Robo-Advisors vs. Human Financial Advisors: Which One Is Best for You

Investing offers several benefits for people who know what they’re doing, but it can be a challenging and intimidating venture for beginners. Economic concepts and investment strategies can sound like a different language for people without investment experience.

Beginners who want to enter the investment space could greatly benefit from some guidance. Robo-advisors and financial advisors provide excellent starting points for new investors who want assistance in their investment decisions.

Read below for an overview of what robo-advisors and human financial advisors can do. Understanding both can help you decide which would work best for you and your financial needs.

What is a robo-advisor?

A robo-advisor is an automated digital platform or brokerage account that provides investment and essential financial planning services to individuals. The “robo-” prefix in the advisor’s name refers to its usage of computer algorithms and programs to make investment decisions and manage investment portfolios.

Automation is a prominent feature of these platforms or accounts, and users often begin by answering a questionnaire to assess their financial goals, risk tolerance, and investment time horizon. The platform then uses this data to create a customized investment plan for the user.

Many of the best robo-advisors allow you to save or invest for specific financial goals simultaneously. They provide sub-portfolios for different asset allocations, such as saving for your retirement fund or home downpayment. Some platforms also include banking services, including savings and cash management accounts.

Robo-advisor platforms, like registered human financial advisors, are regulated or controlled by the Securities and Exchange Commission and must adhere to the obligations of the Advisers Act. The law requires them to have a fiduciary duty toward their client, meaning that robo-advisors should always act in their client’s best interests.

Advantages of robo-advisors

In today’s rapidly evolving financial landscape, robo-advisors have emerged as an accessible solution for individuals seeking to manage their investments and financial goals. They remain a popular option for beginner and experienced investors due to their many advantages.

Here are some of the main benefits of working with a robo-advisor in your investment journey:

• Ease of opening an account. Robo-advisors have simplified the account setup process, eliminating the need for in-person meetings and extensive paperwork. Instead of an in-person interview, users could simply answer a questionnaire during the signup process.

  
  

  This, alongside its many algorithmic and automated features, provides users with a tailored investment strategy without the traditional barriers of bureaucracy. As a result, investing and asset diversification become more accessible to a larger audience.

  
  

• Lower fees than financial advisors. One of the most prominent advantages of robo-advisors is their cost-effectiveness. Their fee structures are typically more affordable than those of traditional human financial advisors.

  
  

  While traditional advisors often charge a percentage of assets under management (AUM) or hourly fees, robo-advisors usually charge low fees. Additionally, the investments in a robo-advisor’s portfolio are often low-cost exchange-traded funds (ETFs), which help keep expenses down.

  
  

• Hands-off management. Automation is a key feature of robo-advisors. They offer a hands-off approach to investment management. Once you set up your account and establish your investment strategies and preferences, you’re good to go.

  
  

  The platform then handles the day-to-day portfolio management tasks, such as asset allocation and rebalancing.

  
  

  This approach is particularly appealing to investors who prefer not to be actively involved in the decision-making process. It can also be helpful for beginners who aren’t as equipped or knowledgeable to perform these tasks by themselves.

  
  

• 24/7 access. Due to their electronic and online nature, robo-advisors provide round-the-clock access to your investment portfolio and financial information.

  
  

  You can monitor your progress, view your portfolio’s performance, and make adjustments at any time. This accessibility ensures that you stay informed and can take action whenever it’s convenient for you, regardless of your location or time zone.

  
  

• Transparency. Transparency is essential in operations involving your money and investments, and robo-advisors have this characteristic. Through the robo-advisor’s platform, clients can access clear and comprehensive reporting on their portfolio performance, fees, and investments.

  
  

  This transparency builds trust and empowers investors to understand their financial decisions better, fostering a sense of control and confidence.

  
  

• Tax efficiency. Many robo-advisors offer tax-efficient strategies, such as tax-loss harvesting, to minimize tax liabilities for investors. Tax-loss harvesting is an investment strategy used to reduce an investor’s tax liability by selling investments that have declined in value.

  
  

  Many robo-advisors automatically sell losing investments and strategically manage capital gains. As a result, these platforms can enhance returns, helping clients keep more of their profits.

Disadvantages of robo-advisors

While robo-advisors have gained popularity for their automated and cost-effective approach to investing, they also come with certain disadvantages. Investors should be aware of these drawbacks to ensure they make educated decisions concerning their investment platforms.

