Robo Advisors vs. Financial Advisors: Which One Is Right for Me?

Updated October 22, 2021

Robo advisors are disrupting the investment universe with their low fees and simplicity. New and inexperienced investors no longer need to navigate what is often a complicated investment process. They can simply turn their money over to the robo advisor of their choice, and have their portfolio professionally managed with an automated process.
 
But are robo advisors making traditional financial advisors obsolete?
 
Hardly. For the most part, robo advisors work by mimicking the job of human financial advisors. They do this by automating the process and managing your portfolio through computer algorithms.
 
This isn’t radically different from what financial advisors do, since they also use algorithms. But financial advisors provide investment management and more, all with a human touch. Since that extra attention requires more time and effort, it also comes at a higher cost.
 
Which investment service is right for you, robo advisors or financial advisors, will depend on your personal investment needs and preferences, as well as the fees you’re willing to pay for the service level each provides.

Robo Advisor vs Financial Advisor: What's the Difference?

Robo advisors and financial advisors provide largely the same service, which is investment management. But how they go about it, the level of services provided, and the costs involved are largely what separates the two.

Services Offered: Robo Advisors

As a general rule, robo advisors offer primarily direct investment management. They typically require only a small initial investment, which can range between $500 and $5,000, though a few allow you to open an account with no money at all.
 
You’ll typically complete a short questionnaire that will determine your investment goals, time horizon, and risk tolerance. Based on your answers, a portfolio will be designed for you. Portfolio risk profiles offered will usually be conservative, moderately conservative, moderate, moderately aggressive, or aggressive. The category you fall into will determine the mix of investments your portfolio contains.
 
Robo advisor portfolios are comprised of asset classes that include US and foreign stocks and bonds, and sometimes other asset classes like real estate and natural resources. Each asset class will be represented by a single exchange traded fund (ETF). Since each ETF contains hundreds or even thousands of securities, you’ll have broad exposure to entire market sectors through a single fund.
 
Many robo advisors now provide additional services, including limited financial planning, tax-loss harvesting, and even limited banking services. For example, both Betterment and Wealthfront – two of the most popular robo-advisors – also provide an interest-bearing cash option, complete with FDIC insurance.
 
Robo-advisors also provide automatic reinvestment of dividends, as well as periodic rebalancing. The latter is designed to ensure your portfolio maintains its designated target asset allocations as time passes and asset values change.
 
When you invest through a robo advisor, your primary responsibility – once you’ve opened an account – is to fund it on a regular basis. The robo advisor will provide complete investment management going forward. You’ll be charged a low annual advisory fee, but human contact will be minimal since the process is entirely automated.

Services Offered: Financial Advisors

Financial advisors provide investment management as well. They may even incorporate a significant amount of automated investing in the process. But the primary difference between financial advisors and robo advisors is the human touch. With a financial advisor, sometimes referred to as a traditional or human financial advisor, you’ll be appointed a dedicated advisor who will work with you through every step of the investment process.
 
The financial advisor may even use a very similar investor profile process. They’ll evaluate your investment goals and time horizon, and assess your risk tolerance. This can either be done through an online questionnaire or by a direct interview with a live advisor.
 
One of the advantages in the internet age is you no longer need to go to a financial advisor’s office. Instead, face-to-face meetings can be arranged online. The process may start with an initial online interview, or a series of interviews, followed by periodic reviews conducted either online or by phone.
 
Besides direct human contact, the biggest difference between the two services is financial advisors commonly go beyond pure investment management. That includes all areas of your financial life, such as retirement planning, tax strategies, and planning for your children’s college educations. It’s also not unusual for financial advisors to direct you to other financial professionals, like estate planners, trust attorneys, or CPAs, as part of the financial planning process.
 
As a client, you’ll have the benefit of regular contact with that advisor. That means you’ll be able to contact the advisor to discuss strategies and concerns, or even get explanations and advice during times of personal or financial market turbulence.
 
However, because of the high degree of advisor access, financial advisors typically work with clients who have larger portfolios.

