Human, Robo, or Both? Find Out Which Works for Your Financial Goals

Robo-advisors have revolutionized the financial advising landscape with their easy-to-use platforms and cost-effective fees.

These digital platforms, powered by algorithms and proven strategies, automate investing at low-cost based on your financial goals and risk tolerance. But how do the best robo-advisors stack up against traditional human financial advisors?

In this article, we’ll explore the advantages and disadvantages of both robo-advisors and human financial advisors to help you choose the best route for your financial journey.

Robo-Advisor

Robo-advisors offer a hands-off approach and low fees and minimums. They are essentially digital platforms that leverage sophisticated algorithms and, in some cases, artificial intelligence (AI), to provide automated financial planning services with minimal human supervision.

With robo-advisors, you simply input your investment goals and time horizon, current financial status, and risk tolerance and you can receive personalized asset management, often at a fraction of the cost of traditional financial advisors.

Robo-advisors then construct an investment portfolio tailored to your specific needs. Most robo-advisors today use the principles of modern portfolio theory (MPT) to achieve diversification and risk management, typically investing your money in a range of low-cost exchange-traded funds (ETFs) and index mutual funds.

The best robo-advisors also offer ongoing portfolio management, including automatic rebalancing and tax-loss harvesting. Automatic rebalancing ensures your portfolio maintains its target asset allocation over time, while tax-loss harvesting seeks to minimize your tax liability by strategically selling off investments that have suffered a loss.

The accessibility and affordability of robo-advisors have made them a popular choice for novice investors and those with smaller portfolios. And they can also be a valuable tool for more experienced investors with their automated portfolio management and rebalancing features, along with tax-loss harvesting.

However, it’s important to remember that while robo-advisors can offer a basic advising service, they can’t offer financial planning for personal circumstances.

Human Financial Advisors

Human financial advisors are highly trained professionals who provide comprehensive financial advice and services They consider your entire financial picture, which can include budgeting, investments, retirement planning, tax strategies, estate planning, and more.

Human advisors offer the personalization that robo-advisors cannot, including helping you navigating major life events like buying a house, planning for a child’s education, or preparing for retirement. They can also adapt to changing market conditions or personal circumstances with strategies that go beyond the rigid algorithms of robo-advisors.

However, even the most experienced advisors are prone to human fallibility and bias. And the cost of their services is often higher. Many advisors charge a percentage of the assets they manage, which can be significantly more expensive than the flat fees charged by most robo-advisors.

A Hybrid Approach

Many financial services companies have started to offer a hybrid approach that combines the accessibility and efficiency of robo-advisors with the personalized touch of human advisors.

In a hybrid model, clients typically have access to a robo-advisor for automated portfolio management, alongside the option to consult with a human advisor for more complex financial planning questions.

However, it’s important to note that the role of human advisors in these hybrid models often differs from that in traditional financial advising. In many cases, these advisors serve more as consultants or guides, helping clients understand their investment options and financial strategies. They may not have the capacity to directly alter portfolios or recommend specific investments, as the automated robo-advisor component typically handles these tasks.

The Bottom Line

Whether a robo-advisor or a human financial advisor is right for you depends on individual preferences, needs, and circumstances. Robo-advisors offer cost-effective, efficient investment management with minimal human interaction, making them suitable for younger or less wealthy investors comfortable with technology. On the other hand, human advisors provide a more personalized service, wider financial advice, and a real human connection valued by older, wealthier, or technology-averse individuals. A hybrid approach, combining the advantages of both, may offer the best solution for many.