Robo Advisors vs Human Advisors: What Is the Difference?
Robo-Advisors are a pretty popular investment approach option these days. These Advisors typically differ from brokerage to brokerage,but the idea is that a complex computer algorithm can manage your investment portfolio better than a human Financial Advisor. Companies like Betterment, Personal Capital, Ellevest all have Robo-advisor options. In addition, these companies offer customer support for questions about the site or the service.
What's Great About Robo-Advisors:
1) Cost: (sort of): Most people believe that Robo-Advisors are always cheaper than human Financial Advisors but that is not always true. This is because there are different types of human Financial Advisors: Fee Only, Hourly, and Assets Under Management (AUM). The difference lies in how these advisors get paid. Fee Only Advisors set their own flat fee prices, and Hourly Advisors are paid hourly. AUM Advisors typical charge at least 1% of the total value of your portfolio. Robo Advisors can charge as little as .25% of assets under management all the way up to 2%+ of AUM --so you really need to read the fine print when you are comparing advisors.
2) Lower Minimum Amounts- Depending on the Robo-Advisors you choose, these advisors can have a lower bar to get started. Personal Capital has a minimum investing amount of $50,000, other advisors like Personal Capital or Ellevest allow you to get started investing with only $1000 to $5000. As a point of comparison, some human advisors (mostly private wealth managers) require at least $500K of investable assets, but others can help you start investment with as little as $1000.
3) Simplicity: Most Robo Advisors pride themselves on ease of use. Many have cool simple apps and interfaces that put you in the investment driver seat.
What's Not So Great About Robo-Advisors:
1) Money is personal and Robo-Advisors Are Not: Robo Advisors are not customized to your individual needs and they are not designed to be. Robo Advisors assume a base of knowledge and aren't available to talk you off the ledge after a significant market downturn. They can't help you adjust to personal life changes that impact your finances and they don't allow you to see your whole financial picture. Taxes, estate planning are typically left out of view when dealing with a Robo-Advisors.
2) No Face to Face Meetings: If you are the type to "Set It And Forget It" than maybe a Robo Advisor approach works best for you. But if you would like to sit down and meet in person with your Financial Advisor and have a relationship with that person, a human advisor is likely a better option for you.
3) Robo-Advisors can be limiting: Robo-Advisors are limited by asset class. Sophisticated and newbie investors may want a broader investment portfolio with a wider range of asset types than a typical Robo-Advisor offers. Of course whether you are an expert or a new investor you may be limited to the Robo-Advisors online community or glossary for additional information about an investment choice.
No matter which approach you opt for, selecting a Robo-Advisor versus a Human Advisor is a personal choice that should be made after you figure out what level of investment guidance you need to suit your individual style, personal goals and level of knowledge.