Robo Advisor vs Financial Advisor

Choosing between a robo-advisor and financial advisor depends on how much money you invest, the involvement you want, and the fees you're willing to pay.

Robo-advisors have changed the way we invest. But that doesn't mean financial advisors are obsolete.

Is one better than the other? And how do you choose the right option for you?

In this article, discover the main differences between robo-advisors and financial advisors. Find out how they compare, how they work, and how to choose your perfect fit.

What's the Difference: Robo-Advisor vs Financial Advisor?

Robo-advisors are computer advisors. You typically don't talk to a human. Your investments are determined by an algorithm and the data you input regarding your goals, timeline, and overall risk tolerance.

Personal advisors are humans. They act on your behalf to invest for you based on the same information the robo-advisor uses, but a human, not a computer, makes the decisions.

You typically meet a financial advisor in person, and he/she may help you with more than your investments. They may help with estate planning, tax planning, and other financial aspects.

How Do Robo-Advisors Work?

Investing with a robo-advisor is simple. It takes just a few steps to get started, and then the robo-advisor takes over. If you want a hands-off way to invest, a robo-advisor may be a good option.

Here's how to start with a robo-advisor:

1. Choose Your Robo-Advisor
   There are hundreds of robo-advisor options, and we outline the top companies below. Make sure to compare minimum investment requirements, portfolio allocations, and costs before choosing.

2. Answer the Robo-Advisor Questions
   Each platform has its own questions, but they all boil down to the same thing - risk tolerance, goals, and timeline. This is how a robo-advisor decides how to allocate your investments. The more time you have and the higher your risk tolerance, the more aggressive the portfolio you can take and vice versa.

3. Fund Your Account
   The final step is to fund your account and let the robo-advisor do the work. Some robo-advisors may allow you to have some say in your portfolio allocation or at least allow you to remove certain investments from your portfolio if they don't align with your beliefs. Still, overall, once you fund the account, the rest is done for you.

   Robo-advisors will buy and sell investments for you. They also automatically rebalance your portfolio as necessary to ensure that you stay at the correct risk level for your goals.

Can You Lose Money with Robo-Advisors?

You can lose money with any investment, robo-advisors included. While robo-advisors diversify your investments across a series of assets and different industries within each asset, there's always a risk of loss.

To offset the risk of a total loss, continue to diversify your investment outside of the robo-advisor. Don't put all your eggs in one basket. If you invest in a taxable or retirement account with a robo-advisor, consider investing in assets outside of it too, whether it's a simple CD or real estate.

Robo Advisor Costs

Different robo-advisors have their own ways of charging. Typically you will see:

• Percentage
  This is when they charge a percentage of your assets under management (AUM). Usually robo advisor fees are 0.25% to 0.50%. This means for every $1,000 invested, you'll be charged $2.50 - $5.

• Monthly flat-rate
  Some robo-advisors charge a monthly flat rate instead. This can work out to be cheaper if you have a large balance. The monthly management fee usually ranges from $1/mo to $9/mo.

There are also some robo-advisors who don't charge management fees at all. But they usually require a bigger initial investment, or have some other caveat (like holding a portion of your portfolio in cash).

Pros and Cons of Robo-Advisors

Pros

• It's a passive investment that doesn't require you to do anything once you fund the account.
  
• Most robo-advisor-built portfolios are well-diversified.
  
• Robo-advisors typically cost less than human advisors.
  
• Many robo-advisors employ tax-loss harvesting to minimize your tax liability.
  
• There's less risk of human error.
  
• Many robo-advisors have low account minimums.

Cons

• It's not a personalized option; most robo-advisors have only a handful of prebuilt portfolios to choose from.
  
• You can't talk to a human advisor with most robo-advisors, and if you can, it's an extra cost.

How Do Financial Advisors Work?

A financial advisor is a human advisor - someone you meet with and talk to often about your investments. Financial advisors can help you choose investments, plan your portfolio, educate you, and offer other financial services.

The process is similar to that of a robo-advisor, except you'll meet the advisor in person or virtually. You'll discuss your finances, goals, timeline, and risk tolerance. The advisor then creates a plan that he/she thinks will work based on your circumstances.

You don't have to take the plan at face value - you can work together to tweak it to meet your exact needs. There isn't a one-size-fits-all portfolio like robo-advisors provide, so it's a more personal approach.

Financial Advisor Costs

There are a few ways financial advisors charge for their services:

• One time session
  If you just need one-time (or occasional) advice, you can just pay for one session. Financial advisors usually charge between $200 and $400 per hour.

• Percentage
  If you want a financial advisor to manage your investment portfolio, you'll typically be charged a percentage of your assets under management (AUM). Financial advisors usually charge about 1% of your portfolio balance.

