Robo-advisor vs. financial adviser: What’s the difference?
The main difference between robo-advisors and financial advisers is that the first is a fully automated computer algorithm that trades and balances your portfolio on your behalf, while the latter is a person who helps you organize your finances from investments to retirement and children’s education plans.
Robo-advisors cost less than financial advisers, mostly because they’re automated and can perform only one task: to automate investment strategies. All you have to do is set up specific parameters, such as your financial goals and risk, and the algorithm will allocate your funds accordingly.
Financial advisers, on the other hand, can provide tailored financial plans for your situation. On top of investment advice, they can provide services such as debt management, budgeting, tax management and estate planning.
Benefits and drawbacks of robo-advisors
Minimal human error. Forget panic selling or impulse buying — robo-advisors lack messy human emotions that could interfere with long-term financial growth.
Lower fees. The cost of an automated adviser is 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 adviser, you’ll appreciate this benefit.
Automated advisers can’t get to know you. Even the most sophisticated computer algorithm can’t sit down with you and explain things to you.
Robo-advisors can’t handle complex portfolios. These advisers aren’t best for large, complicated portfolios. The rule of thumb is that assets of 6 figures or more need the human touch.
Benefits and drawbacks of financial advisors
Advice beyond investment. Financial advisers can help you with your debt management, budgeting, spending habits and other financial responsibilities.
Can save you time and money. If you’re unfamiliar with some aspects of investing or tax management, hiring the right adviser can save you time and money.
Create a strategy. Financial advisers can help you create a long-term financial strategy for your retirement or children’s education plans.
Cost. Most advisers charge a fee equal to a percentage of your portfolio each year, typically between 1% and 2%. Consultations typically cost a flat fee per hour, often ranging from $150 to $350.
Can’t automatically rebalance your portfolio. Financial advisers require time and discussions to manually adjust your portfolio.
Robo-advisor vs. financial adviser: Fees
Fees for using a robo-advisor or human adviser vary based on the company you go with — and even vary among human advisers.
Top-level private advisers, for example, tend to charge a lot more than beginning or standard firm advisers. Some companies charge fees that reflect a percentage of your assets, while others may impose an annual or initial investment fee.
Still, robo-advisors are typically more affordable than human advisers. Here’s what you’ll pay for automated advisers through big-name providers.
Robo-advisor vs. financial adviser: Which one should I choose?
Robo-advisors work well for basic portfolios that aren’t overly complex. Robo-advisors are also helpful if you’re on a budget, typically offering lower fees than human advising services.
But if you have a sizable investment, complex investment goals or simply prefer to do business face to face, a human advisor might be a better fit. Financial advisors are more flexible and adaptive than robo-advisors, and they can help you with various financial goals. So if your long-term financial goals extend beyond a diversified portfolio, consider a human advisor. Your portfolio’s size should also factor into this decision: If you’ve got assets of six figures or more, a human may be your better bet.
That said, there are situations in which using both a robo- and human advisor may be advantageous. As your portfolio grows, so will your goals. Hedging your bets and splitting your investments between an algorithm-driven service and a human advisor could help diversify your interests.
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Bottom line
Robo-advisors are automated computer algorithms that allocate your funds and constantly rebalance your portfolio.
Financial advisers are humans who help you with your finances from investments to retirement and children’s education plans.
Robo-advisors are typically better suited for smaller portfolios and cost less to operate.
Financial advisers are typically better for larger portfolios and for complex financial planning.
Frequently asked questions
Fees depend on the company or provider. For example, some companies charge a management fee — usually a percentage of your assets — as well as annual fees for mutual, index and exchange-traded funds.
An automated adviser can manage simple financial accounts that include:
RRSPs
TFSAs
Index funds
Mutual funds
Exchange-traded funds
Overall, saying goodbye to a robo-advisor is no different — and possibly less awkward — than firing a human financial adviser.
When you're ready to part ways with your robot, talk to a representative with your provider to manage your affairs. You might want to upgrade your account to a hybrid human-robo management system, switch to a solely person-managed account or transfer to another company.
If you have a 6-figure portfolio or if you need a more complex financial plan for your retirement, children's education or even tax and debt management, financial advisers are the better choice.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
Jennifer Gimbel is senior managing editor at Policygenius and a former editor at Finder, specializing in personal finance. Jenn's expertise and analysis has been featured on MediaFeed and other outlets. She holds a BS in arts administration from Wagner College, with minors in economics and journalism.
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