It’s easier than ever these days to invest in the market and build wealth. Online investing platforms and robo-advisors let you make trades and access investment advice without paying an arm and a leg.
But are robo-advisors better than traditional financial advisors?
Robo-advisors cost less and are more accessible for beginners who don’t have a large portfolio. But working with a human financial planner can result in a more customized financial plan.
Erika Taught Me
- A robo-advisor is a low-cost way to optimize your portfolio and automate investing.
- Financial advisors offer several services, including budgeting, saving, investing, and tax strategies.
- Using a robo-advisor while also working with a financial planner can be a good comprehensive financial strategy.
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What Is a Financial Advisor?
A financial advisor is a trained professional who helps you make important financial decisions.
They provide advice on financial topics such as budgeting, investing, retirement planning, taxes, business accounting, and estate planning. They can give you a tailored approach as your financial needs change over time.
Having a human financial advisor allows you to ask questions or get feedback before you make important financial decisions. Investing can be emotional, especially when the market swings, and an advisor can mitigate any risky moves.
But while financial advisors can be good at helping you create a broad financial strategy, they aren’t perfect. Financial advisors may inject their own biases into the advice they give you.
If an advisor is not a fiduciary, they may also have a financial incentive to steer you in the wrong direction, by earning commissions on certain products — even if you don’t need them.
READ MORE: Do You Need a Financial Planner?
Types of financial advisors
Financial advisors include:
- Personal finance coach
- Certified financial planner
- Certified public accountant
- Investment advisor
- Broker
- Wealth manager
- Chartered financial consultant
- Tax attorney
- Estate planner
Some financial advisors (like CFPs) can help you develop new financial strategies as your life changes. For example, they can advise you on saving for a down payment or diversifying your retirement portfolio.
Other financial advisors are experts in their field. CPAs and estate planning attorneys, for example, can provide very specific tax advice to help you structure a business or set up a trust.
Finding a financial advisor
Financial advisors can work within institutions or with clients one-on-one. Brokerage firms like Charles Schwab, Fidelity, and Vanguard have teams of financial planners.
The cost of working with an advisor can vary based on the service they’re providing.
A financial coach may charge an hourly rate, while an investment advisor may charge a percentage of the assets they manage.
Others may charge a flat rate for completing a task, like filing your taxes, while brokers may earn a commission based on the financial products they successfully sell.
Understanding the fee structure of different types of financial advisors can help you determine whether it makes sense to work with one.
For example, for business owners and freelancers, having a professional accountant can be beneficial come tax season. But for investors with a small portfolio, paying hefty account management fees may eat at your overall returns.
RELATED: How To Set Your Investment Goals
What Is a Robo-Advisor?
A robo-advisor is an advanced algorithm that uses artificial intelligence to make financial decisions for you.
It will take your individual goals and risk tolerance and create a semi-tailored portfolio that meets your needs.
While robo-advisors are becoming increasingly popular, they have their limits.
That’s because robo-advisors are trained on predictable needs rather than individual needs. They can provide a standardized solution that you can tailor to a point, but they can’t provide a personalized solution that considers all the complexities of your life.
Most robo-advisors invest in low-cost exchange-traded funds (ETFs) and index funds. This keeps costs down and diversifies your portfolio to mitigate risk.
While robo-advisors can be a good option if you don’t want to take an active role in managing your portfolio, it limits opportunities for strategic investing.
Examples of robo-advisors
Robo-advisors are generally designed for new investors who don’t have a lot of experience or investors who want to passively manage their portfolios.
Some popular robo-advisors include:
Using a robo-advisor
For a small fee, a robo-advisor can provide ongoing management, including periodically rebalancing your portfolio or capitalizing on tax-loss harvesting.
The typical robo-advisor fee is around 0.25%. Some platforms may charge a flat fee while others may charge a graduated fee based on your portfolio size.
Robo-advisors tend to be more accessible, especially for investors with small portfolios. Accounts can be opened with a few dollars and don’t come with minimum investment requirements, unlike with some human financial advisors.
Setting up an account is pretty easy and they offer some of the same products you’d find at a brokerage, including IRAs.
There are usually no account minimums and you can set up recurring deposits to your account.
Should You Use a Robo-Advisor or Financial Advisor?
This is a personal decision that depends on your goals, risk tolerance, and how active a role you want to play in managing your money.
The best approach can be a hybrid one that combines personalized financial planning from a human advisor with low-cost investing through a robo-advisor. This allows you to automate your portfolio while still getting human help for complex questions.
A financial advisor can also provide a check against the robo-advisor — and vice versa. The human advisor can evaluate your portfolio’s performance and recommend changes. The robo-advisor can mitigate the risk of human error in your portfolio.
Determine:
- What your financial needs are
- The type of support you want
- How much you have to invest
- How much you want to spend on financial advising services
- How involved you want to be in the process
The good news is you can start with a robo-advisor and add a financial advisor as your portfolio grows or your needs change.
For more tips on managing your investments, check out these episodes of the Erika Taught Me podcast:
- You’ll Want to Fire Your Financial Advisor After Hearing This
- Investing Advice from the Most Powerful Woman on Wall Street
- The Missing Piece in 99% of Financial Advice
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