
Robo advisors typically cost about 0.25% annually of your total investment amount, though that depends on your brokerage.
In other words, let's say you invest $10,000. You'll pay 0.25%, or $25 per year. Your yearly fee typically grows as your investment portfolio increases. If you invest $100,000, the fee turns into $250 per year, whereas a $1 million portfolio adds up to $2,500 in fees per year.
Ally Invest's cash enhanced Robo Portfolio doesn't charge advisory fees, annual charges or rebalancing fees and costs $100 to get started.
Who should use a robo advisor?
Anyone can choose to use a robo advisor, but they may have more appeal to the hands-off or even beginner investor due to the low fees, easy-to-use technology, low entry point and ease of use.
Financial advisors, sometimes called wealth advisors, provide wealth management services for clients. A financial advisor typically offers general personal finance guidance, executes trades for clients and helps clients map out goals and planning. Financial advisors often have credentials that signal their expertise, including certified financial planner (CFP), chartered financial analyst (CFA) or personal financial specialist (PFS).
Benefits of financial advisors
Financial advisors can offer numerous benefits, including the following:
A financial advisor can help you create an investment strategy. Financial advisors can work with you to come up with a personalized investment strategy that prioritizes both your short-term and long-term goals and can be tailored to your needs. Some advisory services, like Ally Invest Personal Advice, will also advise you on your total wealth — meaning, the advisor will look at your full picture, not just the assets held by the firm.
They can help you minimize taxes. A financial advisor can help you build an investment strategy that may reduce your tax burden.
Financial advisors can help you avoid emotional decisions. Your financial advisor can help you through a volatile market or when your portfolio is not doing its best because they understand that, beyond just financial skill, building wealth is about navigating the emotions that are often tied to money management.
Drawbacks of financial advisors
On the other hand, you can find a few cons related to working with a financial advisor:
You’ll pay more for a financial advisor. The one-on-one experience, expertise, insight and time that a financial advisor offers will cost more than the automated advice of a robo advisor.
You could have trouble finding the right fit. It might take some time to find the right financial advisor for your needs. Quick tip: Look for a personality match and a fee-only fiduciary financial advisor.
The average financial advisor charges 1% of all assets managed, but that often changes based on the amount of assets under management. In general, the more you have under your financial advisor's management, the less you'll pay.
You may find that certain advisors require a high amount of money to invest to get started — some firms start at $1 million for a comprehensive wealth management service. But shop around and see what you find. With Ally Invest Personal Advice, you can begin working with a dedicated advisor at $100,000 in managed assets.
Who should use a financial advisor?
Robo advisor vs. human advisor? Anyone who prefers to sit down with an individual to guide them may want to choose a financial advisor over a robo advisor. But take a good look at your financial goals and think about what you’re looking for in your wealth management. It doesn’t hurt to look around at the financial advisors out there!
Comparing robo advisors vs. financial advisors
Which type of advisor makes sense for you? We put together a quick list of five reasons to choose either a robo advisor or financial advisor.
Comparing robo advisors vs. financial advisors
Less expensive than a financial advisor
Offer more comprehensive advice based on your needs
Automate your investments based on an online survey
Can set up automatic investments on your behalf
Best if you want an all-online or all-app approach
Best if you want one-on-one advice from a human being
May offer automatic tax-loss harvesting
Can consider an overall tax-advantaged approach
Low minimums to get started investing
Can help you avoid emotional responses to negative stock market events
So, robo or financial advisor — what's your preference? Just to recap, robo advisors provide automated portfolio management based on your simplified personal financial profile. Financial advisors provide customized portfolio management that extends to helping you map out goals with particular consideration for your in-depth personal financial profile.
Ultimately, you should consider your specific needs, preferences, and whether you feel more comfortable behind the screen or in the company of a financial advisor.