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Can robo advisors replace traditional advisors?

It used to be that when you invested, your choices were pretty limited. You had only two options to choose from:

  1. Do-it-yourself (DIY)
  2. Hire a financial investment advisor (FIA)

Doing it yourself is good for some people. With modern brokerages, you can keep an account with no fees and few if any commissions for trades. However, you have to do your own research and pick your own investments. And this can be intimidating for many people.

Human advisors are great because they do the research and portfolio management for you. However, there are some downsides to consider:

  • First, many financial investment advisors have minimum asset requirements, sometimes $500,000 or more. These requirements put many FIAs out of reach for younger and lower-net-worth individuals.
  • Also, it's not uncommon for FIAs to charge 1%–2% annually or even more via the loaded investment products they push you into. That's a large headwind just to keep up with the market. As history has shown, this is a steep fee to overcome. And in many cases, FIAs also come with substandard financial advice.
  • Let's also not forget that — if the investment advisor isn't a fiduciary — they may not offer investments in your best interest. Instead, they recommend investment products that best line their wallets.

There are services you can use to find a fiduciary near you. For example, the Paladin Registry can help you find a pre-vetted fiduciary. And this registry is completely free to use.

On the other hand, robo advisors choose a professionally managed portfolio of investments for you based on a survey you complete when signing up. For many investors, robo advisors are a great alternative.

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Robo advisor vs. financial advisor: What's the difference?

Here are some of the main differences between robo advisors and financial advisors and why some investors may prefer one over the other:

ROBO ADVISORS FINANCIAL ADVISORS
Financial Experience You fully understand the impact that investment fees have on your investment performance. You don't agree with the investment allocation robo advisors use
Human Contact You don't need much in the way of direct contact. Direct human contact is very important to you.
Budget You don't meet the minimum requirements for a traditional advisor. Most of your money is in an https://moneywise.com/retirement/employer-sponsored-retirement-plans/.
Self Reliance You're willing to let someone else do all your investing. You want at least some measure of control over your investments.
Tech Savvy You know how to use online tools and support. You're not comfortable transacting business online.

We've already taken a brief look at traditional financial advisors. Depending on the type of advisor you choose, you could get help with your financial plan, investments, taxes, insurance, and anything else related to your money. And you can meet with your advisor in person, by phone, or video call to ask questions and make sure you're on the right track.

Advantages of a robo advisor

With a robo advisor, you typically receive much more limited financial services. Basic robo advising is just portfolio management. In most cases, robo advisors choose a professionally designed portfolio of low-cost exchange traded funds (ETFs) that align with your investment goals. You won't get one-on-one help. But you can rest easy that a team of pros — not just a single investment advisor — is working together to optimize a portfolio for you and potentially thousands of other investors with similar goals.

Because robo advisors spread out portfolio management costs over many customers and require less human interaction, the costs are often far lower. You get a lower level of service, but you may be able to save a bundle. And even a small difference in cost can add up to a huge difference for your portfolio over the years.

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Cost comparison

One of the biggest reasons to choose a robo advisor over a traditional registered investment advisor (RIA) or another FIA is cost. If you pay 1% per year for a traditional advisor compared to 0.25% per year at a robo advisor, the difference over decades of investing could be massive.

fees are killing your investments line graph shows losing $159,000 in fees over 40 years with an actively managed fund
The Atlantic

Graph courtesy of The Atlantic

Let's say you start with $5,000 today and invest $250 per month with an 8% average annualized rate of return. After 30 years with a financial advisor who charges 2%, you would have $224,529. With an advisor who charges 1%, you would have $273,274 after 30 years. If you pick a robo advisor at a 0.25% rate, you would have $317,433.

Between the advisor who charges 1% and the robo advisor that charges 0.25%, that's a $44,159 difference. That can easily cover a full year of retirement for many investors! Comparing the best and worst options here, you would have $92,904 more after three decades.

If you have a bigger portfolio or save more, the impact of those fees can be even larger. Plus, if your human advisor picked high-fee funds and the robo advisor picked only low-fee funds, you could have an even larger spread between the two. And some robo advisors don't charge any management fees (here are the best robo advisors for 2023. So you should really think hard about whether or not a human advisor is worth the cost.

However, there are hybrid companies like Farther that have the perks of automation with the dedication from financial advisors. While Farther is more expensive than your average robo advisor, they are slightly lower than traditional advisors and are upfront about their fees. Plus they are fiduciaries, which means they are legally obligated to act in your best interest.

When should you use a robo advisor?

Robo advisors are not right for everyone. But they work well for a large number of people. If you feel generally comfortable with technology, mobile apps, and navigating the web, you will likely do well with a robo advisor.

This type of investment advising is appropriate for investors of any age. Some robo-advising platforms specialize in portfolio features for taxable accounts (e.g., tax-loss harvesting). Others are better for people who want to add to their retirement portfolios automatically. And still, others focus on regular cash flow from investments during retirement.

Unless you have extremely complex or unique investment needs, don't feel comfortable with computers, or don't trust the robo-advising process, a robo advisor is worth considering.

When should you use a traditional investment advisor?

While this writer personally trusts computers, that isn't the case for everyone. If you are skeptical of robo advising or prefer the personal touch of working with a traditional advisor, the added costs could make sense for you.

You will likely have less in retirement, but you'll also have the added option of being able to call someone for help with your money questions. And you could rest easier knowing someone is watching over your finances.

If you decide to work with a traditional investment advisor, it's a good idea to work with an advisor who works in a fiduciary capacity, which means they must put your best interests ahead of their own.

Bottom line: should I use a robo advisor or do it myself?

The ultimate question is: Should I use a robo advisor instead of doing it myself or should I use a traditional advisor? In many cases, a robo advisor is a solid choice.

A robo advisor is a good fit if you:

  • Are young — For example, with more than 20 years till retirement.
  • Have a simple portfolio — And have small accounts with other financial services.
  • Lack of investment experience — You're unsure about where to begin (in that case, read our how to invest guide).

They don't cost much to use, and in my opinion, most create a decent asset allocation. These services will give you a good starting point.

As your needs change, you could always move your money to another financial service. By then, some of these same services will have advanced and could automate more of what previously required a human.

Are they perfect? No. If you have the skills, you could be better off creating your own portfolio. Or a target-date fund may be all you need. But then again, that's not the audience these companies are targeting. They're filling a niche in the investment advisory space that's been ignored for years.

If you want estate planning or have issues that don't fit the typical investment planning mold (e.g., you have a child with special needs), you might be better off with a traditional advisor. Or a robo advisor service that can help customize your asset allocation.

In my opinion, however, it's no question robo advisors are the future of the financial industry for the most basic advice.

Just as Vanguard revolutionized investing in low-cost indexed-based funds, robo advisors are doing the same with asset allocation for the masses. That may make robo advising a good choice for your next investment.

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Eric Rosenberg Freelance Contributor

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time.

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