Can a Robo-Advisor Give You Better Investment Results Than a Human Financial Advisor?

Financial advisor sitting on a char in an office

Technology is advancing rapidly every day. There are driverless cars, AI can write your emails, and robots can invest your money for you. Well, not exactly. A robo-advisor isn’t actually a robot but is a sound way to automate your investment strategy. If you’re curious about robo-advisors and whether they can do more for you than a human financial advisor, you’ve come to the right place. This comprehensive review will break down the pros and benefits of robo-advisors versus their human counterparts.

What is a Robo-Advisor?

A robo-advisor is known as an automated financial advisor that uses algorithms to build, monitor, and rebalance a client’s investment portfolio. When you choose a robo-advisor, the service comes with little human intervention. You simply tell the robo-advisor your investment preferences (low, medium, or high risk) and watch as it manages your portfolio automatically. 

Robo-advisors use best investment practices (diversification and asset allocation) to maintain a healthy portfolio that holds bonds, stocks, cash, and other asset types. 

What Are the Benefits of a Robo-Advisor?

Over the past few years, robo-advisors have grown in popularity. In the United States, the number of people using robo-advisors is expected to reach 21.120 million by 2027. And there’s a reason for this growing demand! Robo-advisors come with many benefits, including:

  • Affordable: Robo-advisor fees are typically substantially lower than those of a human financial advisor. 
  • Hands-Off: A robo-advisor can offer clients peace of mind their accounts are being monitored, reviewed, and rebalanced without their involvement. A financial advisor may want a quarterly meeting with a client to review performance, but that’s unnecessary with a robo-advisor. As a client, you can go in and review when you wish, but you can also know it’s being appropriately managed without worrying about it. 
  • Tailored: Clients set up their robo-advisor accounts based on their risk tolerance. You can feel confident your robo-advisor will always stick to the risk preferences you set up. 
  • Fast: You can typically set up an account with a robo-advisor within 15-20 minutes online and immediately get investing. In comparison, a human financial advisor will require at least one meeting, so starting will take longer. 

What Are the Cons of a Robo-Advisor?

Of course, no system is perfect. Trusting your money with an algorithm system can feel scary, and there are some downsides you should be aware of:

  • Lack of Human Touch: If you’re confused about your investment results or strategy with your robo-advisor, you don’t have anyone to call and ask questions. 
  • Not Suitable for All: If you have an extensive portfolio or a complex financial situation, a robo-advisor is likely not for you. These situations require a human who can understand the nuances of your circumstances and offer a strategic approach. 

What are the Pros of a Human Financial Advisor?

Financial advisor sitting with financial paperwork on the wall behind him

Human financial advisors have been around for decades for a good reason. There are many benefits to using a human financial advisor, including:

  • Full-Picture Investing: A human financial advisor can consider your entire financial situation. For example, you might have to shift priorities one year, and your financial advisor can suggest how your investment strategy should change to meet the new goals. 
  • More Than Investing: Financial advisors can do much more than just set up and manage a portfolio for you. They can also provide suggestions on how to meet your financial goals, educate you on investing, and make recommendations on other financial aspects of your life (such as wills, estate planning, trust funds, life insurance, taxes, and more). 

What are the Cons of Human Financial Advisors?

There are some downsides to using a human financial advisor:

  • Higher Fees: A human financial advisor typically charges much higher fees. Depending on the advisor, it might be one percent of assets as an annual fee, an hourly fee, or an annual lumpsum fee. These fees are in addition to your account’s trading and investing fees. 
  • Minimum Investment: Many financial advisors require a minimum investment amount to work with them. In comparison, robo-advisors tend to have lower or no minimum investment amounts. 
  • Human Error: Financial advisors are human and might make mistakes with your investment portfolio. For example, their personal feelings about a company or industry might cause them to make poor investing decisions. 

Robo-Advisor vs. Human Financial Advisor: Which is Better?

So, is a robo-advisor or a human financial advisor better? The answer is it depends on the individual and their investment goals. 

You should go with a robo-advisor if:

  • You’re new to investing and don’t have a lot to invest yet
  • You have a straightforward financial situation
  • You’re not looking for additional financial advice or guidance
  • You’re keen on saving money on investment fees
  • You want to be relatively hands-off with your investment portfolio

Conversely, you should go with a human financial advisor if:

  • You’re an experienced investor
  • You have a complex financial situation
  • You have a lot to invest
  • You’re looking for additional financial guidance on topics such as wills, taxes, estate planning, and more.
  • You’re comfortable paying higher fees for direct access to someone experienced and knowledgeable in investing.
  • You want regular updates on your investment portfolio performance and the ability to talk to someone about the decisions that were made.

Ultimately, your financial situation likely qualifies you for either the robo-advisor or financial advisor groups. Many new, inexperienced investors might start with a robo-advisor and upgrade to a financial advisor after several years of investing. 

Additionally, remember neither decision is forever! If you’re unsure which to choose, try a robo-advisor. If you don’t like how it’s working for you, switching your accounts to a financial advisor should be relatively straightforward. 

Now, all that’s left to do is to start! 

You might also be interested in: The Basics Of Investing: Stocks, Bonds, And Mutual Funds

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