Managing your investments can be an arduous task, especially when the market feels extremely volatile or you're nearing a major milestone like retirement and you're afraid of making a misstep. Luckily, though, you have different options to help guide you on your investing journey.
Financial advisors have always been a key asset to wealth management, but robo-advisors have grown in popularity over the years for their hands-off and low-cost approach to managing your investments. Before you decide which route you'd like to take to help you manage those assets, there are a few things you should consider about each option.
It's important to note that a financial advisor can be more helpful to your overall financial health since robo-advisors are only meant to provide investment recommendations while financial advisors provide a more holistic approach to managing your money. Advisors can provide recommendations on more than just investing, including budgeting, spending, major life events and more.
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What's the difference between a robo-advisor and a financial advisor?
Robo-advisors are essentially software platforms that invest on your behalf.A robo-advisor's job is to create an investment portfolio for you and then manage it over time so you don't have to. When using a robo-advisor, you'll usually be asked a few questions which include your age, investment goals, investment time horizon and your overall risk tolerance.
The robo-advisor then uses this information to help decide how your assets should be allocated — like, should you hold more riskier assets or mostly conservative assets. As market conditions change, or as you invest more money, the robo-advisor will automatically adjust your portfolio to align with reaching your goals. This process is called rebalancing.
A financial advisor, on the other hand, is an individual who assists clients with specific, immediate financial matters —like your investments or estate planning. You can work with a financial advisor just a few times or you can choose to have an ongoing relationship with them. Generally, you'd have meetings with your financial advisor in their office but if they aren't local, you'd have phone calls or virtual meetings with them instead.
Costs for a robo-advisor vs. costs for a financial advisor
Generally, both robo-advisors and financial advisors charge a percentage of the total assets being managed. However, the two differ in how big of a percentage they each charge. Robo-advisors usually charge anywhere from 0.25% to 0.5% of your assets managed per year, while financial advisors typically charge around 1% of your assets managed per year.
You'll want to do your research to make sure you're choosing robo-advisors that come with the lowest possible costs and offers the features you need. Wealthfront, for instance, charges just 0.25% of your account balance — in other words, you'll pay $25/year per $10,000 you have invested.
There are many financial advisors that charge a flat yearly fee or even an hourly fee. Also keep in mind that at times, both robo-advisors and financial advisors may require that clients have a specified minimum amount of total assets before they can work together. The minimum will vary but for some financial advisors, that minimum amount could be as much as $250,000. Ellevest, which is an investment platform for women, lets users start investing with a membership as low as $5 per month. Wealthfront's minimum balance requirement, by contrast, is $500.
Really, it's a matter of matching your financial needs with the fee structure that's most compatible with your circ*mstances.
Advantages and disadvantages of using a robo-advisor
When you sign up to use a robo-advisor like Wealthfront or Betterment, you'll be asked some questions about your financial goals, investment time horizon and risk tolerance. As time goes on, your risk tolerance and goals may change, which means you may need to make some adjustments to the assets you're invested in.
This is where robo-advisors can truly shine. They have the ability to automatically rebalance your portfolio for you so you don't have to manually change any asset allocations — or spend time going back and forth with someone to figure out the best course of action for that.
At the same time, though, it's important to keep in mind that a robo-advisor may have a limited view of your financial picture since it won't know how any of your other assets, debts, or other investments come into play. A robo-advisor also may not help you develop a strategy for investing more money to reach your goals faster.
While some robo-advisor platforms may let you connect all of your financial accounts, personalized advice that takes into account the nuances of your situation may still be necessary to help you reach your goals.
Select ranked the best robo-advisors, considering factors like account minimums, fees, choice of investments and types of accounts offered (i.e. IRAs and/or taxable brokerage). Here are a few of our top choices:
Betterment
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
Investment vehicles
Robo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers
Investment options
Stocks, bonds, ETFs and cash
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Wealthfront
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Bonus
None
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Educational resources
Offers free financial planning for college planning, retirement and homebuying
Terms apply.
Ellevest
Minimum deposit and balance
No minimum deposit to start investing and no minimum account balance for Ellevest Membership advisory service; however, there are portfolio-specific minimums (ranging from $1 to approximately $240)
Fees
Fees may vary depending on the investment vehicle selected. Ellevest Essential membership costs $1/month (or $12/year), Ellevest Plus costs $5/month (or $54/year) and Ellevest Executive costs $9/month (or $97/year); fund fees range from 0.05% to 0.10%across all Ellevest Core Portfolios and 0.13% to 0.19% across all Ellevest Impact Portfolios
Bonus
Coaching sessions, small group coaching and access to live events
Investment vehicles
Robo-advisor: Ellevest robo-advisor IRA: Ellevest Traditional, Roth, SEP and Rollover IRAs
Investment options
Stocks, bonds, ETFs, ESG, mutual, alternative and impact funds
Educational resources
Online workshops, email courses and video resources
Terms apply.
