Robo advisor vs financial advisor: Which should you choose?

With the advent of robo advisors in the 1980’s it theoretically became easier than ever to invest. The question of whether to use a robo advisor vs financial advisor became one that people concerned with their finances began asking themselves more and more. After all, using a robo advisor simplified investing even if you didn’t have the financial background or formal education in finance to do so…

Investing several hundred thousand dollars that you had at your disposal suddenly became easier with the advent of the robo advisor. The appeal to use this investment option is easy to spot: Inexperienced investors can take a set-it-and-forget-it approach to investing.

That being said, not all investment strategies are created equal, and as we have all learned over recent years, things are not always as easy as they seem with robots and mathematical algorithms. Truth be told, there is a time and a place for both human financial advisors and their robo counterparts. However, most people don’t know which to use when.

First things first: One of the disadvantages of robo advisors is that they are not actually the type of investment advisor you are probably thinking they are.

A robo advisor defined by Wikipedia is actually

“…digital financial advice based on mathematical rules or algorithms.”

It is an online program or app that allows you to make investments without having to rely on a traditional human financial advisor.

The investments that are made on your behalf are based on algorithms made by financial and investment theorists. As an investor, you’re not really required to think much nor to develop your own plan with the assistance of human advisor.

Is a robo advisor worth it? Truth be told, they are not all bad. When you are first starting to invest financially, you probably won’t know much about how the markets work. You may not have much money, either. With this type of investing, this isn’t an issue.

Many of these algorithm-based robot investment strategies require little to get started. Some robo advisor apps allow you to invest your small change. Initially, the risk isn’t very much. You have less to invest and therefore, less to lose.

Most people have heard of the traditional human financial advisor. Historically, this is a professional who has advice and background education about finance, financial concepts, the financial markets and is well versed in a multitude of different financial strategies. They build a business for themselves on crafting alongside their financial planning teams financial proposals that might work for you based on your very particular financial situation and goal(s). There is no algorithm work involved in their approach, however there are statistics that they and the companies they represent will leverage to build custom financial portfolios for each person.

These are the people you turn to when you need to plan for your kids’ college educations or for your retirement. The experience is much more interactive, with you being a part of the decision-making process. There isn’t the set-it-and-forget-it option here.

Additionally, another reality of a robo advisor vs a financial advisor is that many people who invest in a human advisor or that work directly with a financial consultant typically will need a more significant amount of money to invest, than the “small change” robo advisor apps are willing to take.

The advisor often gets a percentage of this money to help you manage your investments. This amount is typically an amount based on similar percentages that other advisors within the same vicinity charge.

For the inexperienced investor, investing a larger sum of money with a human financial advisor can initially feel quite intimidating. This factor is also what stops many people from going this route and in some cases opting for the “best robo advisor” app or company so they can do it on their own.

As with many things in life, the answer to that is, it depends on your unique situation, needs and goals. For the inexperienced investor, robo investing may be an appealing way to go about investing their money. This investing environment however is associated with a learn-as-you-go strategy that people need to realize has a learning curve and many drawbacks.

While robo advisors cannot be your investment strategy forever, it’s a good place to begin, particularly, as said, when you don’t have a lot of money to invest up front.

For the more experienced investor or for the person who wants to take their investing to the next level, hiring a human advisor can make a huge difference.

Additionally, when the market goes down, your robot friend won’t be much comfort, at least not like any accountable human financial advisor would be. If you feel like you need this kind of personal, human service when it comes to taking care of your money, you may be better off talking to a financial consultant.

Finally, by the time many investors seek out a human advisor, they’re ready to have more control over their financial decisions. With robo investing, you answer a questionnaire.

The questionnaire determines how much financial risk you’re willing to take, and your portfolio of investments is based on this. You can’t really invest outside these parameters.

However, when you hire the services of an actual personal financial advisor like Claudia Weisser, you can be sure your financial advisor will design a strategy tailored to your financial reality far more than her robo counterpart ever could.

Remember that the main advantages of a human financial advisor are:

• that you will always have the option to have face to face meetings,
• a human advisor can always help you whether you’re dealing with a large or a small portfolio,
• lastly, but perhaps most important, robo advisors cannot be as personalized as a human can.

What many people don’t really grasp when it comes to taking care of their finances is that it’s a lifelong pursuit, one that can require change pretty regularly.

For many big financial decisions, the set-it-and-forget-it strategy of robo advisor technology just doesn’t work. Your monetary needs change as your life changes.

As you get older, your financial life often becomes more complicated. You need an investment strategy for each aspect of your life, often starting when your kids are born and concluding with your retirement. These kinds of scenarios work much better when you have access to an experienced human financial advisor.

While your robo friend may get you started, you’ll need more than an algorithm and a computer to make some choices, particularly when those choices become more difficult or financially complex. Having an actual human financial advisor can help you navigate these choices and hence we feel is the main difference between a robo advisor vs financial advisor.

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances .The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.