• Retainer
  If you're looking for advice on an ongoing basis, you can pay a fixed retainer. Then anytime you need help, the cost will come out from the retainer. Usually, financial planners require retainers between $1,000 and $3,000. It could be a monthly or annual retainer.

Pros and Cons of Financial Advisors

Pros

• Financial advisors have a more personal touch, which some people need when investing.
  
• You may have more investing options and can get help with other financial aspects of your life.
  
• Personal advisors can handle more complex financial issues.
  
• Financial advisors can help with specific niches, such as small business owners or high-salary earners, such as doctors.

Cons

• Financial advisors typically cost much more than a robo-advisor.
  
• They require a bigger minimum investment - usually $100,000.
  
• There's more room for human error.
  
• If you don't work with a fiduciary, they'll only sell you investments that benefit themselves.

Should You Use a Financial Advisor or Robo-Advisor?

Choosing between a financial advisor and a robo-advisor is a personal decision. A financial advisor offers more personal service but at a higher cost. There's also more due diligence required before choosing a human advisor.

A robo-advisor offers a completely hands-off approach to investing, which is great for beginners or those who can't handle watching their investments.

So which one is right for you?

Ask yourself what goals you have, how much input you want in the process, and how much you want to spend. Do you like having human contact and regular meetings with an advisor or would you prefer a more hands-off approach, letting technology do its thing?

Which Robo-Advisor is Best?

Just like you should interview human advisors before working with one, if you choose the robo-advisor approach, you should know which is right for you. Before choosing, look at these factors:

• Cost - Each robo-advisor has a different price; know the bottom line before investing to make sure it suits your goals.

• Portfolio options - Look at the different portfolio options each robo-advisor offers (some have more than others).

• Features - Robo-advisors are mostly "set it and forget it," but if you want access to a human advisor, some robo-advisors offer it.

• Account options - Some robo-advisors offer taxable and retirement accounts, but not all; make sure you choose one that offers the account type you need.

• Tax-loss harvesting - If you're concerned about excessive tax liabilities on a taxable account, look for an advisor that offers tax-loss harvesting.

Betterment - Best Overall
Betterment is one of the original robo-advisors, and is a true robo-advisor with all the bells and whistles. You set your risk tolerance, goals, and amount you'll invest and Betterment does the rest.

• Betterment automatically reallocates your portfolio as you get closer to your goal's timeline.
  
• It uses tax-loss harvesting to decrease your tax liability.
  
• There's no minimum account balance.
  
• A basic account costs $4/month for accounts less than $20,000; or 0.25% annual fee for balances of $20,000 or more, or with a recurring monthly deposit of $250 or more.

M1 Finance - Best for Customized Portfolios
M1 is not a robo-advisor and only offers self-directed brokerage services. If you want the benefit of automated investing but don't feel like you fit in predetermined portfolios, M1 Finance may be a good option. You can create portfolios using both ETFs and stocks.

You can even invest in fractional shares, allowing you to maximize your investments without leaving too much cash drag. M1 helps you automate your trading activity and strategy once you create your pie-based portfolio.

• M1 is free to trade and there's no management fee.
  
• Investors create "pies," or portfolios of investments, including stocks and ETFs.
  
• M1 doesn't focus on goals, but rather your customized portfolio based on what you think is best.
  
• Investors also have access to a cash management account that may earn a small amount of interest.

Wealthfront - Best for Hands-Off Investors
Wealthfront is another of the "original robo-advisors" offering low-cost investment opportunities for beginners or investors looking for a hands-off approach.

You need $500 to start and after answering a series of questions and funding your account, Wealthfront does the rest.

• Wealthfront creates a portfolio based on your goals.
  
• All portfolios have daily tax-loss harvesting to minimize your tax liabilities.
  
• Investors can semi-customize their portfolios by eliminating or adding certain assets.
  
• It offers both taxable and retirement accounts.

Fundrise - Best for Real Estate Investors
If you want to invest in real estate, but don't want the responsibility of the physical asset itself, Fundrise is a popular real estate investing platform where you invest in private real estate projects. It's a great segue into real estate investing, especially if this is your first jab at it.

• Investments are less liquid than ETFs or stocks, and you'll pay fees if you liquidate early.
  
• Investors need just $10 to invest in real estate.
  
• Fundrise charges 1% of assets under management.
  
• Any investor can invest in real estate with Fundrise, not just accredited investors.

The Bottom Line: Should You Use a Robo-Advisor or Financial Advisor?

Both robo-advisors and financial advisors have their pros and cons. If you're just starting out or want as little involvement as possible in your investments, a robo-advisor is the way to go. You'll enjoy lower fees, portfolio rebalancing, and sometimes tax-loss harvesting.

If you like a little more control and feel better with a one-on-one conversation or frequent conversations about your finances, a human advisor may be a better option.

Some robo-advisors offer the best of both worlds, though, giving you the option to talk to an advisor when needed. Look at all your options and decide which one will make you feel most at ease.