Investment advisors have historically been a luxury item, available to only the very well-off. Without professional guidance, the rest of us were left to fend for ourselves, often with scant financial literacy.
Investing assistance from a Robo-advisor is now readily available to anyone who wants it. For the most part, they don’t cost anything, or at least much less than hiring a human, and you can start investing with much smaller sums than you would with a traditional broker.
Or, to put it another way, Robo-advisors have shaken up the financial management industry and made it more accessible to the general public. But does that render human counselors unnecessary?
This couldn’t be further from the truth. Some investors might consider working with a human investment advisor because of the unique benefits they provide. What criteria should you use to decide between a human advisor and a Robo-advisor? It turns out to be a lot less difficult of a choice than you might have anticipated.
Responsibilities of Investment Advisors and Robo-Advisors
Financial planners, whether human or computer-generated, make investment recommendations and oversee your portfolio over time. An individual who has ever contemplated their 401(k) investment options knows the value of receiving professional guidance.
A financial advisor will work with you to determine a suitable asset allocation and then make any necessary subsequent adjustments. After all, a person’s ideal investments at age 25 vary greatly from those at age 65.
Investment consultants assist you in determining not only which investments to purchase, but also the total dollar amount to allocate to each. In the simplest terms, this involves determining the appropriate allocation of your wealth among stock, bond, and non-traditional investment options like real estate.
They get more specific within each overarching category. How much of your stock portfolio should be invested in companies based in the United States vs those based in other countries?
Should you only invest in stocks of major corporations, or should you diversify into smaller and medium-sized companies as well? Which fields/markets do you need help with? Most people have no idea how to allocate their investments.
Therefore, they seek the assistance of an investment advisor to make the necessary investments and oversee their management throughout time.
Human advisors can help with more than just investing; they can also advise on other areas of a client’s financial life. The value of human counselors becomes most apparent in this context.
Disadvantages and Advantages of Human Financial Advisors
You have probably set up a few different investment accounts, such as a 401(k), IRA, and/or brokerage account (k). You undoubtedly want to know where you can get the most return on your money while taking the fewest possible risks.
If you have enough money, you can pay someone to inform you. As an added convenience, they may maintain it for you on an ongoing basis. If you’re trying to decide between a human and a Robo-advisor, here are some benefits and drawbacks to think about.
Advantages of Human Financial Advisors
1. Full Personalization and Flexibility
You can get advice from a human financial advisor, but ultimately they will do what you instruct them to do with your money. Your financial advisor can make it so that 63.7% of your portfolio is invested in diamond mines in Zimbabwe if you so desire.
All of your assets, not only the ones in their advisory account, can be managed by them. You can give them access to your 401(k) at work, or at the very least, you can email them a detailed report on how your money is currently invested and what additional options you have.
They are able to review all of your assets, including those related to your home, your company, and even your cryptocurrency. They’ll be able to provide you with personalized advice, which you’re free to accept or reject.
In the event that you become fearful of the stock market and believe a recession is imminent, you can give them instructions to minimize portfolio risk, begin shorting stocks, or liquidate all stock holdings.
You get to do the driving while the professional gives you directions. On the other side, you can give them complete control over transferring your funds from A to B.
2. Comprehensive financial counsel
Investing is a task that can be delegated to an algorithm, and it will do a fantastic job at it, just like a human would.
In most cases, all it takes is filling out a short questionnaire for them to assess your situation and come up with a personalized investment plan. The majority of people don’t have particularly unusual or intricate requirements when it comes to their investments.
However, as you get beyond stock selection and portfolio management, you will quickly run into the limits of algorithms. No matter how much you want their advice on your finances or estate plans, they are not allowed to give it to you.
You won’t be able to have a sophisticated discussion with them about how to prioritize your long-term financial goals. Although many financial counselors won’t work with you in that way, it’s worth noting. But when you get one-on-one time with a monetary guru, you can ask them in-depth questions and get insightful answers.
If you need more help than they can give, they should be able to recommend you to someone else. They can assist with tax loss harvesting, for instance, but they cannot handle the actual filing of your tax return.
Thus, they will advise you to get a reliable accountant. They will assist you to identify whether or not you have a debt or spending problem, and then connect you with a credit counselor if necessary. Robo-advisors have the ability to select diversified assets, but they are unable to engage in these types of in-depth discussions with you.
3. Managing Emotions and Human Interaction
Having the number of a reliable financial advisor handy at all times can be a huge relief. There is always someone there to answer your queries on the other end of the phone when they arise.
