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Key takeaways:
- Professional money management comes in two flavors: Human (financial advisors) and digital, algorithm-based (robo-advisors).
- Both types put your savings to work by creating a customized portfolio based on your goals, investing temperament and other factors.
- It’s in how they do what they do where the robo-advisor versus financial advisor showdown takes place.
- Which one should you hire? The choice comes down to your budget, goals and individual preferences.
A lot of people enjoy tackling the hands-on tasks of managing a portfolio – researching investments, keeping tabs on the market’s movements, noodling with their holdings, and, yeah, even diving into tax-minimization strategies.
Not your cup of tea? No worries! Not everyone’s comfortable going full-on DIY when it comes to investing their money.
Two great options for professional portfolio management: working with a human financial advisor or using an automated, digital investing platform (aka, a robo-advisor). Let’s into the pros and cons of robo-advisors versus financial advisors (human) and figure out the best fit for you.
What are robo advisors?
Robo advisors are portfolio management platforms that use sophisticated software to invest your money. These services leverage technology to build and manage investment portfolios and, in some cases, provide broader financial planning support.
Once you set up an account – you’ll have the choice of Roth IRA or traditional IRA or a non-retirement account (essentially a taxable brokerage account) – the robo gets to work.
How automated portfolio platforms work
The relationship kicks off with the get-to-know-you phase. Before portfolio creation begins, you’ll fill out a questionnaire that asks for your age, investment goals (e.g., saving for retirement, college, home down payment), timeframe (when you need to access your money) and your risk tolerance (a measurement of your comfort level with stock market volatility).
The algorithm running the show uses that information to tailor its investment recommendations and then:
- Choose suitable investments: Robo-managed portfolios use a mix of low-cost mutual funds and/or exchange-traded funds (ETFs) that provide exposure to different segments of the market.
- Determine the proper balance of investments: It calculates how much of your money to allocate to each type of investment.
- Monitor and adjust your portfolio over time: When the stock market sways to and fro (as it naturally does), your robo-advisor is on the case, 24-7 (because robots never sleep, right?). Robo-advisors automatically adjust your holdings when necessary to keep your portfolio on track, meaning you don’t have to lift a finger.
- Make tax-smart investment moves on your behalf: Some robo-advisors also deploy the algorithm to spot and execute tax-smart investment moves within non-retirement (taxable) accounts to help clients offset or minimize what they owe to the IRS.
Affordability and accessibility are two major advantages of using a robo-advisor.
No fancy offices to maintain to impress customers or teams of stock analysts and their minions to support here! (Though, rest assured, behind the scenes human investing experts are programming and monitoring the machine.)
It’s a lot less expensive to deploy AI to handle labor-intensive portfolio management tasks. And lower overhead costs translate to lower fees for customers.
How much do robo-advisors charge?
Robo-advisors make money by charging an annual “management fee” – a small percentage of your portfolio’s value. This fee typically ranges from 0.25% to 0.50%. Translation: You’ll pay $2.50-$5 in fees for each $1,000 you invest; $25-$50 on a $10,000 balance and so on. (Refer to the FAQs for more details on robo-advisor costs and investment fees.)
What are financial advisors?
“Financial advisor” has become a catch-all term to refer to a range of professionals that advise on nearly every money issue under the sun, including budgeting, debt management, retirement savings, estate planning, taxes, insurance needs and on and on.
Under this broad umbrella are a number of specialists and professional designations, including Certified Financial Planners (CFPs), Chartered Financial Analysts (CFAs), and Certified Public Accountants (CPAs) – and that’s just the ones that start with the letter “C”! The confusion over job titles, services and credentials is why we created a guide to the types of money pros for hire and how to vet them.
How investing advisors work
The framework investing advisors use when working with clients is – on the surface – nearly identical to how robo-advisors operate. The difference is in the details, specifically the info-gathering and plan execution phases. They will:
- Gather a lot of information: Financial advisors go much more in depth to learn about your current financial situation, investible assets, timeline, risk temperament and financial goals (investing and otherwise).
- Explain their investment approach: Because you hire a human for their expertise, the best ones will take the time to describe their investment philosophy (overall and in different market environments), what kinds of assets they favor, and the strategies they use to manage client portfolios.
- Create a detailed investment plan tailored to your needs: Like robo-advisors, human advisors map out the ideal mix of assets you should invest in. But the plans they present to clients provide pages of details about all aspects of their recommendations, including which investments to hold in which type of account (IRA vs. taxable account). The one-on-one nature of the relationship allows them to tailor their advice to the specifics of your financial situation. The plan may even include advice on what to invest in within accounts they don’t manage, such as your 401(k).