Here are some of the most prominent disadvantages of investing with robo-advisors:

• Lack of personalization. One of the primary disadvantages of robo-advisors is the lack of personalized financial guidance. These platforms rely on algorithms and questionnaires to create investment portfolios, which may not fully capture an individual’s unique financial situation, investment goals, and preferences.

  
  

  Robo-advisors may not fully understand or adequately address complex financial scenarios, tax situations, or specific investment preferences. As a result, they could suggest suboptimal or inappropriate investment strategies.

  
  

• Lack of human interaction. While robo-advisors boast automation as one of their key features, this characteristic also involves a lack of human interaction. The investment decision-making process lacks the personal touch a human financial advisor could provide.

  
  

  This feature can be a disadvantage for individuals who value the personal relationships and guidance provided by traditional human financial advisors. The absence of a human touch can lead to feelings of isolation, especially during market turbulence or significant life events.

  
  

• Lack of financial planning services. While robo-advisors excel in managing simple investment portfolios, they often do not offer comprehensive financial planning services. They aren’t as capable of addressing elements like estate planning, retirement income planning, tax optimization, insurance planning, and other similar aspects.

  
  

  Investors who require comprehensive and holistic financial planning services may find robo-advisors lacking.

  
  

• Security concerns. Like any online platform, robo-advisors come with the risk of cybersecurity threats and data breaches. Robo-advisors can access, store, and transmit sensitive personal and financial data that might become targets for hackers and other malicious parties.

  
  

  It is essential to select a reputable and secure robo-advisor that places a high priority on the security of your data and financial assets.

What is a human financial advisor?

A human financial advisor is a professional who offers financial guidance and advice. They aim to help people make better decisions about their money and achieve financial goals.

Financial advisors provide services to help individuals, families, and companies with nearly every aspect of their financial life. While they can do almost everything a robo-advisor does regarding portfolio management and providing investment advice, they can also do so much more.

Traditional financial advisors can act as a one-stop shop for finances and financial planning. They are your financial planner and perform services such as retirement planning, estate planning, debt management, wealth management, budgeting, cash flow management, etc.

For a financial advisor to work effectively, you need to build a partnership with them. They need to understand your financial needs and goals, your lifestyle, spending habits, current assets and liabilities, and other relevant information.

Upon meeting and discussing these things with them, they can then assess your situation and provide you with valuable financial advice and suggestions. Depending on your needs, you can have them focus solely on your investments or other financial aspects of your life.

If you hire an SEC-registered investment advisor, you can trust that they will adhere to a fiduciary duty to act in your best interests.

“Financial advisor” covers several different job titles. Some financial advisors specialize in one area, while others have more diverse service offerings. Here are some of the basic types of financial advisors you may encounter:

• Investment advisor
• Certified financial planner
• Broker-dealer and broker
• Financial consultant
• Financial coach
• Portfolio, investment and asset manager
• Wealth advisor

Advantages of human financial advisors

Despite the increasing popularity of investment automation tools like robo-advisors, human financial advisors still play a prominent role in managing people’s finances. They continue to offer valuable expertise and support, among many other advantages.

Let’s explore some of the key reasons why individuals and businesses turn to human advisors for their financial planning needs.

• Professional expertise. Human financial advisors bring a wealth of knowledge, experience, and expertise. Many of them undergo extensive training and certification processes. Some hold designations like registered investment advisors, certified financial planners, or chartered financial analysts.

  
  

  This professional expertise enables them to provide informed, up-to-date financial guidance. They use the best accounting software and adhere to industry standards. Experienced financial advisors also accumulate knowledge through years of experience with numerous clients.

  
  

• Personalized guidance. Human advisors offer a high degree of personalization in their advisory services. They take the time to understand their clients’ unique financial situations, goals, and preferences. Their practice often begins with an in-depth consultation to gain sufficient information about their client.

  
  

  This information allows them to create customized financial plans and investment strategies. A traditional financial advisor also offers a human touch that helps clients feel heard and understood.

  
  

• Freedom from financial work. Human advisors take on the responsibility of managing various financial tasks on behalf of their clients. These tasks often include portfolio management, tax planning, real estate planning, and retirement planning, among others.

  
  

  This financial work can be time-consuming and stressful for many clients, especially if they have a lot going on. Hiring a financial advisor can free up a significant portion of time that you can spend addressing other priorities.

  
  

• Encouragement to stick to a strategy. One of the challenges many investors face is staying committed to their financial plan and investment strategy. People can get particularly discouraged during turbulent market periods.

  
  

  Human advisors provide support and encouragement, helping clients stick to their financial goals. Financial advisors also help clients avoid impulsive and unwise decisions based on short-term market fluctuations.

