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Humans vs. robots: Which advisor is better?
Automated advisors are a key player in financial portfolios — but are machines better than people?
Investing is becoming easier and cheaper thanks to invisible programs working behind the scenes to match investors with the best ways to grow their money. These automated bots – called “robo-advisors,” – deliver online financial management services designed to supplement, or take the place of, human financial advisors.
Unlike traditional advisors, who review your financial situation, talk through your goals and customize a portfolio to suit your needs, robo-advisors automatically select investments for you based on computer algorithms programmed with your risk tolerance, financial capability, goals and timeline.
Although the concept of allowing a “robot” to manage your finances might sound a little futuristic, auto advising services can benefit many consumers. Robo-advisors can manage basic portfolios at a much lower cost than people can — and may even pick up on investment trends faster, thanks to specialized technology.
What is a robo-advisor?
A robo-advisor is not actually an advisor at all — nor does it refer to a single entity. Rather, it describes any number of online platforms that track investment trends, follow an algorithm designed for a client’s portfolio preferences and recommend opportunities to save or invest.
Although “robo-advisors” sound like something out of Terminator, there’s nothing made up about these technology-based financial players. Robo-advisors in Canada currently manage around $5.5 billion USD for clients (over $7 billion CAD), and this number is expected to climb dramatically over the next decade.
Who are robo-advisors best for?
Automated advisors are best for basic portfolios that aren’t overly complicated or complex. They are also helpful if you’re on a budget, typically offering lower fees than typical advising services.
If your portfolio includes many components, you have a sizeable investment or you’re looking for individualized, customized options, a human advisor might be a better fit.
How do robo-advisors work?
Because these advisors work via software, you’ll typically fill out a financial questionnaire to help “program” that software with your investment preferences.
Your preferences can include:
- Your personal risk tolerance. You specify whether you’re looking for high-risk investments or prefer lower-risk opportunities.
- Your age and investment timeline. If you’re a 22-year-old college student, you’ll have much different financial needs than, say, a 60-year-old who’s ready to retire.
- Your retirement goals. Aiming to be a millionaire by retirement? Your robo-advisor needs to know to plan how to get you there.
- Your current portfolio information. Folding in your current investments results in a fully informed advisor — and decisions that are more likely to successfully meet your goals.
What are the benefits of a robo-advisor?
Many people value the ease of a robo-advisor’s automation when it comes to managing and growing their investments, among other benefits that include:
- Minimal human error. Leaving a “robot” to manage your money and investments might feel uncomfortable initially. But a lack of unintended errors that come with being human is one of its biggest benefits. There’s no panicking and selling off a stock too early and no messy emotions that can get in the way of long-term financial growth.
- Lower fees. The cost of an automated advisor is typically less than what you’d pay for a human one.
- No awkwardness. If you’ve ever been in the uncomfortable situation of not getting along with your financial advisor, you’ll appreciate this benefit. Turns out, robots don’t mind being fired when it’s not a suitable match.
What are the drawbacks of a robo-advisor?
Because there are 2 sides to every story, there are also potential drawbacks to using a robo-advisor. For example:
- Automated advisors can’t get to know you. Even the most sophisticated computer algorithm is still an algorithm. It can’t sit down with you, it can’t explain things to you and it certainly can’t listen to your dreams about the future.
- Robo-advisors can’t handle complex portfolios. These advisors aren’t best for overly complicated portfolios. The rule of thumb is that assets of 6 figures or more need the human touch.
- Questions may cost you. If you work with a human advisor, it often doesn’t cost you more to actually talk to them. Unless you subscribe hybrid human–robo management, you might have to pay to speak with a real person.
- You might find it difficult to lose control. You’re always in control of your finances technically, but you might not be ready to hand over the reigns of your portfolio to a robot. If you prefer a more hands-on approach to digital guidance, a robo-advisor might not be a great fit.
- You can’t auto manage employer retirement plans. This software can’t do much with retirement plans like RRSPs, so putting any money in a robo-advisor for a plan like that won’t do you much good.
Who offers lower fees?
Fees for using a robo-advisor or human advisor vary based on the company you go with — and even vary among human advisors.
Top-level private advisors, for example, tend to charge a lot more than beginning or standard firm advisors. Some companies charge a fee reflecting a percentage of your assets, while others may impose an annual or initial investment fee.
Still, robo-advisors are typically more affordable than human advisors. Here’s what you’ll pay for automated or semi-automated advisors through big-name providers.
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To manage a basic financial portfolio, a robo-advisor can offer automated management and lower fees. These automated advisors also remove the human elements of error and fear that might hurt long-term financial growth and gain. However, human-managed investments can be more individually customizable and might be more suitable for complex, high-value portfolios.
Many popular robo-advisor platforms offer consumers the option to combine both a robo and human advisor for the best of both worlds. But in the end, choosing one over the other depends on your personal preferences, goals and assets.
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