On occasion, we humans may use some comfort in the form of a calming voice on the other end of the telephone. , or even better, an opportunity to meet with a financial planner face to face.
We are not perfect examples of rationality. It’s easy to freak out when a market correction causes your portfolio’s value to plummet. If you tell your financial advisor that you want to liquidate all of your stock holdings in one phone call, they will tell you to take a deep breath and count to 10.
They’ll go on to explain that market corrections are common, that you shouldn’t sell in a panic, and that equities usually bounce back within a few months. All the risks associated with trying to predict market movements will be explained.
Robo-advisors are helpless in this situation. If you lose your cool and withdraw all of your money from your Robo-account, advisor’s you won’t have the calming influence of a trusted human advisor.
Disadvantages of Financial Advisors Who Are Human
1. High prices
To put it simply, human investment counselors cost more than Robo-advisors. Fully automated Robo-advisors, such as Betterment, typically charge between 0% and 0.5% annualized of your portfolio.
Many others, such as Ellevest, require a nominal annual or monthly subscription fee. Some of the others are available for no cost at all. Human investment advisors typically charge between 1% and 2% of assets under management.
A 2% management charge on a portfolio of $500,000 would be $10,000 per year, which is quite a bit. You should also include in the costs charged by the funds they select, in addition to their own fee.
A human advisor may advise you to invest in actively managed mutual funds or ETFs, which can add an extra 1% to 3% to your annual investment costs. And if they don’t offer you that degree of detail when suggesting investments, you probably won’t even realize it’s happening.
2. Accessibility to the Common Person
The time and effort put in by human financial advisors are not wasted. To make it worthwhile for them to take you on as a client, human advisors need a sizable portfolio to handle they often charge a percentage of your assets.
The low end of minimum portfolios is roughly $50,000. If you want to work with a financial advisor, you’ll need at least $1 million in assets before they’ll consider you.
However, a 2019 Gallup poll found that only 55% of American adults actually own any stocks at all. Since many Americans can’t afford even that much, many people in the U.S. just can’t afford to hire human consultants.
3. People Can Fall Short
People’s financial advisors have the same ups and downs in their own emotions as you do. They might grow twitchy and sell out on their own instead of waiting for you to sell in a hurry.
However, there is a greater danger that they will try to beat the market by strategically selecting equities. As reported by MarketWatch, only 23% of actively managed stock funds outperform their passively managed counterparts.
As a result, most people are unable to outperform the market while attempting to identify successful stocks. And since they assume they are smarter than everyone else, smart people often try to cheat the market.
And then there’s the possibility of people taking your money in bribes, stealing it, pocketing the extra, or disappearing to Colombia with it. Although the financial sector is subject to strict regulation, not everyone who calls themselves an advisor can be trusted.
In the end, it’s important to remember that your advisors are still just people, with all of their inherent flaws and virtues. Like the positive parts of life, the terrible parts come with it as well.
The advantages and disadvantages of Robotic Advisors
Common investing demands exist across the board. The requirements of a 30-year-old single individual with moderate risk tolerance, a $60,000 annual income, and a 62-year retirement goal are roughly the same as those of other people fitting that profile.
The shares in the Zimbabwean diamond mine can be invested independently of any specific strategy. Robo-advisors are computer programs that analyze your individual circumstances and goals in order to recommend a strategy for investing. You have a look at the plan before giving the final go-ahead.
Completely automated Robo-advisors seem to be sufficiently strong for many, if not most, investors. Your portfolio is managed by professionals who select safe investments and regularly rebalance them.
However, most automated financial counselors go beyond. Most modern Robo-advisors offer hybrid advising solutions, bringing humanitarian assistance to your fingertips when you need it most.
Your investments are managed by an algorithm, but you have access to human advisors 24/7 should you have any questions or wish to adjust your portfolio.
Advantages of working with an investment advisor are provided, such as increased freedom and personal attention, without the obligatory high fees and high net worth thresholds.
Advantages of robot advisors
1. Everyone Has Access to It
The minimum investment with most Robo-advisors is far less than the minimum with human advisors. When it comes to investing, certain sites, like SoFi Invest, have no minimums on them below.
Surely, you can afford ten dollars for financial investment. Many human advisors would demand a minimum of $100,000, which is beyond your financial means. Investing can be a reality with as little as $1,000 thanks to low entry requirements.
Instead of letting your money sit in a savings account and get eaten away by inflation, you can start earning returns immediately. Thus, Robo-advisors have genuinely democratized investment advice and made it accessible to anyone.
