With the rise of robo advisors in the late 2000’s, the old ways of working with a financial advisor quickly changed and continue to change. Robo advisor platforms leverage algorithmic trading and provide a highly digitized experience, which can reduce costs. In spite of this, studies show that people would prefer to work with a financial advisor vs. a robo-advisor1 when it comes to charting their financial path. Let’s explore the path of both robo-advisors and human advisors, and getting the most out of either experience.
What are the benefits of using a robo-advisor?
Robo-advisors can get new users started quickly from their mobile device or browser. This low barrier to entry combined with low-cost ETFs and low management fees of the funds within the robo-advisor model portfolios enables people to start investing with little money at a fraction of the cost.
Some key advantages of using a robo-advisor include:
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- Relying on technology to execute trades
- Rebalancing your portfolio on a daily basis
- Tax lost harvesting
These benefits, plus the fact that these platforms are fairly affordable for the everyday investor, leave many people wondering whether they should completely switch to a robo-advisor or if they should continue to work with their human financial planner.
What are the benefits of partnering with a human financial planner?
For starters, robo-advisors will never provide the human element that financial planners still offer, such as listening to your personal financial goals and concerns or helping you initially set up your accounts. Many robo advisors only use taxable brokerage accounts, which means you aren’t getting the same long term tax advantages you’d get from the appropriate retirement accounts. Financial planners also will take your goals and long-term strategies into consideration when helping you select the appropriate risk tolerance for your investment accounts. Additionally, a financial planner you trust can help you manage your emotions and behavior when it comes to investing, instead of making irrational or spontaneous decisions.
An added benefit of working with an actual financial advisor is their ability to help you customize specific strategies such as:
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- Build a comprehensive financial plan towards your future financial goals
- Review your cash flow and budget
- Set up the right savings and investment accounts
- Help you understand the right insurance and estate planning documents you may need
- Plan for events like purchasing a first home or saving for college
So what’s better, working with a robo-advisor or a human financial planner?
While your specific situation may vary and one option might be best suited for you, the ideal answer is to work with a combination of both technology and human expertise.
1 Paulo Costa and Jane Henshaw, “Quantifying the investor’s view on the value of human and robo-advice,” Vanguard, February 2022, https://advisors.vanguard.com/iwe/pdf/ISGHVD.pdf.
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