Is a Robotic Advisor Really As Trustworthy As a Human?
A recent Harvard Business School study found that most people trust the algorithm more than the judgment of their fellows . So, when it comes to investing, should you use an automated robo-advisor to support your portfolio, or would you be better off spending a little more money on a flesh-and-blood financial advisor? Both will adjust your investments based on your financial goals, but there are trade-offs that differentiate them. Here’s a look at how they differ and why you might prefer one over the other.
Difference between robo advisor and financial advisor
Robo Expert Advisors are the best set and forget strategy for passive investors as they are run by investment management companies that use computer algorithms to manage and rebalance your portfolio. Except for some initial questions that determine your risk tolerance and anticipated time horizon , robotic advisor portfolios require very little interaction on your part.
Financial advisors also support your portfolio, but they can comprehensively manage other aspects of your personal finances, including other investments, daily budgeting and estate planning. They may work for you on a permanent or temporary basis, and they will be available to discuss your finances in regular face-to-face meetings.
Robo consultants typically charge 0.25% to 0.50% per year to be managed, and some will not have the required minimum account to set up your account. Financial advisors, on the other hand, will cost you about 1-2% of your assets under management for ongoing portfolio management, although they can charge a flat fee of $ 1,500 to $ 2,500 to create a complete financial plan at a time for each Smart Asset .
Reasons to choose a robo-advisor
A Robo Advisor is a great option if you are happy with the all-in-one investment strategy, are familiar with modern portfolio theory , do not have a lot of other assets to manage and want to keep costs as low as possible. as low as possible. Saving is no joke either. As explained in Barron’s :
Imagine a 30-year-old with a $ 50,000 retirement account that earns an average of 7% through a financial advisor whose fees are up to 1.5% per year (it’s cheap). Assuming that there are no more investments in this account, then at the age of 65 the investor will have $ 314,500. When using a robot with a total commission of 0.5%, with the same investment and the same rate of return, the account will have $ 448,000. This just 1% per year will reduce the total profit by $ 133,500.
Another advantage is that robo-advisors do not have the account minimums that are usually required by financial advisors (some minimums can go up to a million dollars). This makes them a great choice for new, young investors. In addition, some robo-consultant services offer a hybrid program that allows you to consult with financial consultants as needed, although this usually requires additional costs.
Reasons to Choose a Traditional Financial Advisor
If you prefer more active management of your investments or have other assets besides the investments recommended by the robot, you may be better off using the comprehensive services of a financial advisor. Unlike a robo-consultant who will have a very limited understanding of your complete financial picture, a financial consultant will be able to give you professional advice based on the totality of your finances: estate planning, tax strategies, retirement strategies, debt refinancing options. even making sure you have an adequate emergency fund. The trade-off for these services is cost, but a good financial advisor can potentially save you enough in the long run to be worth it, especially if you have no idea what you are doing.