- Implement the plan for you: At this point most investing advisors will take over and actively manage your money for you. They may even use an automated portfolio management software with a much higher level of customization (compared to robo-advisors) to manage your money.
- Hand over the recommendations for you to follow: Not all advisors provide hands-on service. If you hire a pro for advice only, you’ll get a detailed list of investment recommendations (stocks, bonds, funds, ETFs, cash) that you’ll execute on your own by making trades within your investment accounts.
A high level of personalization and detailed expertise are the key benefits of working with a financial advisor. They have the ability to fine-tune your portfolio by taking into account other aspects of your finances, including workplace retirement plans, pensions and other assets outside of the money they actively manage for you.
How much investment advisors charge
Like robo-advisors, most investment advisors charge a fee based on the assets they manage for you (known as “assets under management,” or AUM). Typical management fees run from 1% to 2% ($10-$20 for every $1,000 they manage; $100-$200 on each $10,000 invested).
Other common financial advisor fee structures include hourly rates (typically $150–$300) and fixed, or per-project, fees ($1,000–$7,500 or more). These setups are often used for clients who hire an advisor solely for investment recommendations (the action plan) rather than ongoing, hands-on portfolio management. It’s also the more likely offering for those who don’t meet a money manager’s high minimum investment requirements (we’re talking hundreds of thousands of dollars!).
Differences between robo-advisors vs. financial advisors
Beyond the whole ‘bot vs. human thing, the biggest differences between robo and human advisors are how they operate, the range of core services they provide, how much they charge and the degree of customization they offer.
| Robo-Advisor | Financial Advisor | |
| Services offered | Digital portfolio management May offer additional financial planning services | One-on-one advice and portfolio management; may include comprehensive financial planning |
| Approach | Automated data-driven portfolio management | Human-led investment management; may incorporate robo-like management tools |
| Minimum investment requirement | As little as $0 to open an account and often less than $100 to invest your money | Anywhere from $25,000 to $1 million or more in investable assets |
| Typical portfolio management fee | 0.25% – 0.50% of assets managed (e.g., $25-$50 for every $10,000 invested) | 1% – 2% of assets under management (e.g., $100-$200 for every $10,000 invested |
| Investment options | A range of pre-screened low-cost mutual funds and ETFs across asset classes (stocks, bonds, etc.) | A range of investments (funds, ETFs, individual stocks, other assets) chosen by the advisor |
| Customer support | Tech and account support (online/in-app/email/phone); May offer access to human advisors for an extra fee | One-on-one access to a dedicated advisor |
How do these differences play out in real life? Let’s take a closer look:
Human vs. algorithm investment management
Robo: Robo-created portfolios are built and managed using an algorithm that incorporates customer-provided data. Ongoing management (rebalancing) is automated to ensure the mix of investments remain aligned with your goals and timeframe.
Human: Advisor-managed portfolios also rely on technology to an extent, but human advisors are able to consider more nuanced, client-specific information and integrate it into their investment decisions.
Scope of services
Robo: When robo-advisors sprung onto the scene, the focus was providing portfolio management at a price the masses could afford. Since then many companies have expanded into traditional financial planning territory. Some even offer one-on-one coaching to new customers and access to on-staff certified financial planners (CFPs) if your account balance meets eligibility requirements.
Human: Beyond investment management, financial advisors are known for providing a broad range of other services, including retirement planning, taxes, estate planning, guidance on insurance, budgeting, real estate, wealth preservation. Some focus on a particular type of client (e.g., business owners, military families) where they’ve built up their expertise to provide highly tailored advice.
Cost
Robo: Automated portfolio platforms typically charge between 0.25%-0.50% of the assets they manage for you. Access to premium financial services (e.g., the ability to meet with financial planners) is reflected in the management fee and typically runs in the 0.75%-0.80% range.
Human: Financial advisor fees can vary, but expect to pay an advisor at least 1% of assets under management annually – and potentially more (1.5%-2%) if you’re receiving additional ongoing services beyond investment management.
Level of customization
Robo: The benefit of using a robo-advisor is that the algorithm is designed to manage your portfolio without the need for constant adjustments. You can adjust the key inputs – your goals and risk tolerance – at any time, which will influence how your money is invested. Beyond that, customization is limited due to the preset portfolio parameters established by the algorithm. (This is one way they keep costs low.)
That said, some platforms offer flexibility, allowing customers to swap a limited number of holdings for different ones from a list of robo-approved options. For example, if ethical investing (ESG) is important to you, you can replace an ETF that doesn’t align with your values with one that does.
