Robo-Advisors vs. Financial Advisors: Which One Fits Your Financial Needs Best?

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Robo-advisors have soared in popularity over the last decade, with the automated investing advisors quickly growing assets under management, many into the tens of billions of dollars. But how do they compare with traditional financial advisors?

Perhaps surprisingly, after an initial period of shunning these upstarts, the industry has begun to embrace them, merging traditional financial advice with the automation of robo-advisors.

But each approach has its positives and negatives. Here’s how to decide which is best for you.

Robo-advisor vs. financial advisor: What they do

Let’s take a look at each kind of advisor to see what they do and what advantages they offer to investors.

How robo-advisors work

You may be familiar with names such as Betterment and Wealthfront. They’re two of the best robo-advisors, and they’ve become quite popular over the last 10 years. Robo-advisors are the ultimate in “do it for me” investing solutions, something you can just set up and then leave alone.

Robo-advisor sounds tremendously complex, maybe even a little bit dangerous. After all, it seems risky to entrust your money to a computer program. And that’s really what a robo-advisor is — a computer algorithm that invests your money based on your answers to a few questions, such as when you need the money, your risk tolerance and how much you have to invest.

Then, using good investment practices — such as asset allocation and diversification — the robo-advisor automatically builds you a portfolio to fit your needs using perhaps up to a dozen exchange-traded funds (ETFs) that hold stocks, bonds, cash and potentially other kinds of assets.

Pros of using a robo-advisor

• Robo-advisors are relatively cheap. Robo-advisors often charge a management fee of about 0.25 percent of your assets annually, or $25 for every $10,000 invested. That’s basically the industry standard, though some robos offer a higher level of service (such as access to human advisors) for a slightly higher cost. Other robo-advisors may charge a monthly fee or even offer a free service. 

  The funds you’re invested in also charge an expense ratio, a fee paid to the fund management company. Typical funds might charge 0.05 percent to 0.35 percent annually ($5 to $35 for every $10,000 invested). You’ll typically pay these fees regardless of which robo-advisor you choose. Adding the two fees together, you might pay around 0.3 to 0.6 percent of your assets annually for a robo. Usually that’s the extent of the fees, and it means you’ll have a clear idea of your costs. All additional services are usually included in the management fee.

• It’s fairly easy to open a robo-advisor account. With a few financial details, you can fill out the form and have the account ready to go in about 15 minutes. Many robos allow you to open a standard taxable account, an IRA account or a joint account, among others.
• Most robo-advisors have low account minimums. In fact, most robo-advisors don’t even have a minimum balance to open an account.
• Robos offer automated services that are tough for a human to replicate. This includes tasks like daily tax-loss harvesting. They may also automatically rebalance your portfolio when it deviates from the preset target allocations.

Cons of using a robo-advisor

• There’s no human touch. Robo-advisors are great for automating investments, but they’re not so great at providing individualized guidance. You can’t have a dialogue about your goals that’s unique to you.
• Little personalization. When you sign up for a robo-advisor, you’re one of many. You answer generic questions regarding your goals, risk tolerance and time horizon and the algorithm delivers an answer that works well for many people. This lack of personalization can make meeting complex or less common financial goals challenging.
• You may pay more than with DIY investing. Although robo-advisors are a cheap option, there may be some instances where it’s cheaper to do it yourself. Opening a brokerage account online and investing in low-cost ETFs and mutual funds – which charge very low expense ratios – may actually be cheaper than having a robo do it for you. 

While independent players, such as Ellevest, receive a lot of recognition for their robo offerings, larger brokerage firms such as Charles Schwab and even bigger financial firms such as Bank of America’s Merrill Edge offer this kind of managed portfolio, too.

How financial advisors work

A financial advisor does what a robo-advisor is set up to do for investing. In fact, unless they’re real stock analysts or portfolio managers, they’re likely using the same fundamental tools as a robo-advisor to build your investment portfolio.  

