How Should Investors Decide Between Robo-Advisors and Traditional Advisors?
The Changing Investment Landscape
Robo-advisors and new financial technology are paving the way for completely innovative ways of investing and making financial decisions. In recent years, there has been a surge in the number of robo-advisors. These automated investment platforms do most everything traditional human advisors do.
A robo-advisor is a high-tech term that refers to an automated portfolio management service. These services use complex algorithms to simply investing. Users can input their investment time horizon and how tolerant or risk-averse they are, and they receive a diversified portfolio. There are typically features included with robo-advisory services including automatic rebalancing and tax-loss harvesting.
With the selection of robo-advisors, it’s giving investors more choice in terms of what they want their approach to be. However, are there things a traditional advisor can do that an automated platform can’t?
What Are the Benefits of Going with a Traditional Advisor?
Despite advancements in technology, there can almost always be some indisputable benefits of investing with a traditional advisor. One of the primary benefits of a traditional advisor is the sense of personalization. Yes, you may be able to input certain objectives when you’re signing up with a robo-advisor platform, but it’s not the same as sitting with someone and telling them your goals and your concerns. Your financial objectives are likely multi-faceted and a robo-investor platform might not be able to address that complexity.
There can also be a sense of comfort that comes from having a person you can talk to if you’re unsure or the market is volatile. The best strategy during volatility is usually to wait it out, and that’s much easier when you have a professional to talk to.
Of course, with benefits come some possible downsides. For example, it can be challenging to always know if a traditional advisor is looking out for your best interest or their bottom line. Traditional investors tend to charge pretty high fees, and the barriers to entry can be high. Many top advisors only work with high-net-worth clients.
What are the Benefits of a Robo-Advisor?
Robo-advisors make investing much more accessible for more people. Investing in the stock market is no longer something that’s seen as just for wealthy people. Now it can be done on the phone with an app. Robo-advisors lower the barriers to entry that investors would have previously experienced. For example, there are minimal investment requirements to fund an account.
Along with lower minimums, there are also lower costs in general when someone uses an automated investment platform. Some brokerage firms even offer entirely free trades. Even when it’s not completely free, most robo-advisor platforms only charge around 0.25 percent of the value of a portfolio each year, which is much lower than what a traditional advisor is going to charge.
Selecting asset allocations and diversifying a portfolio can be very complex, and it can take a lot of knowledge and expertise. Most people don’t have advanced financial and investment knowledge, and robo-advising platforms make this easier as well. For most of these platforms, you just have to input basic information about yourself and your goals the platform does everything else for you.
Rebalancing is an important concept in investment management, and without automated technology, this has to be done manually. This would also typically require paying commissions to sell and buy the necessary assets to appropriately rebalance, but robo-advisors do all of this for users in most cases, and the user doesn’t have to pay commissions.
Another advantage of a robo-advisor relates to tax-loss harvesting. Tax-loss harvesting used to be something that only the highest level investors had available to them, but robo-advisors automatically integrate this into platform features. Tax-loss harvesting is something that occurs as poorly performing investments are sold, and then something similar is immediately purchased, creating a tax loss. This is good in that it can offset whatever gains someone else might have with their other investments.
Making the Call
Ultimately if someone is wondering whether a robo-advisor or a traditional advisor is right for them, that decision is going to come down to personal preferences. Not everyone is going to be comfortable with the concept of trusting investment decisions to an algorithm. They might appreciate a sense of face-to-face interaction with an advisor and highly personalized service.
On the other hand, another person might prefer the sense that they can take control over their financial life and enter the world of investing in the stock market even if their budget is small and they can’t afford high fees.
By Andrew from LendEDU – a financial and consumer education website. Check out the blog if you’re interested in learning about anything personal finance.