Should You Use a Robo-Advisor or Personal Financial Planner?

Thought you needed to pick your own investments in order to start investing? Think again! If you don’t have that much knowledge about investing, don’t have the time, or simply feel overwhelmed, you can choose between a robo-advisor or traditional financial planner.

Your choice will ultimately depend on what kind of help you need and how much money you have to invest. Robo-advisors typically offer lower costs, while financial advisors cost more.

So, How Do Robo-Advisors and Financial Planners Differ?

Usually, a traditional financial planner offers either investment advice or discretionary management, meaning that a wealth manager will invest on behalf of the client (you). Robo-advisors, however, sit in between.

With robo-advisors, the online platform will normally assess your risk appetite and then offer a model portfolio that is suitable for you. When you sign up with a robo-advisor, you usually have to answer an online questionnaire about things like your financial goals and how nervous you get when the stock market goes down. The robo-advisor firm will then invest your funds in low-cost exchange-traded funds (ETFs) based on your personal profile and risk tolerance.

In terms of performance, robo-advisors have proved to be very efficient and highly accurate. As for accessibility, robo-advisors are more accessible than traditional financial advisors.  Robo-advisors never sleep, so they are available online 24/7.

Personal financial advisors are professionals you can hire, on an ongoing or temporary basis, to help manage aspects of your financial life — from investing to estate planning and more. You’ll generally meet your advisor locally, at his or her office, to create and go over your financial plan. However, several companies offer virtual access to financial advisors for less than you’d pay a traditional in-person advisor.

Basically, if you need a significant amount of financial hand-holding, then a personal financial advisor might be the best option. With a personal financial advisor, you can spend time talking about taxes, financial planning, family issues, something that you can’t do with a robo-advisor. 

If you’re starting a family or planning for retirement, investing may be only a small part of the financial puzzle you need to figure out. In that case, a personal financial advisor would be the way to go. But, if you’re in your 20s and all you need is investment management, then robo-advisors might be all you need.

Cost

Fully automated robo-advisors are cheaper than traditional human financial advisors, so more people opt to use them, given that they charge minimal to no fees at all. In fact, robo-advisors charge fees from 0.25% to 0.50% of the amount managed per year, though most services fall toward the bottom of that range. 

Generally speaking, the more human touch required, the higher the cost for financial advice. Many personal financial advisors charge a percentage of your assets — the median is 1% per year but it can range higher for small accounts and lower for big ones. 

Fee structure and professional qualifications are among the important questions to ask before you hire a financial advisor.

Minimum Investment Amount

Because robo-advisors are cheaper to use, the minimum amount of money they require their users to invest is much lower than the amounts required by financial planners. In fact, many will take on new clients with $0 to open an account.

Some traditional advisors would require you to have a balance of $250,000 or more. However, there are financial advisors who charge a flat-rate or hourly fee and require lower or no minimums to begin.

Combining a Robo-Advisor and a Personal Financial Planner

Deciding between a robo-advisor and personal financial planner does not have to be an either/or situation. A number of robo-advisors like Betterment now offer a combination of robo-advisory, with a human touch. For a higher fee, about 0.40%, you can have unlimited access to a certified financial planner who can talk you through your plans.

Basically, if life grows more complicated but your net worth doesn’t quite grow enough for you to afford a full-service wealth management firm, you could think about pairing a robo-advisor with the services of an independent financial advisor.

Final Verdict?

Ultimately, whether you choose a robo-advisor or personal financial advisor will very much depend on your age and financial plans. 

Robo-advisors make it really easy to invest. You sign up, answer a few questions and you’re done. The risk of trying to invest by yourself is that you’ll end up pushing it off. That procrastination is likely to cost you, on average, far more than a robo-advisor’s fees.

On the other hand, a traditional financial planner can help you prioritize and track your goals and adapt as your life changes. This inherently builds a relationship that extends beyond just the nuts and bolts of investing.