Robo-Advisor vs. Financial Advisor: Choosing Your Financial Ally

Taylor Mathis |
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Let’s get this out of the way up front: as a Financial Advisor I am inherently biased in my discussion of Robo-Advisors and Financial Advisors. There can be great value in both options depending on your individual situation, your needs, your comfort with investing and finances, and so on.  My goal here is to offer a high level of some considerations you should think through when making this decision for yourself. 

If you’re like many Americans, you aren’t exactly sure who to turn to when it comes to financial advice.  A recent Wall Street Journal poll found that 42% of Millennials and 25% of Boomers don’t know who to trust with their finances.  Not knowing where to turn, or who to trust, can be scary if you’re just getting started saving and investing as a Millennial; it could be downright terrifying if retirement is lurking around the corner as a Boomer.  Perhaps you’re comfortable with your own knowledge and capabilities to manage your own money – if so, congratulations!  You are in an enviable position, but even then, you may have questions from time to time as new opportunities arise or situations become more complex.

After reading news stories of Ponzi schemes and big corporate financial bets gone bad, you could be forgiven for casting a suspicious eye towards the largest financial institutions.  The first Millennials (a generation who is now roughly 25 – 40 years old) were either in the first few years of their careers or just graduating when the 2008/2009 financial crisis hit – it’s natural for broad swathes of a generation launched into financial turmoil to be skeptical about who to trust.  The same is true for Boomers – after working for decades, many Boomers saw their retirement savings fall precipitously as the markets sank, and in some cases, they saw pensions evaporate as companies went bankrupt.  How can an individual succeed if enormous financial institutions with balance sheets as large as some countries’ GDP can fail?

Forget about the money for a moment. You’ve arrived at a point in your life where you need advice.  Who do you normally turn to when you need advice? A parent? A friend? A professional? Does the source of trusted advice vary based on the topic or the scale of the issue at hand? 

You may call your parent to help you with a small home repair project when you just need an extra hand, but you may hire a contractor to update your kitchen. 

You may call a friend with a truck to help you move a new piece of furniture, but you may hire a moving company if you’re moving everything you own to a new house across the country. 

You may watch a video tutorial on YouTube about how to change your car’s oil, but you would probably take your car into the shop to replace its transmission. 

You get it – depending on your own experience, knowledge, and comfort level, there are many scenarios in which you either choose to manage something for yourself with a little help or you decide you need professional help.

Similarly, the choice between signing up with a Robo-Advisor and hiring a Financial Advisor ultimately boils down to your knowledge and comfort with personal finances and understanding what kind of help you need.  There are situations where each choice makes sense, and the tipping point from one to the other is different for everyone.  There is even broad variation in the capability and cost for the automated services provided by Robo-Advisors.

Let’s take a step back. 

What is a Robo-Advisor?  It’s a term broadly used for a program, platform, or application that uses algorithms to help you open investment accounts and make investment decisions.  Many Robo-Advisors provide a limited selection of investments, most commonly Exchange Traded Funds (ETFs), with a mix of asset classes (e.g. Large Growth, Mid-Cap, etc.) and industry segments (e.g. Technology, Healthcare, Real Estate, etc.).

Who is a Financial Advisor and what do they do for you?  At its most basic, a Financial Advisor is someone you hire to provide advice on financial topics. There are a few ways to differentiate between the variations of Financial Advisors in the marketplace: their credentials, what services they provide, how they charge for their services and the value they generate, and so on.  If you want to hire someone to give you financial advice and even manage your investments on your behalf, you want to hire someone who has your best interests in mind.  Look for a Fiduciary – that is, someone who must legally keep your best interests in mind when making recommendations.

What if your questions go beyond just investment choices and management?  A CERTIFIED FINANCIAL PLANNER™ professional is a Financial Advisor who is trained across disciplines to provide comprehensive financial planning advice, including tax planning, investment management, risk management and insurance planning, retirement planning, estate planning, and education planning.  In order to become certified by the CFP® Board, a Financial Advisor must complete education requirements, pass a grueling exam, meet experience requirements, and commit to strict ethical guidelines. All CFP® professionals have a fiduciary duty to their clients.

As with any decision you make in your life, there are Pros and Cons to each option when evaluating Robo-Advisors and Financial Advisors.  This list is not exhaustive, but it should help you better understand which questions to ask and which option may make the most sense for you.

 

Cost

A primary selling point for Robo-Advisor services is a lower price point.  It’s common in the financial advisory industry to be paid a percentage of the assets being managed on an annualized basis, or Assets Under Management (AUM).  Robo-Advisors’ fees can vary from 0.2% to 0.5% of AUM, or higher if the service is a so-called “hybrid” model that also provides some interactions with a human advisor. 

The cost for engaging a human Financial Advisor varies as each firm has its own fee structure, but a general rule of thumb in the industry is a 1% annual AUM fee.  Some Financial Advisors are foregoing AUM fees in favor of planning fees and annual retainers, but it’s safe to say that engaging with a Financial Advisor will probably cost more than a Robo-Advisor.  You can see Berkeley Advisors’ AUM fee structure here (link).