Human: Financial advisors offer greater flexibility than robo-advisors, which is much of the appeal for people who have more complex finances. The one-on-one relationship allows them to integrate a client’s existing assets (individual stocks and other investments) into the overall financial plan. They can customize the investment portfolio at any time and in any way when necessary or whenever a client desires a change.
How to choose which is right for you
If you’re just getting started, have smaller amounts of savings to invest or have relatively straightforward financial needs, a robo-advisor is an easy, affordable place to start — and even stick with for the long haul.
Robo-advisors align perfectly with a future-forward vision of financial services, leveraging technology to make professional portfolio management both user-friendly and wallet-friendly.
Down the road as your needs evolve, consulting with a financial advisor for more customized advice is always an option.
Robo-advisor pros and cons
| Pros | Cons |
| Low account minimums (often $0) and less than $100 to start investing | Portfolios based on relatively broad customer inputs (goals, timeline and risk tolerance) |
| Typical management fee is 0.25% of account balance | Investments limited to a pre-selected menu of mutual funds and ETFs |
| Portfolio creation, maintenance and ongoing management is automated | Lack of human interaction may be off-putting |
| Easy account setup, similar to opening a bank account | Core service does not include holistic financial planning |
| May offer access to human advisors and other financial services for an additional fee |
If you have complex finances involving various asset types and accounts, high-dollar balances to optimize for tax savings or other specialized needs, you’ll get the most personalized advice by working with a financial advisor.
In addition to portfolio management, many advisors provide comprehensive, holistic financial guidance and ongoing advice. Working one-on-one you’re able to establish a dedicated relationship with a professional who knows your specific circumstances and can help you plan accordingly.
Financial advisor pros and cons
| Pros | Cons |
| Highly tailored advice based on your entire financial story | High minimum investment requirements (think $100K and up) for money management |
| Ability to customize investments for each client’s needs and circumstances | Hourly/per-project costs run from hundreds to thousands of dollars |
| High-touch, one-on-one human help available on call | Requires vetting to find a qualified and credentialed pro |
| Can provide a full range of financial services in addition to investment management | More involved onboarding and multiple meetings to get started |
Algo vs. human advisor
The decision between ‘bot or human help boils down to your budget, complexity of investing needs, level of preferred involvement and whether you’re comfortable with a digital-only relationship or prefer one-on-one human help.
Whichever you choose, the most important decision is to start putting your money to work. Whether you begin with the cost-effective automation of a robo-advisor or the high-touch advice of a human pro, professional portfolio management can help you stay on track to reach your financial goals.
Frequently asked questions about robo advisors vs. financial advisors
How much does it cost to use a robo-advisor?
There are two types of fees you pay when using a robo-advisor:
- Annual management fee: This fee is based on the amount the robo-advisor manages for you. Hence the aptly-named “assets under management” fee, or AUM for short. A typical management fee is 0.25%-0.50%. That translates to $25-$50 per year for a $10,000 account.
- Underlying investment fees: The mutual funds and ETFs you’re invested in within your robo-run portfolio also charge annual management fees (aka expense ratios). These fees are automatically taken out of your investments. Robo-advisors are known for being fee-sensitive when it comes to the investments they use. They keep costs down by choosing investments like index funds and ETFs with low expense ratios (e.g., less than 1%). Only in the case of specialty funds are you likely to pay more.
- Other potential fees: Less common are account fees, but you may encounter them if the robo-advisor offers a premium subscription-like service (such as access to human financial planners). Other potential account fees include wire transfer fees and account closing fees.
What is the main downside of using a robo-advisor?
The main benefit of using a robo-advisor can also be the main drawback for some investors. The streamlined, standardized algorithm robo-advisors use to manage customers’ money is what makes it convenient and accessible to the masses. But it isn’t designed to take into account individual financial situations beyond the key inputs used – your general investing goals, timeframe and risk tolerance. (This is one way they keep costs low.)
What is the main drawback of using a financial advisor?
Getting personalized, one-on-one help managing your money is the gold standard of financial advice. The downside: Cost. The first financial hurdle is minimum investment requirements. Some financial advisors will only work with clients who bring $100,000 (at the very low end) and more likely $250,000 or more to the table to invest.
As for fees, hiring an advisor who charges clients based on assets under management (AUM) will generally run you 1% to 2% of the amount you invest with them. While a few percentage points might seem minor, it can add up. For an investment of $75,000, an advisor charging 1.5% would cost you $1,125 annually. In contrast, a robo-advisor charging a 0.25% management fee would only cost you $187.50.