Advantages and disadvantages of using a financial advisor
Unlike robo-advisors, financial advisors have the ability to take a look at all aspects of your financial life to provide appropriate recommendations and next steps. Your financial life is interconnected, so your debts, budget, spending habits and other financial responsibilities (like caring for aging parents or paying for your child's college tuition) can all impact how much you're able to invest and how long it could take for you to reach your investment goals. Robo-advisors don't take these factors into account.
Because of this, it's valuable to have a human assist you with working out feasible next steps. Financial advisors will also, of course, take into account factors like your time horizon and risk tolerance when making investment recommendations.
Since financial advisors cannot automatically rebalance your portfolio the way a robo-advisor can, you'll need to spend the time discussing any adjustments with your advisor so they can manually make changes to your portfolio. That's not all that bad, though, since it gives you an opportunity to try to understand some of the changes being made.
Bottom line
Robo-advisors offer the convenience of a hands-off investment management strategy at a lower cost. However, if you prefer more human interaction and need recommendations based on a more nuanced view of your overall financial picture, a financial advisor could be the way to go. Either way, make sure you double check the fee structure before you agree to the services.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
As a seasoned financial expert with a deep understanding of wealth management, investment strategies, and financial planning, I'll delve into the concepts presented in the article, providing insights and additional information to enhance your comprehension of managing investments through robo-advisors and financial advisors.
Robo-Advisors: Automated Investment Platforms
Definition and Functionality:
Robo-advisors are software platforms designed to automate the investment process on behalf of users. They utilize algorithms to create and manage investment portfolios based on individual preferences and risk tolerance. The primary goal is to provide a hands-off and cost-effective approach to investing.
User Interaction:
When using a robo-advisor, users typically answer questions related to their age, investment goals, time horizon, and risk tolerance. This information guides the robo-advisor in determining the optimal asset allocation for the user's portfolio.
Rebalancing:
One key feature of robo-advisors is automatic portfolio rebalancing. As market conditions change or users contribute more funds, the robo-advisor adjusts the portfolio to maintain alignment with the specified investment goals. This process is known as rebalancing.
Limitations:
While robo-advisors offer convenience and automated rebalancing, they may have a limited view of the user's overall financial situation. They may not consider other assets, debts, or financial nuances that a human financial advisor would take into account.
Financial Advisors: Human-Centric Financial Guidance
Definition and Role:
Financial advisors are individuals who provide personalized guidance on various financial matters, including investments, estate planning, budgeting, and major life events. They offer a holistic approach to managing a client's money.
Interaction and Relationship:
Clients can choose to work with a financial advisor on a one-time basis or maintain an ongoing relationship. Meetings can occur in person, over the phone, or virtually, depending on the client's location and preferences.
Comprehensive Financial Planning:
In contrast to robo-advisors, financial advisors consider the broader financial picture of clients. They take into account factors such as debts, budget, spending habits, and other financial responsibilities that may impact investment decisions.
Manual Portfolio Adjustments:
Unlike robo-advisors, financial advisors do not automatically rebalance portfolios. Clients engage in discussions with advisors to make manual adjustments based on changing financial circ*mstances, market conditions, or client preferences.
Costs and Fees:
Robo-Advisors:
- Robo-advisors typically charge a percentage of the total assets under management, ranging from 0.25% to 0.5% per year.
- Example: Wealthfront charges 0.25% of the account balance.
Financial Advisors:
- Financial advisors usually charge around 1% of the assets under management per year.
- Some financial advisors may have flat yearly fees or hourly fees.
- Minimum asset requirements may apply, varying between advisors.
Select Top Robo-Advisors:
Betterment:
- Minimum deposit: Varies based on the investment vehicle selected.
- Fees: Vary based on the investment vehicle.
- Investment options: Stocks, bonds, ETFs, and cash.
Wealthfront:
- Minimum deposit: $500 for investment accounts.
- Fees: 0.25% annual management advisory fee.
- Investment options: Stocks, bonds, ETFs, real estate, natural resources, and dividend stocks.
Ellevest:
- No minimum deposit for Ellevest Membership.
- Membership fees range from $1 to $9 per month.
- Investment options: Stocks, bonds, ETFs, ESG, mutual, alternative, and impact funds.
Advantages and Disadvantages:
Robo-Advisors:
- Advantages: Hands-off investment management, automatic rebalancing, lower costs.
- Disadvantages: Limited view of overall financial picture, may not provide nuanced advice.
Financial Advisors:
- Advantages: Holistic financial planning, consideration of broader financial context.
- Disadvantages: Higher costs, manual portfolio adjustments required.
Conclusion:
Whether to choose a robo-advisor or a financial advisor depends on individual preferences, financial needs, and the level of human interaction desired. Robo-advisors offer convenience and cost-effectiveness, while financial advisors provide a more comprehensive and personalized approach to financial planning. Before making a decision, it's crucial to carefully review the fee structures and align them with your financial circ*mstances.
In summary, understanding the key distinctions between robo-advisors and financial advisors empowers individuals to make informed choices that align with their unique financial goals and preferences.