 

Investment Management vs. Comprehensive Financial Planning

Robo-Advisors are primarily focused on helping you open and manage investment accounts.  A Robo Advisor’s algorithm may help it suggest diversified investment options, tax-harvesting opportunities, or periodic re-balancing, but only for the accounts within its platform.  They may or may not be able to incorporate a 401(k) or IRA account held elsewhere. 

A Financial Advisor offering comprehensive financial planning services will review your entire financial landscape.  Investment advice and management is only one component of a strong financial plan.  Are you saving enough to reach your goals?  Are your investments appropriately tax-efficient?  Do you have the right levels of insurance coverage on your life, your home, your vehicles?  Have you considered your estate plan or beneficiary designations?  Are you planning for your children’s or grandchildren’s education?  If you give to charity, are you making donations in the most tax efficient manner?  These are all questions that a comprehensive financial advisor can help you navigate, among many others.

 

Decision Making

Humans are emotional creatures.  As much as we hate to admit it, we often make decisions based on emotions rather than logic.  You may think a Robo Advisor can help take the emotions out of investing, but can a Robo Advisor talk you out of selling when the market is falling?  Or help you keep your focus on your long-term strategy?  Some of the more advanced Robo-Advisors can provide situational advice, like reminding you to make a contribution or suggesting a security sale to capitalize on a tax loss, but these suggestions often lack context or answers to your follow-up questions.

One of the more intangible benefits of working with a human Financial Advisor is that there is always someone you can talk to, someone to offer counsel and guidance, when your emotions overcome your logic.  Individual investors have a troubling track record of selling as markets fall, and not getting back in until well after the market has turned off a bottom.  A financial advisor can help you keep your focus on your long-term goals and not succumb to the emotional pull of a market pull back.

 

Bias & Conflict of Interest

Humans are inherently biased.  A Financial Advisor with a Fiduciary obligation to his or her clients will always clearly articulate their biases and conflicts of interest – remember, Fiduciary means they keep your interests first. 

It’s harder to tell with a Robo-Advisor.  On the surface, you think that a “robot” will offer pure logic.  You have to remember, though, that the algorithms that drive the Robo Advisor were written by humans.  Their behavior, for better or worse, is driven by the code that may or may not have inherent biases that even the coders are unaware of.  This issue of bias in programming is cropping up nearly everywhere that humans have ceded analytical processes to machines – in facial recognition technology, in data analysis, etc.  It doesn’t necessarily mean that it’s bad in terms of offering investment management services, it’s just one more element to consider.

 

Why would you choose a Robo-Advisor?

Generally, the fees are lower and so are account minimums (if they have any minimum investment requirements at all) when compared to Registered Investment Advisers (RIAs) or big Broker Dealers.  Robo-Advisors are commonly focused on investment management – providing access to investment choices, diversifying and re-balancing your portfolio, and in some cases offering tax-loss harvesting strategies.  Of course, the more nuanced the program, the more expensive it gets.

If you:

  • Are just getting started with investing, or
  • Are a knowledgeable investor and want to manage your own finances, or
  • Want to reduce your costs from another investment broker, or
  • Are more comfortable working with an application than a person,

Then a Robo-Advisor may be the right choice for you.  There are many Pros to utilizing a Robo-Advisor platform, just be sure they align to your needs.

 

Why would you hire a Financial Advisor?

If you:

  • Have questions or concerns that extend beyond simple investment management, or
  • Want to create a ‘monthly paycheck’ from your accumulated retirement savings, or
  • Are looking to develop a comprehensive financial plan for yourself or your family, or
  • Want to understand your options when changing jobs and have a retirement account, or
  • Need help navigating the estate planning process, or
  • Plan on creating a fund for a family member with special needs, or
  • Have complex financial situations or multiple accounts for which you need advice,

Then you should schedule a meeting with a Financial Advisor.  Or schedule a meeting with several Financial Advisors from different companies so you can get a better feel for their principles, methods, and strategies to find one that best fits your needs. 

After all – the wealth you have built or are building is intensely personal – you need to make sure you hire an Advisor you can work with over a long period of time.  Ideally, you all will work together to develop a lifetime financial strategy to help you achieve your personal and financial goals.

So, should you choose a Robo-Advisor or a Financial Planner?

Where are you most comfortable?  Do you engage well with online tools and applications, or would you prefer to work with a person (or a team of people)? 

Consider the need you’re trying to address for today.  You may start with a Robo-Advisor initially and as your needs become increasingly complex, a human Financial Advisor may make sense. 

There is no one answer to this question. Each person will have a different need at different stages in his or her life. It’s up to you to make the right decision for yourself.

 

Live Fully Live Richly This blog post is not offering investment or financial planning advice, tax or legal advice, or any form of specific suggestions/recommendations for the reader. Examples are just that – broad examples to illustrate a point. Please review the Disclosures Page for more information.

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Berkeley Advisors, Inc. | Catherine Mathis | Taylor Mathis