How do you choose between robo-advisors and traditional advisors? (2024)

The important parts of the robo-advisor definition is that they automate client data collection and portfolio construction. The lower cost usually comes from using passively managed building blocks of the portfolio, although that's just a common business strategy decision and not a fundamental element of what robo-advisors are. They choose to use indexed components because robo-advisors in their current form are unable to oversee active managers.

The choice between a robo-advisor or a traditional advisor completely depends on: 1. the individual preferences2. the complexity of financial needs 3. the level of human interaction desiredRobo-advisors rely heavily on algorithms, and their performance may get impacted during periods of market volatility or unprecedented events that the algorithms would not have anticipated. They don't have the ability to understand and respond to our emotions or circ*mstances that may affect financial decisions.On the other hand Traditional advisors build long-term relationships with clients, offers emotional support and provides better understanding to navigate financial decisions.Me being an emotional being would choose for a traditional advisor.

Traditional financial advisers, or financial planners, provide holistic advice on a wide range of topics - investing, retirement, estate planning, mortgages and insurance, taxes, inheritance planning etc. In the past, advisers were compensated by investment product providers (getting commissions), which many saw as a conflict of interest (and rightly so). Today, advisers charge initial and ongoing fees, usually linked to AUA. Financial advisers usually work with people with at least $100,000 of investible assets (usually higher, like $250k plus).

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Traditional advisors operate in a well-defined legal area, with clear allocation of responsibilities. They rely on tge totality of available client information, not just what is collected through a survey. Because of this "high touch" approach, there is a material cost to portfolio construction.

The pros of a robo-advisor is accessibility. Many investors don't have access to certain money / portfolio managers because they don't meet the account size minimums. Previously, these investors were not given an alternative option. They had to rely on building an investment strategy on their own or using a diversified mutual fund or a fund of funds. Robo-advisors give these investors access to diversification and automation which is extremely helpful for busy people. The cons of a robo-advisor is that it is limited in its customization and you don't get the personalized touch of human interaction.

In my life as a DIY investor prior to becoming licensed, I thought about using a robo-advisor. They can be great for some people. However, using them can be dangerous for people who don't understand the way robo-advisors work. Robo-advisors are not emotionial or biased to their own preferences. Unfortunately, because robo-advisors are so efficient, this is a case of the old phrase "garbage in, garbage out." The results can give clients a false sense of confidence that since the advisor said it, they are OK.

Traditional financial advisers provide very useful services and help manage all aspects of your financial life that go way beyond the investment side. I don't see any cons when using a financial adviser. Some might say they are more expensive, which is true. But you pay for what you get, and they provide value for their money.

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Traditional advisors are great for investors who have more complex financial planning needs, such as:- Business owners, especially with complex ownership structures- Investors with significant wealth who can benefit from more complex tax-planning strategies- Investors with complex estate planning needsTraditional advisors sometimes come at a higher cost than robo-advisors, depending on the type of investor.Some traditional advisors facilitate investment into investment vehicles that are not available through robo-advisors, such as insurance-based solutions, individual stocks and bonds, private equity, debt and real estate.Traditional advisors can also help investors better understand their financial plans through 1-on-1 reviews.

Comparing robo-advisors and traditional advisors like comparing apples and oranges. I strongly believe that if you have reasonable amount of money to invest, or want to have your financial life in order, it is definitely worth paying for financial advice. If you don't have money yet, then robo-advisors is your only option and it's better to start somewhere.

When deciding whether to use a robo-advisor or traditional advisor, consider the complexity of your situation, and whether a robo-advisor has the resources to provide the advice and investment options that are best for you. If you're the type of investor who needs coaching to adhere to your goals, consider whether automated reminders from a robo-advisor, or personal communication with a traditional advisor is more suitable for you.

First, you need to understand your goals, and based on how much money you have, you choose which route to take - use a robo-advisor or work with a traditional advisor. When choosing a robo-advice platform, research, look for reviews and ask for recommendations from friends and family. When choosing a traditional adviser, the approach is the same. Still, you must also remember that you will need to meet your financial adviser in person (unless they can provide service online, which is also called hybrid advice).

In today's complex financial markets, combining the strengths of AI-powered robo-advisors and the expertise of traditional advisors is key. Robo-advisors excel in processing vast amounts of data quickly, offering efficient recommendations. However, their accuracy depends on the quality of input data. Traditional advisors bring invaluable human insight, especially in interpreting nuanced market trends. By integrating these two approaches, financial firms can enhance decision-making. Robo-advisors can provide rapid, data-driven suggestions, while traditional advisors apply their experience and understanding to make final, well-informed decisions. This synergy ensures more reliable and holistic financial guidance.

Ultimately, the challenge of using any investment advice is credibility and suitability of the advice. A robo-advisor gives you advice based on your input. It is objective and unbiased. However, if your input is wrong, then the advice will be wrong. A robo-advisor also cannot give you accountability.A good human advisor will delve into your deepest desires and goals and create a detailed plan that will help you decide how to invest your money. A good human advisor will also provide accountabilty for you to stay the course. Robo-advisors are best for those who already have a good handle on their plan, a good handle on their emotions, and a good handle on knowing when to adjust their plan.