Robo-advisor VS. Financial advisor: which one to choose?

Managing your investments can be a daunting task, especially when the market seems extremely volatile or you’re approaching a major milestone like retirement and you’re afraid of making a mistake. Fortunately, however, you have different options to guide you through your investment journey.

Financial advisors have always been a key asset to wealth management, but robo-advisors have grown in popularity over the years for their hands-off, low-cost approach to managing your investments. Before deciding which route you want to take to help manage these assets, there are a few things to consider about each option.

It is important to note that a financial advisor may be more helpful to your overall financial health, as robo-advisors are only intended to provide investment recommendations, while financial advisors offer a more holistic approach to managing your money. Advisors can provide recommendations on more than just investments, including budgeting, spending, major life events and more.

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What is the difference between a robo-advisor and a financial advisor?

Robo-advisors are essentially software platforms that invest on your behalf. A robo-advisor’s job is to create an investment portfolio for you and then manage it over time so you don’t have to. When you engage a robo-advisor, you’ll typically be asked a few questions, including your age, investment goals, investment time horizon, and overall risk tolerance.

The robo-advisor then uses this information to help decide how your assets should be allocated – for example, whether you hold riskier assets or predominantly conservative assets. As market conditions change or you invest more money, the robo-advisor will automatically adjust your portfolio to align with achieving your goals. This process is called rebalancing.

A financial advisor, on the other hand, is someone who assists clients with specific and immediate financial matters, such as your investments or estate planning. You can work with a financial advisor on a few occasions or you can choose to have an ongoing relationship with them. Typically, you would have meetings with your financial advisor in their office, but if they are not local, you would instead have phone calls or virtual meetings with them.

Costs for a Robo-Advisor vs. Costs for a Financial Advisor

Typically, robo-advisors and financial advisors charge a percentage of total assets under management. However, the two differ in the percentage they each charge. Robo-advisors typically charge between 0.25% and 0.5% of your assets under management per year, while financial advisors typically charge around 1% of your assets under management per year.

You’ll want to do your research to make sure you’re choosing robo-advisors that offer the lowest possible costs and offer the features you need. Wealthfront, for example, only charges 0.25% of your account balance — in other words, you’ll pay $25/year for every $10,000 you’ve invested.

There are many financial advisors who charge a fixed annual fee or even an hourly fee. Also keep in mind that sometimes robo-advisors and financial advisors may require clients to have a specified minimum amount of total assets before they can work together. The minimum will vary, but for some financial advisors, this minimum amount could be as high as $250,000. Ellevest, which is an investment platform for women, has portfolio-specific minimum balances ranging from $1 to $240. Wealthfront’s minimum balance requirement, on the other hand, is $500.

In reality, it’s about matching your financial needs with the fee structure most compatible with your situation.

Advantages and disadvantages of using a robo-advisor

When you sign up to use a robo-advisor like Wealthfront or Betterment, you will be asked a few questions about your financial goals, your investment horizon and your risk tolerance. Over time, your risk tolerance and goals may change, which means you may need to make some adjustments to the assets you invest in.

This is where robo-advisors can really shine. They have the ability to automatically rebalance your portfolio for you so you don’t have to manually change asset allocations – or spend time going back and forth with someone to figure out the best course of action. for it.

At the same time, however, it’s important to keep in mind that a robo-advisor may have a limited view of your financial situation, as they won’t know how your other assets, debts, or other investments come into play. Robo-advisor may also not help you develop a strategy to invest more money to reach your goals faster.

While some robo-advisor platforms may allow you to connect all your financial accounts, personalized advice that takes into account the nuances of your situation may nevertheless be necessary to help you achieve your goals.

Select has ranked the best robo-advisors, taking into account factors such as account minimums, fees, choice of investments, and types of accounts offered (i.e. IRAs and/or taxable brokerage ). Here are some of our top picks:

Improvement

On Betterment’s secure site

  • Minimum deposit and balance

    Deposit and minimum balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, minimum balance of 0 USD; Premium investment requires a minimum balance of $100,000

  • Costs

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has an annual fee of 0.40%

  • Prime

    Up to one year of free management service with qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

  • Investment opportunities

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

wealth front

On the Wealthfront secure site

  • Minimum deposit and balance

    Deposit and minimum balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Costs

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront’s annual management advisory fee is 0.25% of your account balance

  • Prime

  • Investment vehicles

  • Investment opportunities

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial planning for planning college, retirement and buying a home

Ellevest

  • Minimum deposit and balance

    No minimum deposit to start investing and no minimum account balance for the Ellevest Membership advisory service; however, there are wallet-specific minimums (ranging from $1 to around $240)

  • Costs

    Fees may vary depending on the investment vehicle selected. Ellevest Essential subscription costs $1/month (or $12/year), Ellevest Plus costs $5/month (or $54/year) and Ellevest Executive costs $9/month (or $97/year); fund fees vary from 0.05% to 0.10% for all Ellevest Core portfolios and from 0.13% to 0.19% for all Ellevest Impact portfolios

  • Prime

    Use code GOFORGOLD to get $20 when you become a member and start investing (offer expires August 13, 2021)

  • Investment vehicles

  • Investment opportunities

    Stocks, Bonds, ETFs, ESG, Mutual, Alternative and Impact Funds

  • Educational resources

    Online workshops, email courses and video resources

Advantages and disadvantages of using a financial advisor

Unlike robo-advisors, financial advisors have the ability to examine all aspects of your financial life to provide appropriate recommendations and next steps. Your financial life is interconnected, so your debts, your budget, spending habits and other financial responsibilities (like caring for aging parents or paying your child’s school fees) can all affect how much you’re able to invest and how much time you have will take to achieve your investment goals. Robo-advisors do not take these factors into account.

For this reason, it’s helpful to have a human help you determine feasible next steps. Financial advisors will also, of course, consider factors such as your time horizon and risk tolerance when making investment recommendations.

Since financial advisors cannot automatically rebalance your portfolio like a robo-advisor would, you will need to spend time discussing any adjustments with your advisor so they can manually make changes to your portfolio. It’s not too bad, however, as it gives you a chance to try and understand some of the changes.

At the end of the line

Robo-advisors offer the convenience of a hands-off investment management strategy at a lower cost. However, if you prefer more human interaction and need recommendations based on a more nuanced view of your overall financial situation, a financial advisor might be the way to go. In any case, be sure to check the fee structure carefully before agreeing to the services.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

About Troy McMiller

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