A Robo-Advisor or a Financial Advisor – Which is Best for You?

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
As technology advances and artificial intelligence and automation seep into every aspect of our daily lives, it was perhaps inevitable that our finances got swept into the equation. Enter the robo-advisor, also known as a digital advisor or automated investment platform, a hands-off investment tool that combines artificial intelligence with automation to increase your wealth with little to no input from you, the investor.
Since the first launch in 2008, robo-advisors have become ubiquitous, with a staggering $1.17 trillion in assets under management in 2023 alone, with an expected $2.02 trillion by 2027. With recent sudden advancements in artificial intelligence, it won’t be surprising if these numbers are surpassed.

How does it work?

After filling in a simple questionnaire to determine your financial goals and risk tolerance, the robo-advisor automatically purchases investments, such as ETFs, mutual funds, or bonds, that, according to its calculations, fit your situation best.
The robo-advisor then manages your investment portfolio as time passes, making adjustments as necessary to stay aligned with your initial risk profile. Some popular examples of robo-advisors include those offered by Betterment, Wealthfront, and Vanguard’s Digital Advisor.

Pros of Robo-Advisors

Accessibility

As I mentioned above, robo-advisors are ubiquitous. Many major brokerage firms have their own robo-advisor managed investment accounts complete with much lower investment minimums, making them an easy choice for those just starting their investment journey.
For example, Betterment requires a minimum of $10 to start investing, while SoFi, requires only a buck. Of course, a buck won’t get you far, but it handily proves the point.

Affordability

Due to their automated nature, robo-advisors often maintain lower fees than traditional advisors, making them a more affordable choice for those on a budget. Whereas it may take a human advisor hours or days to carefully analyze the appropriate funds and asset allocation for your portfolio, a robo-advisor can make the same decision in a matter of seconds.
Like account minimums, robo fees are extremely low. SoFi charges only .25% annually for its automated trading platform, while Vanguard offers a different approach – from $20 to $25 per $10,000 invested depending on your choice of either passive or active investing.

Simplicity

Robo-advisors handily take care of asset allocation and rebalancing, making them an ideal choice for amateurs who know nothing about investing or those who simply don’t have the time to conduct the necessary research.

Reliability

You can set your robo-advisor on autopilot and forget about it. With automatic payroll deductions to fund it, you’ll never have to worry that your portfolio isn’t getting managed or assets aren’t getting purchased. In fact, each time the robo-advisor buys or sells assets, you’ll get an email notifying you of the event along with a new prospectus for new holdings for review at your leisure.

Drawbacks of Robo-Advisors

Lack of Personalization

With a robo-advisor, you forego the one-on-one consultation that accompanies a human advisor. While these digital platforms typically use questionnaires to determine your financial goals and risk tolerance, the resulting advice is based on a standard algorithm, not individual understanding. A robo-advisor cannot thoroughly consider your unique needs, circumstances, or financial nuances. For instance, if you’re going through a significant life change like marriage, illness, divorce, or retirement, the nuanced advice a human advisor can offer would be likely necessary.

Limited Services

While some digital advisors include features like tax-loss harvesting to minimize your tax liability, they typically do not offer comprehensive tax planning that looks not only years ahead but also years behind. They’re unable to strategically coordinate your various investment accounts, Social Security benefits, and potential tax implications in a cohesive manner like a human advisor. Nor can they roll over previous losses over a period of years. These are vitally important aspects of financial management that you don’t receive when relying on an automated investing platform.
Moreover, robo-advisors cannot devise an estate plan involving trusts or other complex legal instruments. Similarly, the absence of a flexible, personalized retirement withdrawal strategy could pose a risk to your financial stability in your golden years.

Lack of Emotional Intelligence

Financial planning isn’t purely about numbers – it’s also about managing emotions. During periods of market volatility, having an advisor who understands your financial situation can provide emotional support and prevent rash decisions. When the market plunges, it’s reassuring to have a human voice on the other end of the line providing guidance and reassurance, something a robo-advisor can’t replicate.

Lack of Adaptability

While robo-advisors are programmed to adapt to market changes, they may not adjust to changes that might affect your financial plan. A financial advisor, on the other hand, can help you navigate these personal changes – be it a career change, a new addition to the family, or a sudden illness – and adjust your financial plan accordingly.
Of course, these aspects may change in the future as artificial intelligence advances, but we’re still quite far from that.

