Robo vs. human advisors: Who really builds more wealth over time, and what hidden costs should investors watch for?

As Morningstar puts it: “Robo-advisors occupy a middle ground between a wealth manager and a do-it-yourself trading platform.” (1)

According to a report by Data Insights Market (DiMarket), the growth of the robo-advisor market is driven by “the growing millennial and Gen Z investor populations who are digitally native and comfortable with technology-driven financial management” as well as a “rising preference for personalized financial planning, particularly amongst individuals with smaller investment portfolios.” (2)

While Gen Z and millennials are leading adoption, the DiMarket report notes that robo-advisor platforms are increasingly targeting high-net-worth individuals by offering “personalized services and higher investment thresholds.”

Robo vs human advisor fees

Compared to human financial advisors, robo-advisors offer a low-cost alternative — especially for investors with smaller portfolios.

As of 2024, the median robo-advisor fee was about 0.25%, according to Morningstar. However, that may be slightly lower or higher, depending on the platform. It’s sometimes paid as a flat monthly rate or annual fee.

Human advisors use a wider range of fee structures. Most charge an AUM (assets under management) fee, which is a percentage of your assets. Typically it’s 1.0% a year, but some advisors charge less. (3)

Traditional advisors might also charge by the hour, offer a flat monthly or annual retainer fee or even work on commission. But the vast majority charge AUM fees, with 92% of advisors incorporating AUM fees “in some way,” according to a Kitces report. (4)

However, fees aren’t always straightforward. Human advisors may have additional costs, such as management expense ratios (MERs) in mutual funds and exchange-traded funds (ETFs).

Robo-advisors, too, may have fees on these underlying funds (and some robo-advisors keep portfolio management simple by using ETFs instead of individual stocks). There could also be account maintenance fees or trading fees — so there’s more to consider than the flat monthly fee.

Pros and cons of each approach

You don’t need a large amount of money to start investing with a robo-advisor. According to Morningstar, about a quarter of robo-advisor platforms only require an account minimum of $50 or less.

This makes robo-advisors attractive for investors with smaller portfolios — where paying a percentage-based advisory fee might not make sense. By contrast, many human advisors have higher minimum investment requirements (often $25,000 or more) or cater primarily to high-net-worth clients. (5)

Robo-advisors also appeal to beginners who want a hands-off approach and don’t have extensive investing knowledge. However, they can also suit experienced, tech-savvy investors comfortable managing their portfolios online.

Not all robo-advisors are the same. Some may offer additional services, such as tax-loss harvesting (helping you reduce the taxes you pay on any investment gains). So it’s worth doing your homework to find the right platform.

A human advisor can offer advice for larger, more complex portfolios, as well as long-term financial planning. Plus, they typically offer more than financial expertise, such as estate planning, tax planning and insurance and risk management.

A human advisor can also provide reassurance and support during major life events or downturns in the market, helping to prevent panic-selling.

Comparing outcomes and risks

Robo-advisors help remove emotion from investing, which can lead to more consistent decision-making and potentially better returns. However, they don’t necessarily outperform human financial advisors. Results depend on several factors, including your risk tolerance, investment mix, and the quality of the platform's algorithm.

A study by Vanguard of 1,500 American investors revealed that those working with a human investor estimated an annual average return of 15%, while those working with a digital advisor estimated a return of 24%. (6)

However, as Vanguard points out, “digital-advised investors skew younger and self-report being more aggressive in their investments, which could have led them to higher performance.”

Overall, investors in the Vanguard study believe that human advice “provides higher incremental portfolio value” than going it alone. “The perceived value-add to annual performance was 5% for human advice and 3% for digital-only advice.”