2. Reduced Prices
Robo-advisors, as we’ve seen, often charge far lower fees than their human counterparts (typically between 1% and 2%). It’s possible to find a free Robo-advisor. That’s why they may still be used by regular people, so to speak.
Besides charging minimal or no management fees, Robo-advisors have a hands-off approach to investing. They prefer passively managed funds because they have lower expense ratios and historically have outperformed their actively managed counterparts.
Keep in mind that, over the past decade, just 23% of actively managed funds beat the performance of passive ETFs.
The savings from lower fees on both the adviser and fund ends might add up to a significant amount when compounded over time. The retirement age might be lowered by two years, from 62 to 60, if annual investing fees could be reduced by just two percent.
3. Full Automatization
Every week, my Robo-advisor invests some of my paychecks for me. It invests it for me according to my preferences and automatically rebalances my portfolio.
I spent little more than five minutes answering the initial questionnaire and validating the system’s predetermined investment options. It took me an additional two minutes to pick the options for the automated fund transfer.
Afterward, I stopped working on it altogether. When it comes to my paper holdings, everything is hands-free. Rather than relying just on my own self-discipline, which is not always reliable, I can keep my savings rate high by setting up automatic contributions.
If everything happens automatically, without my involvement. I am able to deceive myself into conserving money because the withdrawal occurs before the funds are available in my bank account.
Of course, there are human advisors who can help automate the process of rebalancing your portfolio on a periodic basis. Because my Robo-advisor takes care of everything for me automatically, I see no reason to hire a human financial counselor.
4. Make no emotional investment choices
Robo-advisors do not panic or attempt to be creative by shorting stocks. They stick to your investment plan, which is exactly what long-term investors should do in tumultuous times.
They automatically assist you in selling high and buying low through routine, automated rebalancing. Rebalancing capitalizes on the gain and purchases more of the undervalued asset when one investment rises while another falls.
Disadvantages of robot advisors
1. Limitations on Personalization and Flexibility
Some high-net-worth investors and those with truly unusual requirements discover that Robo-advisors lack the customization they want.
A human financial advisor or a hybrid between a computer and a human is what you need if you want full discretion and customization over your assets. Investing choices are limited with fully automated Robo-advisors.
2. Low Human Contact
Whether you choose a fully automated service or a hybrid that allows for some human involvement depends on the Robo-advisor you use. Having no human contact options at all is a common result of full automation.
Getting in touch with customer care is usually easy and quick, but they will likely only be able to assist you with technical or broad inquiries. Reps in customer service aren’t trained to give investment advice or plan for the future.
More human assistance from knowledgeable financial experts is available to you through hybrid advisors. Many offerings include unrestricted access to human consultants who can be reached via scheduled phone conversations.
If you opt for a more premium service, you may be assigned one or more personal advisors who work exclusively on your account and get to know you, your financial history, and your long-term objectives. Inevitably, the fees charged by hybrid advisers are higher than those charged by Robo-advisors.
3. Lack of Financial Support or a Wider Perspective
Investing in the right things, having your money moved around automatically, and having your portfolio rebalanced on the regular are all tasks that algorithms can do exceptionally well.
For example, some will notify you if your monthly credit card bills have increased significantly or if you tend to spend too much on eating out. The algorithms are getting better, but that won’t make you see reason.
If you’re lucky, you’ll get an email telling you that your restaurant spending was 32% higher than usual or that your credit card amount is now 26% higher than it was last month. That’s not the same as having someone sit down and say, Let’s talk about how to budget your money better.
A competent financial advisor will consider your entire financial picture. They can aid in problem identification and the generation of novel approaches to addressing the issue at hand. Investment management is the primary service provided by Robo-advisors, but that’s about the extent of their help.
4. Lack of Emotional Control
A fully automated Robo-advisor cannot calm your jittery nerves in a crisis. All you need is an account on a website. You can turn it off without having to interact with a human being.
The fact remains, however, that people can get sentimental when it comes to their financial situation. And it is in those times that the reassuring words of an expert are most welcome. The reassuring words, Everything is going to be OK, are a comfort we can all need from time to time.
Methods for Selecting Human, Hybrid, and Robot Advisors
The first and most basic inquiry is, How much money do you have to invest? When you have $500 to invest, you don’t have much of a choice. You don’t have enough money for human or even hybrid advisors to take you on as a client just yet.
Get your money working for you with the help of a Robo-advisor, and then build your portfolio as your financial situation allows. However, some hybrid advisors will accept clients with as little as $10,000 to invest. You should then start asking yourself how crucial it is to be able to communicate with a real person.