Costs: Robo Advisors

One of the major benefits of working with a robo advisor is low fees. The annual advisory fee isn’t just lower than what a financial advisor typically charges, it’s usually much lower.
 
A typical fee arrangement for robo advisors is between 0.25% and 0.50% of your portfolio balance. For example, if a robo advisor charges 0.25%, you’ll pay just $50 per year to have a $20,000 portfolio managed. However, there are robo-advisors that impose no annual advisory fee.
 
A sampling of annual advisory fees by popular robo advisors:

Robo AdvisorFee Structure
Betterment0.25%, or 0.40% for Betterment Premium ($100,000 minimum)
WealthfrontFree for the first $5,000, then 0.25%
SoFi Automated InvestingNone
M1 FinanceNone
Fidelity GoNo fee up to $9,999; $3 per month on balances between $10,000 and $49,999; 0.35% for balances of $50,000 or more

As always, there are fees associated with the funds a robo advisor invests your money in, known as expense ratios. These are fees charged within the fund – that reduce the annual net return – and are used to pay for management and marketing expenses of the fund.
 
Robo advisors typically limit investment options to low-cost, index-based ETFs. With most funds, expense ratios will be below 0.20% per year, and have only a minimal impact on your investment returns.

Costs: Financial Advisors

The typical fee for a financial advisor is around 1% of your portfolio value. Some advisors will go as high as 1.5% or even more.
 
Investing with a financial advisor may also involve higher investment fees. While robo advisors focus on low-cost, index-based ETFs (which financial advisors may use as well), financial advisors may also use actively managed mutual funds. These often come with higher fees, known as loads or load fees, that can range between 1% and 3% of the money invested in the fund.

When Should You Use a Robo Advisor?

Robo advisors are a good option when:

  • You’re a new investor. Since financial advisors often have high minimum investment requirements, they don’t often work with new investors.

  • You have a small investment to manage. Financial advisors typically require clients to have several hundred thousand dollars to qualify for management. Many robo advisors require $500 or less.

  • You’re only interested in investment management. You have no interest or need for additional services, like financial planning.

  • You prefer to have some of your portfolio managed, but you also want to engage in self-directed investing. Robo advisors like Fidelity Go, Schwab Intelligent Portfolio, and SoFi Automated Investing also offer brokerage services for self-directed investing.

Pros & Cons of a Robo Advisor

Pros:

  • Low-cost management, including low advisory fees and expense ratios.

  • Small initial investment, and often no investment required at all.

  • Cookie-cutter investment plans to accommodate both taxable investment accounts and most types of IRA plans.

  • Digital platforms that can be accessed on a 24/7 basis, on a laptop or mobile device.

  • No investment experience required. The robo advisor handles everything from creating the portfolio to rebalancing it and reinvesting dividends.

  • Perfect investment solution if you find yourself too busy to research investments.

  • Many robo advisors now provide tax-loss harvesting on taxable investment accounts to minimize your investment-generated tax liability.

  • Many robo advisors now offer additional financial services, like limited financial advice and banking services. Some also offer self-directed investment options.

  • Completely removes the necessity of investment decision-making. This can take the emotion out of the investment process, particularly when markets are in a downturn.

Cons:

  • Minimal – and sometimes nonexistent – human contact or advice.

  • Lack of control over investment selection. Your portfolio is created entirely from your answers to a questionnaire, and cannot be modified by you.

  • Limited investment returns. Since robo advisors invest your money in index-based funds that merely track popular investment benchmarks, they’re not designed to outperform the market.

  • No availability of financial planning.

When Should You Use a Financial Advisor?

Financial advisors are a good option when:

  • You have a large investment portfolio to manage. Managing a seven-figure portfolio can easily turn into a part-time job. You may want to turn the job over to a financial advisor.

  • You have a demanding career, a large portfolio, and no time to manage it. A financial advisor can provide comprehensive financial management, using your input as a guide.

  • You’re inexperienced when it comes to investing. Many successful professionals and business owners are good at making money, but know little about investing it. A financial advisor can fill that void.

  • You have a need for comprehensive financial services, like retirement planning, estate planning, and tax planning.

