Which is better for you depends on your personal financial goals and situation. A robo-advisor may be more cost-effective, while a financial advisor provides personalized advice.
Investors look for low-cost investment solutions with solid returns. Robo-advisors, also called online advisors, have risen in popularity in recent years and are a staple in automated investing. With automated investment systems that offer the possibility of returns comparable to managed funds, automated investing can be an attractive option for new and seasoned investors with significant assets.
What’s the difference between a robo-advisor and financial advisor, and how do you know which one is a better fit for your investing needs? Find the key differences and similarities between robo-advisors vs. financial advisors to assess which is right for your financial needs.
Robo-Advisors vs. Financial Advisors: Overview, Pros and Cons
Here is an overview of robo-advisors and financial advisors, including pros and cons, to help guide your decisions.
Robo-Advisors
Robo-advisors vary from firm to firm. Generally, the term robo-advisor refers to an online service that provides automated investment services based on your preferences. Robo-advisors determine your preferences based on a questionnaire you fill out that assesses your risk tolerance and investment goals. A robo-advisor uses advanced computer algorithms and software to build and maintain your investment portfolio.
In some cases, a firm may offer a few preset portfolios based on your risk portfolio. There may be a more personalized selection process or screening in other cases. Robo-advisors use software to not only automatically buy and sell assets but also rebalance your portfolio over time.
Robo-advisors assist with various services, from portfolio creation and automatic rebalancing to tax optimization. Though robo-advisors require little to no supervision, most providers have human advisors available for questions you have along the way. Learn more about whether robo-advisors are worth it.
Pros:
- Low startup cost: Most robo-advisors have low transaction fees and account minimums, letting you get started investing quickly.
- Minimal ongoing costs: Auto-investing companies usually only charge a minimal 0.25%-0.50% annual management fee.
- Quick to open: After completing an initial questionnaire, you can open an account and invest in minutes.
- Easy to manage: Robo-advisors are an automated process. You don’t have to log into your portfolio because the robo-advisor manages it.
- Impersonal and rational: A robo-advisor's sole job is to use algorithms to make rational decisions for your investment portfolio. Because of its impersonal nature, you have less risk of making investment mistakes based on emotions.
Cons:
- One size fits all: Robo-advisors are cheaper than personal advisors because they offer a streamlined one-size-fits-all service package.
- Less flexible: Robo-advisors rely solely on algorithms to make investment decisions, which limits their flexibility in making investment choices.
- Impersonal: Robo-advisors are designed to make rational decisions about building your investments and are not equipped to handle the emotional component of building wealth, like changes in your financial situation or personal life.
Financial Advisors
A financial advisor is an umbrella term for a financial professional who helps you manage your money and investments. Advisors provide tailored advice to help you meet your financial goals. Financial planners are popular financial professionals who specialize in helping you create and meet long-term financial goals.
Most financial advisors specialize in a particular area and hold a series of related licenses overseen by the Financial Industry Regulatory Authority (FINRA). Additionally, many advisors are fiduciaries. A fiduciary means your financial advisor is legally obligated to act in your best interest by the U.S. Securities and Exchange Commission (SEC). Learn more about financial advisors vs. financial planners and find questions to ask a financial advisor here.
Pros:
- Hit goals: Financial advisors help you create and implement strategies to meet your long-term financial goals.
- Expert knowledge: Financial advisors possess deep financial knowledge and keep up with current market research and trends. You can ask questions whenever you need and advisors will offer research-based strategies to help you make better decisions.
- Personalized management: For a fee, someone else invests the time and energy to research the market and manage your portfolio for you, saving you time and (ideally) accelerating financial growth.
Cons:
- Conflicts of interest: Commission-based advisors might not always have your best interests at heart because they earn more income by selling you specific products. To avoid this issue, choose a financial advisor that's a fiduciary.
- Fees versus returns: If you don’t invest a significant amount of money, the fees you pay your advisor may impact your returns.
- Lack of control: A financial advisor acts on your behalf. However, if you prefer to be hands-on, an online alternative that allows you to have more input might be better for you. Likewise, if you want certain screening, such as ESG screening, the financial advisor may or may not be configured to use personalized screening.
Robo-Advisors vs. Financial Advisors: What’s the Difference?
While both robo-advisors and financial advisors can help in your investment strategy, there are significant differences. Here is an overview of the key differences:
| Feature | Robo-Advisor | Financial Advisor |
| Fees | Average of 0.25%-0.50% annual management fee | Varies by fee structure; often 0.25% to 1% per year, a flat fee or hourly rate. Flat annual fees can range from $2,000 to $7,500. |
| Investment options | Automated investment portfolios based on risk profile. | Most investment options are available. Personalized investment advice and financial planning solutions. |
| Personalization | Not personalized; AI or automated investments | Can be customized to your individual needs |
| Minimum deposit | No or a low account minimum | Varies by provider, from $0 to thousands of dollars |
| Management | Managed by a computer | Managed by a person |
Each of these can have a big long-term impact on your long-term investment outlook. Here is how fees, investment options, minimums and management can affect your decision about robo-advisors vs. financial advisors.