The knowledge that they can reach out to a real-life financial advisor at any time can help some investors get a good night’s rest. Many people don’t give a hoot.
You should also consider whether you need assistance with only making investing decisions or whether you would also like assistance with long-term planning. A Robo-advisor can assist with investment selection and management, but it can’t help you develop a long-term financial strategy like a retirement savings plan.
Don’t be shy about hiring a financial advisor on an hourly basis. In the end, investment advice and financial planning are two distinct but related fields. You can employ a Robo-advisor to take care of your investments and then pay an annual or biannual fee to sit down with a financial planner to talk about your long-term financial plans and objectives.
The more money you have to invest, the more complicated your personal finances will become. You may reach a moment in your financial life where you realize you need more specialized assistance and might benefit from working with a hybrid or human investment advisor.
Challenges for Robo-Advisors and Hybrid Advisors
Are you prepared to get assistance with making and monitoring your investments? If you’re an investor in any sector of the economy, you’ll find a lot to like about the services listed below. Check out our breakdown of the top Robo-advisor platforms for additional information.
SoFi’s Robo-advisor service is offered at no cost to customers. Considering that you can get started investing with as little as a single dollar, there’s really no reason not to. Unlike its competitors, SoFi does not provide perks that affluent investors crave, like tax-loss harvesting or 401(k) guidance.
Even more impressive is that it’s completely free of charge and includes access to actual human investment counselors. If you’re just getting started with investing or don’t have a lot of capital to put in the market, SoFi is a great choice.
Betterment provides users with a Robo-advisor and a human/robot advisor alternative. Each choice is more expensive than the corresponding SoFi plan, but it comes with additional features.
Betterment Digital, the automated option, charges 0.25 percent of AUM. But there’s no low-ball investment requirement. The minimum investment for Betterment Premium, the hybrid option, is $100,000.
This is because of the higher cost of the hybrid option, 0.40%. Investors can make their own investment selections and make changes to their asset allocations in a straightforward manner.
The two types of funds share tax-loss harvesting and 401(k) guidance but lack 529 plans. They also provide an alternative for investors who value social responsibility.
If you’re looking for a top-tier Robo-advisor, go no further than Personal Capital. If you invest at least $200,000, you’ll get all the bells and whistles, plus a personal financial counselor.
Investment guidance for 401(k)s, 529 plans, trusts, tax loss selling, ESG investing, and stock ownership are some of the other features available to those with more money to invest.
Pricing for the service is commensurate with the level of quality provided. Those with less than $1,000,000 invested are charged 0.89%, while those with $10,000,000 or more pay only 0.49%. The account opening requires a hefty $100,000 minimum commitment.
When all is said and done, Personal Capital is a fantastic hybrid choice for affluent investors. Before you commit your savings to Personal Capital, though, make sure you’ve read some in-depth evaluations first.
Schwab Intelligent Portfolios
Schwab’s automated investment advisor is a service I use and recommend. It costs nothing at all, albeit a minimum contribution of $5,000 is required. Some upscale options, such as tax loss harvesting and trusts, are included, while more basic ones, such as assistance with 401(k) accounts or 529 plans, are not.
Furthermore, Schwab provides a novel hybrid advisory service. There are no percentage-based fees, which is unusual for the financial advisory profession. The set rate it charges makes hybrid advising accessible to more people.
A $300 setup charge and $30 each month are what you have to shell out for this service. You may talk to actual real financial counselors as much as you like for that price!
A CFP professional collaborates with you to do a thorough evaluation of your financial situation, formulate a strategy for achieving your long-term goals such as retirement, and offer any additional necessary emotional support.
There is a $25,000 entry fee for this hybrid advisory option. But both types of accounts provide reasonable financial advice for regular people.
We all have various and ever-evolving monetary requirements. If you are just getting started with investing, I recommend signing up for a free, fully automated Robo-advisor like SoFi or Schwab.
Consider incorporating hybrid advising as you amass wealth for a more customized experience. As your wealth grows, you may feel comfortable switching to a service that is overseen entirely by humans.
Choose your counsel wisely if you go with the third option. SmartAsset is a good place to start because it helps you choose a local financial advisor that fits your specific needs and preferences.
No matter the route you follow, advisors can help you select a balanced portfolio of investments and keep track of your changing holdings as time passes.
Even if you like the freedom of making your own financial decisions through a separate brokerage account, you should still consider working with an advisor, whether automated, hybrid or human.