  • You want to talk with a professional about your choices and strategy.

Pros & Cons of a Financial Advisor

Pros:

  • Provides holistic financial management, including financial-, tax-, and retirement-planning, in addition to managing investments.

  • Designed specifically for high net worth individuals.

  • Regular interaction with financial planners, as well as other company staff as needed.

  • Can provide direction for comprehensive financial planning, involving attorneys, CPAs, estate planners, and insurance agents in the process.

  • Provides one-on-one interaction with a dedicated financial advisor, making the arrangement heavily relationship based.

  • Customized investment management, providing broader asset types, including mutual funds and individual securities.

  • Investment advice can extend to employer-sponsored retirement plans, though it will not include direct plan management.

  • A trusted financial advisor can be a calming voice during a time of market turmoil.

Cons:

  • High fees that can be several times the amount charged by robo advisors. There may also be additional fees connected with specific investments.

  • Requires a large initial investment of at least $250,000, and often $500,000 or more.

  • Portfolio management will only be as good as the financial advisor and his or her team and organization.

  • Not all financial advisors are independent. One who is employed by a financial firm may limit or at least favor investments to those provided by the sponsoring organization. For example, a financial advisor associated with an insurance company may favor annuities and investment funds provided by that company, which may charge higher fees and might not be the best investment options for you.

Vanguard Personal Advisor Services – A Happy Medium?

If you’re still undecided between a robo advisor and a financial advisor, there is another option. Vanguard Personal Advisor Services offers a hybrid between the two. You get the benefit of live financial advisors, but with an annual advisory fee that matches those offered by robo advisors.
 
Vanguard Personal Advisor Services is a low-cost advisory service providing you with access to licensed investment advisors. This will not only provide professional portfolio management, but also with advice in building and managing that portfolio. It’s a full financial planning service that will help you determine your risk tolerance, establish investment goals, build your portfolio, and make adjustments.
 
The service even provides the ability to investigate “what if” scenarios. That will give you an opportunity to see what making certain adjustments in your investment plan will have on the end result.

Vanguard Personal Advisor Services Drilldown

Vanguard Personal Advisor Services uses a similar automated investment management style used by other robo advisors. But you’ll also have the benefit of regular consultations with live financial advisors who are available by phone or by email, Monday through Friday, from 8:00 AM to 8:00 PM, Eastern Time.
 
Planning services include retirement and other financial goals, tax optimization, Social Security planning, Roth conversions, estate planning and trust services. They can accommodate individual and joint brokerage accounts; traditional, Roth, rollover and SEP IRAs, trusts, and 401(k) plans held through Vanguard.
 
One of the advantages to working with Vanguard is you’ll get the benefit of a portfolio constructed of Vanguard funds. With an average weighted expense ratio of just 0.09%, these funds offer some of the lowest expense ratios in the industry. That’s the reason why Vanguard funds are so widely used by the robo advisor industry.
 
Vanguard Personal Advisor Services requires a minimum initial investment of $50,000. But the annual advisory fee is just 0.30% on portfolios up to $5 million. Above $5 million, the advisory fee stair steps down, going all the way down to 0.05% for balances over $25 million.

In addition to Vanguard Personal Advisor Services, Sofi Automated Investing also offers a hybrid option, with access to a team of financial advisors and career coaches at no additional cost.

Summary

Though robo advisors have come up fast in the past decade, and are truly disrupting the investment industry, it’s unlikely they’ll ever completely replace traditional financial advisors.
 
Robo advisors and financial advisors fill different investor needs. Robo advisors are generally better suited to small investors and those looking to get started. They provide professional investment management at a low fee.
 
But for higher net worth investors, especially those looking for custom portfolio options, as well as the potential to outperform the market, there will always be a place for financial advisors.
 
You may want to start with a robo advisor early in your investment life, then engage the services of a financial advisor as your wealth grows and your financial needs become more diverse.

RELATED: The 13 Best Robo Advisors

References:
https://investor.vanguard.com/expense-ratio/

 

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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years creating professional financial certification exams and another 20 years of college-level teaching.

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