Robo-Advisor vs. Financial Advisor: Which Is Right for You?

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Updated on Tuesday, October 12, 2021

Robo-advisors and traditional financial advisors both help investors to construct portfolios for investing and growing their savings. The biggest difference between the two is in who — or what, as the case may be — is providing the financial advice.

In general, financial advisors are people who provide personal, one-on-one advice to clients, while robo-advisors are largely digital investment advisors that rely on algorithms and computer data to drive customer investments. There are also significant differences in the costs of each, their investment approaches and the type of services offered.

Robo-advisor vs. financial advisor: What’s the difference?

Robo-advisor

Financial advisor

  • Digital investment advisor, with limited direct human interaction
  • Fees are lower on average than human advisors
  • Your funds are generally invested in broad-based exchange-traded funds (ETFs)
  • May have lower account minimum requirements than traditional advisors
  • Human investment advisor
  • Fees are higher, on average, than for robo-advisors
  • May offer a wider range of investment options
  • May have higher account minimum requirements than robo-advisors

Robo-advisors and financial advisors both ultimately provide the same basic service — professional recommendations about how to best invest your money. There are some distinct differences, however. Robo-advisors tend to offer more general, less personalized services limited to investment advice, while traditional financial advisors often offer additional services and a human touch. Here are some other ways the two types of advisors differ:

Robo-advisor vs. financial advisor costs

In general, robo-advisors are less expensive than financial advisors because they usually provide more limited services and less direct human interaction in exchange for lower fees. On average, the fee for a balance of $50,000 is 0.36% with a robo-advisor — or about $180 per year. That’s considerably lower than the cost for human advisors, who charge an average fee of 1.17% — or $585 for that same balance.

Robo-advisor vs. financial advisor minimums

In many cases, robo-advisors offer accounts with lower minimum account balance requirements than traditional financial advisors. Many top-rated robo-advisors have no account minimum requirement or a nominal one (think $10 or less), though minimums for robo-advisors can be as high as $100,000. The account minimums for traditional financial advisors vary more widely and are generally higher. While some advisors have $0 account minimums, other people only take on clients with at least $10 million in assets, and there is a lot of variation in between.

Robo-advisor vs. financial advisor investment approach

When evaluating the two options, many people wonder: “How do robo-advisors work?” It may seem a bit intimidating to remove the human factor from financial advice, but that works well for many people. Robo-advisors generally base your investment approach on a questionnaire you complete online that evaluates your goals, tolerance for risk and other factors. Then, using an algorithm, the company builds a portfolio for you, usually constructed of ETFs or similar investments.

A financial advisor, on the other hand, offers more personalized services. The advisor may meet with you in person or over the phone to evaluate your risk tolerance, goals and other factors to determine the best makeup of your portfolio. While your portfolio may contain ETFs, human advisors typically provide a variety of other investment offerings, as well. Financial advisors are also more likely to offer additional services such as budgeting, education planning, retirement planning and creating plans to pay down debt.

Robo-advisor vs. financial advisor returns

In general, various studies estimate that professional advice may result in an increase in a portfolio’s value of between 1.5% and 4%. However, returns aren’t guaranteed for either type of advisor. If your money is invested in a diverse portfolio of assets that aligns with your goals, rather than trying to “beat the market,” your average returns are likely to be similar in the long-term with a robo-advisor or a financial advisor. While you can compare the returns of various advisors from previous years, that doesn’t mean you can bank on the same returns in ensuing years due to market volatility.

Pros and cons of robo-advisors vs. financial advisors

When it comes to choosing between a robo-advisor and a traditional advisor, it’s important to weigh the pros and cons of each. Both types of advisors can help you invest your money with a goal to grow it with interest over time. Unless you’re highly educated about investing and have the time and dedication to research and manage your funds yourself, advisors are helpful. Which one stacks up better for you, however, will depend on your own unique circumstances and personal preferences.

Robo-advisor pros and cons

In general, robo-advisors are simple to use and great for beginner investors who want to jump into investing without too much hassle or commitment. But there are pros and cons of robo-advisors, including the following:

Pros

  • Low fees Due to the lack of — or at most, limited — human assistance, the fees for robo-advisors are typically lower than those of traditional advisors. The less you spend on fees, the more money you can invest.
  • Ease of use In just a few minutes, after providing some basic information and answering questions online, you can start investing with a robo-advisor. Managing your account also is easy, since you can access it anytime online or via an app.
  • Low barrier to get started Some traditional financial planners have minimum account balances that range from thousands to millions of dollars. Many robo-advisors have $0 minimum account balance requirements or nominal ones, making them a great option for beginner investors who may not have a lot of money to get started.

Cons

  • Potentially limited services In general, robo-advisors limit their services to investment advice, unlike traditional advisors who may offer an array of services, such as help with budgeting, retirement planning, financial planning and more. Some robo-advisors do provide additional services, but they often charge an additional fee.
  • Lack of human interaction If you like a personal feel and want to get to know your advisor on a one-on-one basis, then a robo-advisor probably isn’t for you. To some people, using a robo-advisor may feel cold, impersonal and even unsettling to think of an algorithm being in charge of their money.
  • Limited trading and investment options In general, robo-advisors tend to invest customer funds in ETFs, which is a good way to build a diversified portfolio. If, however, you want to invest in other products or you want to trade individual stocks, you’re less likely to be able to do so with a robo-advisor.

Financial advisor pros and cons

A traditional financial advisor offers the human touch some investors may prefer. They often offer a wide range of services in addition to basic investment advice, which may be helpful depending on your personal circumstances. There are, however, pros and cons all investors should consider before choosing a financial advisor:

Pros

  • Personalized service Traditional advisors typically offer clients the option of sitting down with their advisor face-to-face on a regular basis. This is important to some investors who want to establish a personal relationship with the person managing their money.
  • Full array of financial services Many financial advisors offer additional services in addition to just building and managing portfolios. They often offer services such as retirement planning, estate planning, goal planning and more, which may be important to you.
  • More investment options While a traditional advisor may recommend ETFs as part of your portfolio, many also offer other investment options. Also, if you want to buy or sell individual stocks, commodities, currencies or other types of assets, your planner can help you do so.

Cons

  • Fees The biggest downside to using a financial advisor may be the fees. Those fees for traditional financial advisors tend to be higher than robo-advisors, and it’s important for clients to understand the full scope of fees they’ll be paying and how it may affect their bottom line.
  • Account minimums While there are some traditional financial advisors that don’t require a minimum account balance, many do. Some of those minimums can be quite high (up into millions of dollars), which is prohibitive to some investors.

Should I use a financial advisor or a robo-advisor?

You can’t go wrong choosing either a financial or a robo-advisor, since either way you’re investing money that will likely grow over time and help you build a solid financial future. However, depending on your unique circumstances and preferences, one may be a better choice for you.

Beginning investors or those people with limited funds may find a robo-advisor to be the best bet, since fees and account minimum requirements are typically lower. Those people investing with greater sums of money or who want to have more choices and more individual attention paid to their investments, will likely be more satisfied using a financial advisor. It’s also important to consider the significant differences between individual robo-advisors and traditional advisors.

If you’re torn between the two types of advisors, another option is an online financial planning service, which has a mix of the benefits of robo-advisors and human advisors. These services, along with hybrid models from robo-advisors, offer a bit more human interaction, but it’s mostly done through phone calls, e-mails or live chats, rather than the in-person assistance typically offered by traditional advisors.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.