If you’re a beginning investor, there’s a lot you can do on your own to get started building your portfolio. But as you advance, you’ll probably notice that investing can get complex and decisions can get more involved than you anticipated. Determining whether a particular stock is a smart addition to your portfolio isn’t something you want to do on a whim, either. But if you’re like most investors, you probably don’t have enough hours in the day to thoroughly research every possible option. Fortunately, when you work with robo advisors and financial advisors, you can get good results with less legwork.
When it comes to the question of choosing a robo advisor or a financial advisor, though, how do you decide which is best for your needs? If you’re wondering how to choose, we’re sharing some information that can help you make your choice.
What You Need to Know About Robo Advisors
What Are Robo Advisors?
While the term “robo advisors” might conjure up images of HAL 9000 apologizing with an “I can’t do that,” that isn’t what’s happening here. Instead, a robo advisor is a digital platform with an algorithm that takes information investors share and uses it to determine the best investment strategy based on the investors’ needs, financial position and preferences.
In the simplest sense, robo advisors are an automated pathway for investing. After answering some preliminary questions, the system can start managing your portfolio and allocations and making investment decisions automatically on your behalf. The way robo advisors go about this may vary, but many use their collected data to recommend preset investment packages. Then, you can move forward with the package that appeals to you by investing a single sum that the robo advisor divvies up based on your portfolio’s design.
Pros and Cons of Robo Advisors
There are around 100 popular robo advisors, each with its own benefits and drawbacks. However, there are some pros and cons that apply broadly to these services.
Overall, the most significant benefit of robo advisors is the low barrier to entry. You don’t need existing wealth to sign up, you can often invest small amounts at a time and you aren’t required to make recurring investments. There are also minimal fees, along with a wide variety of investment options.
The guidance available through robo advisors also makes investing less intimidating. They’re designed to simplify your investment decisions and give you some confidence that your portfolio aligns with your needs, preferences and strategy.
When it comes to drawbacks, many robo advisors offer limited direct support options. Typically, all investment guidance comes through materials in the app, so you usually can’t ask an investment expert for advice. In some cases, even help with technical issues isn’t easy to access, though the exact support level does vary between companies.
Additionally, while the portfolio recommendations are reflective of your needs and preferences, they aren’t fully personalized. While this isn’t automatically a problem, it’s essential to understand that some asset allocation decisions may not be in your hands.
Which Types of Investors Are Best Served by Robo Advisors?
For the most part, robo advisors were created with newer investors in mind. The goal was to increase investment accessibility while simplifying the complex landscape for people who are new to the space or unfamiliar with investing. Along with simplified portfolio planning, robo advisors commonly come with lower fees, no account minimums and fractional share purchase capabilities.
Robo advisors are also a good choice for tech-savvy investors. Many of the platforms are app-based, so familiarity with basic app operation is helpful. That’s particularly true since many robo advisors offer limited support options when it comes to learning each app’s functionality. While written walk-throughs and online FAQs are widely available, you may not be able to call the company if you have a quick question about how features work.
What You Need to Know About Financial Advisors
What Are Financial Advisors?
Financial advisors are investment professionals who offer clients direct guidance based on their unique financial situations. They review your full financial picture, discuss goals in detail and otherwise gain a deep understanding of what you want. That allows them to create custom pathways to help you achieve your goals.
Some financial advisors focus on investment support, while others offer holistic services, effectively overseeing your entire financial life. What comes with the service may depend on the exact type of financial advisor you decide to work with.
Pros and Cons of Financial Advisors
The biggest benefit of using a financial advisor is the direct, personalized support. Your financial advisor looks closely at your entire financial picture, and they have in-depth conversations with you about your goals. That allows them to create custom investment strategies and offer other kinds of financial guidance to move you toward your targets faster.
It’s also common to develop long-term working relationships with a single financial advisor. That makes adjusting your investing activities as you progress toward your goals easier. Additionally, it allows your financial advisor to update their guidance in response to key events, including life changes like marriages as well as economic shifts, emerging companies and more.
When it comes to drawbacks, the biggest is typically the cost. Using a financial advisor comes with a far heftier price tag than a robo advisor, both upfront and long-term. Additionally, some financial advisors may limit their client bases to households or individuals with certain income levels. You might need several thousand dollars – if not tens or even hundreds of thousands – either in existing investments or in investable funds to begin working with them.
While all financial investors must keep your best interests in mind, commission-based financial advisors may also make investment recommendations based on boosting their compensation. While those recommendations may be suitable in a broader sense, it’s possible they aren’t as strong a fit as some alternatives. This means some of your investments might not perform as well as they could.
Which Types of Investors Are Best Served by Robo Advisors?
Generally speaking, financial advisors are a better choice for investors with substantial income and complex financial lives. But, with a financial advisor, you get a professional who can examine the entire picture, ensuring your broader financial strategy – not just your investment approach – meets your needs now and into the future.
