There’s a new buzzword in financial advising: robo-advisors. These online investing services provide automated algorithm-based portfolio management for a low fee. Though the concept of using low-cost index funds has been around for decades, robo-advisors have recently started gaining popularity as their automated offerings grow in sophistication. Today, both new and established investment firms offer tools for asset allocation aimed at achieving long-term investment goals.
It’s the next generation of robots in a world where tollbooths, movie rentals, and grocery store checkouts have been revolutionized by automated technology. But successfully managing your wealth carries serious long-term consequences – much more so than, say, buying a loaf of bread. So the age-old question of man versus machine remains: When is a robo-advisor sufficient? And when is a professional financial advisor the better choice?
The advantages of a robo-advisors
- Low fees: Robo-advisors offer automated asset allocation using algorithms based on a client’s age and investment goals as well as historical risks and returns for stocks, bonds, and other asset classes. With little to no personalized service, they can offer their services for a relatively low fee. Robo-advisor portfolios are typically structured using mutual funds or exchange-traded funds that mirror the broad stock and bond indices. This presents an appealing alternative for young investors in particular, for whom the financial picture is less complex and costs are an important consideration.
- Low account minimums: Most robo-advisors require relatively low minimum account balances - usually around $5,000. Some even require no minimums at all. This makes them an attractive choice for investors who are just beginning to accumulate their wealth.
- Ease of management:Robo-advisors appeal to some for their hands-off, set-it-and-forget-it quality. Asset allocation is automated using client inputs on age, risk tolerances, and investment objectives, making them ideal for individuals with little time to dedicate towards investing, little knowledge of investment strategy, and more straightforward financial situations — such as those saving for the down payment on their first home.
The advantages of a financial advisor
- The human element:The most obvious difference between a robo-advisor and financial advisor is human interaction. Your financial advisor can be a single point of contact for managing your wealth as well as a resource in areas like financial planning and estate planning, or financing for business or personal needs. A financial advisor can also serve as a sounding board for addressing financial decisions that don’t have a clear-cut answer, such as how to fund college tuition or whether or not to downsize a home.
- Comprehensive strategy:This becomes particularly important with the passage of time. As an individual’s financial complexity grows, a one-size-fits-all approach of a robo-advisor is no longer practical. Your financial advisor can take into account all the unique factors of your individual situation. Goals like saving for a grandchild’s education, paying off your mortgage, filing for Social Security, managing stock options, drawing up an estate plan, and charitable giving are all important factors an advisor will consider to keep your long-term financial plan attuned to changes in the economy and your life.
- Knowledge and expertise:When you work with a financial advisor, you benefit from the expertise of a larger team, and can draw on the knowledge of specialists in the economy, asset allocation, investments, and tax planning. A team of experts can be a valuable resource in times of volatile markets and economic uncertainty.
As robo-advisors prove, man isn’t always at odds with machines. However, for investors with more complex financial situations, an experienced and knowledgeable financial advisor offers the most comprehensive solution. After all, robo-advisors are not really advisors — they’re software-driven, computerized investment programs. For more comprehensive, customized advice a traditional financial advisor continues to be the best choice. There’s simply nothing like the human touch.
This article is for informational purposes only and should not be construed as investment or legal advice.