  
  

• Peace of mind. Finding and working with a financial advisor you can trust helps provide peace of mind and a sense of security.

  
  

  Knowing that you have a dedicated professional overseeing your financial well-being can alleviate stress and anxiety related to money matters. This peace of mind is vital when facing complex financial decisions or significant life changes.

  
  

• A holistic view of finances. Financial advisors can do more than handle investment accounts. They take a comprehensive approach to financial planning. They consider various aspects of a client’s financial life, like investments, insurance, estate planning, tax strategies, and retirement planning.

  
  

  This holistic view ensures that all aspects of a client’s financial life align and work together cohesively to achieve long-term goals.

Disadvantages of human financial advisors

Human financial advisors provide valuable expertise and personalized guidance, but like any service, they come with disadvantages. Working with a financial advisor might not be for everyone.

Here are some of the potential drawbacks of traditional financial advisors:

• Higher costs. One of the most significant disadvantages of human financial advisors is the cost. Financial advisors charge fees for their services, such as management fees, flat fees, hourly fees, or commissions on financial products they recommend.

  
  

  These fees can add up over time and potentially reduce the overall returns on your investments. It’s essential to assess the benefits you might get from working with a financial advisor to see if they are worth the cost, considering your situation.

  
  

• Potential conflict of interest. Human financial advisors may have conflicts of interest, particularly when they earn commissions or fees based on the financial products they recommend.

  
  

  These commissions or benefits can incentivize advisors to prioritize products that generate higher fees for themselves. Some might recommend investments or financial products that benefit them even if they may not be the best choice for the client’s financial goals.

  
  

  While many advisors have a fiduciary duty to act in the client’s best interest, conflicts of interest can still arise. For this reason, it’s essential to choose a financial advisor you can trust, one with minimal biases.

  
  

• Loss of direct control. When working with a financial advisor, you relinquish some direct control over your financial decisions.

  
  

  Advisors will make recommendations and implement strategies based on their professional judgment and your goals. These recommendations and plans might not always align with your immediate preferences on personal finance or outlook on the markets.

  
  

  If you want a more hands-on approach, you can communicate this preference with your financial advisor to minimize frustration and potential conflicts.

  
  

• Varying qualifications. The financial advising industry is diverse, with advisors having varying levels of education, experience, and qualifications. Not all people who advertise themselves as financial advisors have the same training, experience, or certifications.

  
  

  Before working with a financial advisor, talk about their experience and qualifications. This discussion can help you know what to expect from your prospects.

Choosing the Right Option: Robo-Advisor vs. Human Financial Advisor

Both robo-advisors and human financial advisors can assist with investment planning and portfolio management. However, they have different capabilities, advantages, and disadvantages that address specific financial needs.

Choosing the right option between a robo-advisor and a human financial advisor depends on your unique needs and circumstances. Here are some of the factors you should consider when making that decision:

Available cash

The cost is one of the most defining factors when deciding between a robo-advisor and a human financial advisor.

Robo-advisors have lower costs compared to human financial advisors, making them more suitable for beginners or people with limited financial resources. However, they also offer limited financial planning services compared to financial advisors.

Human financial advisors often cost more but can offer more personalized recommendations informed by their experience and certifications. They are likely more suitable for people requiring a more hands-on approach and complex financial and investment advice.

Investing experience

Robo-advisors are more accessible for beginners or people who prefer a more hands-off investment approach. They offer a more basic suite of portfolio management services that are easier for beginners to grasp.

On the other hand, human financial advisors might suit more experienced investors or those who know their investment preferences better. Financial advisors are better equipped to provide personalized advice and to handle complex investment or financial situations.

Financial needs and goals

Robo-advisors excel in managing investment portfolios. They best suit individuals with straightforward financial goals, like saving for retirement, building wealth, or education planning.  They may not offer comprehensive financial planning services, which can be a limitation for those with complex needs.

Human financial advisors offer a broader range of financial services, like investment management, retirement planning, estate planning, tax optimization, insurance advice, and more. They work best for individuals with complex financial needs or those who want a holistic financial approach.

Choose Your Investment Journey

The investment market can be complex and volatile at times, and the right source of assistance can do wonders for beginner and experienced investors. Robo-advisors and human financial advisors can provide this assistance for investors at different points in their journey.

Assessing your current financial situation, available resources, and financial needs is key to making the right decision. You can always change your mind and try both to see what they can do for you and your investment portfolio.