Working with a Financial Advisor

Now let’s compare a robo-advisor with the high-touch, personalized advice of a caring and passionate financial planner.

Personalized Service

A financial advisor isn’t your typical banker. They’re a trusted confidante that seeks to truly get to know not just your finances but you as a person. Only when they truly get to know you can they craft a bespoke financial plan that accounts for details such as your lifestyle, financial obligations, long-term aspirations, family commitments, and even your personality.
This personalized approach extends to assessing risk tolerance and capacity as well. While a robo-advisor uses a simplistic questionnaire, a financial planner discusses your comfort level with different risk scenarios, leading to a portfolio that better matches your financial goals and provides greater peace of mind.

Comprehensive Planning

Financial advisors analyze your financial health from a 360-degree perspective, not limiting themselves to simply managing your investment portfolio.
Heading into retirement is fraught with risks, such as market volatility, inflation, and health concerns. Your investment plan now becomes your provider, and it must be converted from a wealth builder to an income generator while accounting for the above-stated risks. This means a carefully crafted withdrawal plan, an analysis of government benefits, a tax strategy, and an insurance needs analysis.
Additionally, if you’re interested in leaving a legacy, an advisor can assist you with estate planning, ensuring your wealth is distributed according to your wishes after you’re gone. And if you’re a business owner, they can offer guidance on business succession planning, helping to ensure a smooth transition when it’s time to step down.
Finally, an advisor can offer advice on specific financial matters like buying a house, funding a child’s education, or adjusting to significant life events like marriage, divorce, or the loss of a loved one.
Essentially, a financial advisor’s role is to integrate all aspects of your financial life into one coherent plan that serves your short-term and long-term goals. Such a holistic approach is something a robo-advisor simply can’t match – for now, at least.

Cons of Financial Advisors

Higher Costs

Naturally, the kind of personal attention an advisor gives comes at a cost. Crafting a lifelong financial plan is time-consuming, tedious, and complex and requires a wealth of knowledge and experience to execute. But in the end, it’s worth it. What you pay for in higher fees is easily made up for with expert advice that earns you more money faster and saves you more money in the long run.

Less Accessibility

The accessibility of a financial advisor can be a barrier for some individuals, especially those in the early stages of wealth accumulation. Financial advisors often set a minimum investment threshold ranging from thousands to millions of dollars, serving as an entry barrier for those with limited assets to invest.
A minimum investment requirement is primarily due to the intensive, hands-on nature of the service provided by financial advisors. Their personalized, comprehensive wealth management necessitates a significant amount of time and expertise. To make the business model viable and to offer the best possible advice, they often need to limit their services to clients who can invest a substantial sum.
However, it’s important to note that the landscape is changing. Many advisories are recognizing the potential of catering a broader audience by lowering their minimum investment requirements or offering one-time plans.

Which is Best for You?

If you’re looking for low-cost, basic investment management and don’t need a comprehensive financial plan, a robo-advisor may be a suitable choice. Digital advisors are particularly beneficial for those just starting their investing journey that don’t have many pieces to their financial puzzle, such as a family, government benefits, or real estate.
On the other hand, if you have a complex financial situation, or want advice on a broader range of financial matters, a traditional financial advisor may be the better option.

In Conclusion

Choosing between a robo-advisor and a financial advisor isn’t simply about opting for the newest technology or sticking to tradition. Instead, it’s about aligning your choice with your financial goals, the complexity of your situation, and your personal comfort level. Many Americans simply don’t trust a robot to do the job or they may see it as a big fuss, while a financial advisor is just a phone call away.
Yet, in many ways, the decision isn’t either-or. Many Americans find that a combination of robo-advisors and human advisors best meets their needs. You might use a robo-advisor for its affordability and simplicity for managing standard holdings and partner with a financial advisor for planning more complex aspects, such as estate planning.
It’s important to research your options, understand your needs and preferences, and make the decision you feel most comfortable with for your financial future. After all, whether you choose a robo-advisor, a financial advisor, or a blend of both, the most crucial factor is that you’re taking steps to grow your wealth and secure your financial future.
Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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Ken Hargreaves - Wealth ManagerKen Hargreaves - Wealth Manager

Ken Hargreaves
CFP®, AIF®, AWMA®, CRPC®

Founder, Wealth Manager
Shane Klemcke - Wealth ManagerShane Klemcke - Wealth Manager

Shane Klemcke
CRPC®

Wealth Manager