Investors looking for investment management are both blessed and cursed with many choices. Among them, should they go with a human financial advisor or an automated investment manager known as a robo advisor?
To make matters more complicated, the lines between the two are blurring, with some robo advisors offering access to human advisors and some human advisors using robo advisors to manage assets. When markets are rising, the differences may seem moot, as both robo advisors and human investment managers manage your investments according to your financial goals. When markets are falling, however, a robo advisor may feel, well, too impersonal and robotic.
[See: 9 Things to Know About Robo Advisors.]
Actually, “a robo advisor is a misnomer as there is no robot involved, just a computer algorithm,” says David S. Thomas Jr., CEO and senior investment management consultant at Equitas Capital Advisors. Investors input their age, financial goals and risk tolerance, and the computer suggests an investment asset allocation based on those criteria. It’s the same process that a person might use but at a lower cost and without the potential biases, or benefits, of a human investment advisor, Thomas says.
There are distinctions among robo advisors. Some invest in fewer than 10 exchange-traded funds, rebalance these investments based on your preferred allocation and offer little else. Other robo advisors offer individual stock investing in addition to many diverse ETFs, along with other services such as tax-loss harvesting, retirement planning and access to human financial advisors, within their platform.
At Schwab Intelligent Portfolios, Personal Capital and Ellevest, these advisors are certified financial planners. Schwab financial planners, for example, answer questions about saving for college, retirement or a home while referring more complex matters such as taxes, insurance and estate planning to an outside expert, according to Tobin McDaniel, president of Schwab Wealth Investment Advisory.
Robo advisors began in the wake of the 2008 financial crisis, and these digital investment managers have known only the bull market of the past nine years. It’s unclear how the computer algorithms will handle high volatility, market declines and fearful investors, said Seth Freeman, CEO of EM Capital Management, before the market’s recent decline.
When stocks fell sharply during a turbulent week in early February, robo advisors had their first significant test. Some experienced excess site volume that temporarily shut or slowed down their websites, including Fidelity, TD Ameritrade, T. Rowe Price, Betterment and Wealthfront, according to a financial-planning.com article. Others, like Schwab and Ellevest, reported no disruptions. “It was business as usual,” says Sylvia Kwan, chief investment officer of Ellevest, which targets women investors. Both Ellevest and Schwab sent out newsletters to subscribers aimed at calming frayed nerves and warding off irrational behavior.
Costs are key. If investors continue to stick with robo advisors through market ups and downs, one reason may be the savings. Most robo advisors cost less than human financial advisors. In fact, Schwab Intelligent Portfolios, WiseBanyan and M1 Finance give their investment management for free, passing on to investors only the costs of the investments. Other robo advisors charge from 0.15 percent up to 0.89 percent of assets under management for their platforms, with hybrid robo advisors that let you consult with a financial professional typically starting at 0.5 percent.
[See: 7 Investment Fees You Might Not Realize You’re Paying.]
By contrast, financial advisors can charge up to 1 percent or more to manage your investments, although other financial advisory models may include fee-for-service, commission-based and monthly charges. Newer investors with less money to invest may not even have the option to work with a financial advisor, as many professionals require clients to have $250,000 or more in investing assets.
That may be why hybrid financial managers are becoming popular. Hybrid robo advisors such as Personal Capital, Betterment, Ellevest and Wealthsimple all offer access to human financial advisors. Investors want both digital tools and unbiased advice, says Yvette Butler, president of Capital One Investing. Its 2017 Financial Freedom Survey found that 69 percent of investors wanted a digital-human hybrid to manage their investments, with 74 percent preferring a financial advisor in a turbulent market.
The flip side of that coin is hybrid financial advisors who use robo-advisor models to select and manage their client’s assets. Some robo advisors are marketed to financial advisors as a way for them to integrate digital investment advice into their services. That frees up time for the financial advisor to counsel their clients and can lower client fees.
Which is best? Whether you need a financial advisor, robo advisor or some combination of both depends on your situation. If you’re young and beginning to invest, the low- or no-fee robo advisors such as Wealthfront, Betterment, WiseBanyan should meet your needs.
Older investors and those with more complicated finances may be better served by hiring a financial advisor, a hybrid financial advisor or a robo advisor that gives them the option to consult with a financial planner when one is needed. A more seasoned investor might opt for an automated-plus-human-advisor platform such as Personal Capital or a financial advisor with an automated investment manager.
Mike Kerins, CEO and founder of RobustWealth, frames the financial advisor discussion this way: “It’s not necessarily a question of which is better — robo advisor or financial advisor — but how robo technology will automate advisors’ workflows so they can spend ample time working directly with clients.”
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Thomas suggests that investors let the computer do what it does best — data management number crunching, logic and speed — and letting humans do what they do best — intuition, vision, creativity and compassion.
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This Is How You Choose Between a Robo and Financial Advisor originally appeared on usnews.com
