Robo advisors are said to be the next big thing in investing, but are they really better than a human financial advisor? Some would argue so, but others swear robo advisors are the future of investing.
A robo advisor is a way for individuals to manage their finances online through automated investing for a low fee and with little help from a human. The systems manage your portfolio automatically, so as a consumer, all you have to do is deposit your money and move on. This allows people to focus on other areas of their life without having to check on their investments day after day.
How Robo Advisors are Similar to Financial Advisors
Robo advisors are actually very similar to financial advisors. The goal of both is to manage your portfolio in a way that gives you the greatest return on your money. Both a financial advisor and a robo advisor will ask questions regarding your current portfolio, your income, your goals, and the amount of risk you're comfortable taking. A financial advisor would then create a portfolio tailored to your individual needs; a robo advisor would do the exact same thing.
How Robo Advisors Differ from Financial Advisors
Financial advisors allow you to clearly communicate your needs to another human being. If you aren't happy with something, you can talk to someone and reach a solution together. Technology, while incredible in so many ways, just cannot replace an actual human. If you're looking for financial advice, help with your retirement plan, tax preparation help, or a general financial consultation, a robo advisor will not be able to meet your needs. A financial advisor, however, will be able to meet those specific needs.
A financial advisor will look at the big picture-not just the money you want to invest. They'll make sure you have an emergency fund in place, ask you about your retirement goals, and more. They can create a long-term financial plan for you, whereas a robo investor will only work with the money you put in to invest.
Financial advisors, however, will charge more for their services than robo investing. Robo advisors typically charge low management fees and low expense ratios, which will make them the more cost-effective choice. Certain platforms-such as Personal Capital-offer investments that are monitored by computers in addition to financial advisors to help better meet the needs of the investor.
Which is Better: A Financial Advisor or a Robo Advisor?
While the answer will depend on your unique financial goals and situation, a good strategy is to use a mix of both robo investors and financial advisors. Financial advisors can help you see your finances as a whole; robo investors can help simplify your investment goals for a low fee and no supervision from you.
Whether you decide to use a financial planner, a robo advisor, create your own plan for managing your finances, or a combination of all of the above, the important thing is that you have a plan in place to help you meet your financial goals.