Fees
The difference between a 0.25% robo-advisor fee and a 1% financial advisor fee may not seem substantial but think of it in terms of the millions you hope to build over time. For every $100,000, you can reinvest an extra $750, or $7,500 per $1 million each year. Consider total fees and weigh the value with reference to your long-term financial goals.
Financial advisors who charge per hour or a flat annual fee can be even more costly when you're just starting or don't yet have a large portfolio. Average costs range from $2,000 to $7,500. If you don't already have a large portfolio, you can maximize early portfolio growth by focusing on low-fee options with strong historical returns.
Investment Options
Robo-advisors have set investment options based on risk profile and your unique response. Robo-advisors can provide investment guidance and portfolio management but may have limited options. They can be good when starting out or if your situation is not complex.
Financial advisors may be able to offer a more personalized investment experience. This can include the possibility of screening tools for your preferences and access to the latest research or investment opportunities.
Minimum Deposit
You can use a robo-advisor with a small minimum investment, even as little as $10. While some financial advisors have a low account minimum, others only accept clients with a minimum of several thousand dollars.
Management
Robo-advisors are built on passive investing principles with a buy-and-hold strategy. They invest heavily in low-cost funds linked to a preset mix of investments like the S&P 500 index. These funds aim to match whole market gains over time, which have shown strong historical returns.
In contrast, a financial advisor can offer highly personalized advice on not only investments but overall financial planning. They can help you with big life decisions and planning like how to buy a house or a car. They can give you advice on whether you are saving enough for retirement or if you can afford an investment property. Many financial advisors also have access to specialized investment software to track investment opportunities and potentially help you generate greater returns.
Robo-Advisors vs. Financial Advisors: Choosing the Right Type of Advisor
Both robo-advisors and financial advisors offer opportunities to build asset value. Robo-advisors shine in low-cost, set-it-and-leave-it investment options. You have limited personalization options, but enough for many investors. On the other hand, financial advisors stand out in the comprehensive services they offer. Here is an overview.
Who Should Use a Robo-Advisor?
Robo-advisors are an ideal tool for helping you meet a single investment goal. Services offered by a robo-advisor, such as automated portfolio rebalancing, can help you stay on track to meet individual goals at a lower cost than a personal advisor.
A robo-advisor is right for you if:
- You don’t mind limited human interaction: Robo-advisors manage your portfolio for you online, eliminating the need for human assistance.
- You have limited time: Automated services offered by robo-advisors reduce the time and energy you would spend managing your portfolio.
- You have a simple investing goal: If your needs are straightforward or singular, you may not need the hand-holding approach offered by a financial advisor to meet them.
- You want to reduce costs: If the costs of a financial advisor are higher than you want or can spend, you may want to choose a robo-advisor to manage your account. You will still have expert assistance making investments via the robo-advisor algorithms but at a more affordable price.
Who Should Use a Financial Advisor?
If your main goal is to improve your financial situation, a financial advisor’s services may be a good fit. Financial advisors help you plan for the future in many ways. They may assist you with making a budget to manage your debt, from estate planning to retirement planning.
A financial advisor is right for you if:
- You prefer human connection: If you’re an investor who needs personal support or value having a familiar voice advising you, then a financial advisor is a better fit for you.
- You have multiple accounts: The holistic services offered by a financial advisor are more suitable for managing multiple accounts, particularly if you need to coordinate company or retirement accounts.
- You require a tailored approach: You pay more for a financial advisor’s services but are guaranteed an approach specifically tailored to your financial situation and needs.
Working with a financial advisor can help you make better decisions, create strategic, long-term plans and improve your financial health. Before working with a financial advisor, it is important to determine your financial goals so you can discuss the advisor’s qualifications and experience in that area. Use this list of questions to help you decide if an advisor’s services fit your needs. Find the differences between a financial advisor and an investment advisor.
How to Find a Robo-Advisor
Robo-advisors have a place in many portfolios. Find some of Benzinga's best robo-advisors here:
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How to Find a Financial Advisor
The best financial advisors have a strong reputation and act as fiduciaries. Find the best financial advisors here:
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Do You Need a Robo-Advisor vs. a Financial Advisor?
For many investors, especially those who choose a long-term strategy with low-cost index funds, a robo-advisor offers the greatest value with minimum costs. But if you need personalized financial planning advice or comprehensive, complex financial services, a financial planner with fiduciary responsibility can offer valuable insights to build your complete financial strategy.
Before deciding who — or what software — you want to handle your investments, make sure that you have determined your financial goals and done research to see whether the services offered by an online advisor vs. a personal advisor are a better fit for your investing needs. Ready to check out the best options? Find the best robo-advisors or online financial advisors. You can also learn more about the differences between a fiduciary vs. a financial advisor or try out the best financial planning software.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.