Financial advisors can do so much more though. Human financial advisors can give you all kinds of counsel, from the relatively mundane (basic banking) to the highly complex (like estate planning and trusts). The skills and expertise vary from advisor to advisor, of course.

Where human advisors can really excel are the specialized tasks that require detailed expertise — the highly unusual or specific tax advice to help you optimize your situation and other legal advice such as that for transferring wealth.

Pros of working with a financial advisor

• You’re provided with a comprehensive, personal financial strategy. If you have a good, qualified financial advisor, they should equip you with a well-rounded strategy. If you’re not sure where to start your financial journey, a financial advisor can help with that too.
• Financial advisors can offer responsive advice. If things don’t go according to plan — the market takes a turn or your priorities change — financial advisors are able to adjust your strategy and help you plan for the future. This includes working on things like saving for college and planning for retirement.
• Niche help is available. If you need anything off the beaten financial path — such as help constructing a trust or how to handle an inherited IRA (where the rules are highly complex and messing up could cost you) — you’ll want to speak with a competent financial advisor with demonstrated expertise in that specialized field.

Cons of working with a financial advisor 

• Financial advisors can be expensive. Some financial advisors charge 0.25 percent to 1 percent of your assets under management, plus expense ratios. Others charge an hourly fee, with rates ranging from $200 to $500 and up, or a flat fee.
• Qualifications vary. Because financial advisor is an umbrella term with no set qualifications, someone can call themselves a financial advisor without any credentials to back it up. Look for an advisor who is a certified financial planner or holds another relevant designation and check up on their credentials.
• You have to find the right fit. Finding the right financial advisor for you can be like finding the right therapist or doctor. Even an advisor with solid experience and credentials may not be the right advisor for you.

Which type of advisor is better for you?

The type of advisor that is better for you depends on what your financial needs are. For core investing and planning advice, a robo-advisor is a great solution because it automates much of the work that a human advisor does. And it charges less for doing so — potential savings for you. But financial advisors have their pros too.

There are times when a robo-advisor might work best for you and other times when you need the help of a human advisor. It’s not an either-or choice. You can use a robo-advisor for your key investing tasks, while you call in an advisor for the specialized or one-off tasks that require expertise. But you’ll want to pick the right type of advisor for the job you need done.

A robo-advisor might make sense if:

• You’re a new investor.
• You prefer a “set it and forget it” approach.
• You want a diversified portfolio without the work of doing it yourself or the cost of working with an advisor.

A financial advisor might make sense if:

• You need guidance on your overall financial situation, including investments, retirement and other areas.
• You have a set goal you want to meet, such as estate planning or retiring early.
• You’re going through a major life event, such as getting married, getting divorced or starting a business. 

FAQs

• Do robo-advisors outperform the S&P 500?
  

  Sometimes robo-advisors outperform the S&P 500, sometimes they don’t. A robo-advisor might even be close to the S&P 500 if your portfolio includes an index fund that tracks the S&P 500. How a robo-advisor performs compared to the S&P 500 depends on what assets you’re invested in, your risk tolerance and goals and how the overall market is performing.

• Can AI replace a financial advisor?
  

  AI can be a helpful financial planning tool for simple questions but it’s just a tool and can offer unreliable advice. Al also has no duty to act in your best interest, unlike a financial advisor who is a fiduciary. AI can support financial decision-making but shouldn’t replace the role of a qualified financial advisor, especially on complicated matters.

• What is the average return on a robo-advisor?
  

  For robo-advised portfolios with a mix of 60 percent stocks and 40 percent bonds, average annual returns ranged from about 7 percent to 9 percent for a five-year period as of September 2024, according to Condor Capital’s Robo Report. Returns will vary based on your risk tolerance and what assets you hold.

Bottom line

A robo-advisor can be an excellent choice to manage your money, especially as you’re just getting started on your investing journey and your needs are relatively simple and straightforward. As your needs become more complex, it makes a lot of sense to consult a financial advisor who is invested in your own success so that you receive the best advice.

— Bankrate’s Logan Jacoby contributed to an update.