Nobody knows everything. You might be a skilled pilot, a celebrated teacher, or the first plumber on half your city’s speed dial … and still not know the first thing about investing.
But your retirement savings don’t need to suffer just because you didn’t earn a degree in finance or accounting. For a long time, you could have someone handle your investing for you—or, thanks to the advent of robo-investing, you can have something do the job instead.
The demand for financial help is growing, and robo-advisors are helping to fill that need. Robo-advisors—which use algorithms and sometimes artificial intelligence (AI) to choose a client’s investments—are expected to manage more than $4.6 trillion worldwide by 2027, according to data from Statista Market Insights.
But can you trust robo-advisors with your money, or should you leave your nest egg in the hands of a human financial advisor? Well, read on, and I’ll help you make a more informed choice by going over the pros and cons of robo-advisors, then briefly discussing which people are best suited for robo-advisors vs. human management.
Advantages of Robo-Advisors
Robo-advisors are one of the latest in a long line of innovations—index funds, exchange-traded funds, fractional shares—that have made investing more accessible to the masses.
Specifically, robo-advisors fill a need for people who want some direct help in constructing a portfolio, but who either don’t want or can’t access the help of a human financial advisor. Although in some cases, it’s just a matter of preference.
To understand more about why people invest with robo-advisors, I’ll start by looking at the advantages of this technology. Each “pro” listed here is a general upside for robo-advisory products; however, there might be specific instances in which the advantage doesn’t apply.
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They’re Time-Efficient
I’ve had to review a number of robo-advisory products over the years, and virtually all of those reviews have included the setup process.
So you can take it to the bank: Getting set up with a robo-advisor is typically quick and easy.
Most of the robo-advisory services out there are attached to a brokerage firm. So, if you’ve already opened a brokerage or retirement account, the hard part (paperwork, linking a bank account) is done! Setting up the robo-advisory feature itself involves simply providing some basic information and answering a few financial questions, often involving risk tolerance, time horizon, and financial goals, among other things). Your responses will educate the robo-advisor’s investment choices.
Better still, many robo-advisors provide automatic rebalancing and even other portfolio adjustments on a regular basis, which means you don’t just save time upon setup—you save time over the years by not having to manually tweak your holdings.
Robo-advisory services are often referred to as “set-it-and-forget-it” solutions, and I’m sure Ron Popeil would agree.
Related: Are You Saving Enough for Retirement?
They’re Cost-Efficient
Robo-advisors won’t just save you time … they frequently will save you money, too.
To be clear: From one advisor to the next, pricing can vary wildly for both human financial advisors and robo-advisors.
Still, a 2023 AdvisoryHQ report gives us a good idea of what we can broadly expect. According to AdvisoryHQ, traditional financial advisor fees for the “percentage of assets under management (AUM)” pricing structure usually fall between 0.59% and 1.18%, with many advisors charging lower fees for clients with greater assets. Robo-advisory fees can sometimes vary based on assets, but typically fall between 0.25% and 0.50%.
Some human advisors may charge a flat rate per period, instead—say, $2,000 a year. The percentage you’d be charged would depend on how much in assets you were investing. Thus, someone with lesser assets might be overcharged, while someone with greater assets might be getting a good deal.
A few robo-advisors offer flat-dollar fees, and of those, some have a hybrid model where clients are charged a flat-dollar fee up to a certain level of AUM, then a percentage-of-AUM fee above that threshold.
Another way in which robo-advisors might save you money is in “acquired fund fees.” Regardless of whether you go human or go robot, financial advisors typically will invest most if not all of your money in investment funds—and these funds charge their own management fees. That said, robo-advisors frequently lean toward exchange-traded funds (ETFs), with an emphasis on low-fee products. Human advisors sometimes utilize ETFs only, but more commonly, they’ll use a blend of mutual funds and ETFs, or mutual funds exclusively. Depending on which mutual funds (and which share classes) they’re invested in, your costs could be significantly more than an all-ETF portfolio.
In short: While assessing an advisor, human or otherwise, determine the fees they charge for management—as well as the fees charged by the funds they hold.
Related: How Much Does Financial Advice Cost?
They Require Less Money to Begin Investing
“It takes money to make money,” or so the saying goes.
But how much money does it take?
Well, if you’re asking that as it pertains to advisory services, it usually takes a lot more money to start with a financial advisor than it does to start with a robo-advisor.
Necessary minimum asset thresholds can vary significantly depending on the advisor and the services they provide. But it’s unusual to find an advisor who will accept clients with less than $25,000 in liquid assets, and the starting line is typically much more than that—in many cases, six or even seven digits.
Minimum initial investments are much, much lower for robo-advisors, though these levels can vary, too. For instance, Betterment starts at $10, Vanguard Digital Advisor requires a $100 account minimum, and Wealthfront’s robo-advisory services require a $500 account minimum.
Related: 15 Best Investing Research & Stock Analysis Websites
More Accessible
Past lower fees and lower asset requirements, robo-advisory services often simply feel more accessible to your average person who knows little to nothing about investing.
The sign-up process is typically very straightforward. If you have social anxiety, you don’t have to worry about having to field a sales pitch. Robo-advisors rarely deal in complex assets, so you can get an understanding of their portfolios in just a few bullet points. They’re also good at keeping financial jargon to a minimum.
For what it’s worth, many good financial advisors share these qualities—they keep terminology simple, they don’t build exotic portfolios, and they have straightforward pricing that they list upfront. But on the whole, robo-advisors are more likely to exhibit these traits than human advisors.
Related: How to Get Free Stocks for Signing Up: 10 Apps w/Free Shares
Disadvantages of Robo-Advisors
Of course, there’s a reason why robo-advisors command a sliver of assets compared to human managers, and why most surveys show that investors trust human advisors more.
Actually, there are a few reasons.
For all of their benefits, robo-advisors do have some downsides. These might not necessarily be deal-killers in your book, but they’re worthwhile shortcomings that anyone should understand before signing up for one of these services.
Like with advantages, each “con” listed here applies in a broader sense, but specific exceptions might apply.
They Provide Less Portfolio Customization
Investment management is both an art and a science.
Most of the science is done on the computer front, whether you’re dealing with a human or a robo-advisor. Even human advisors use algorithms and other technology to assist in modeling and assembling an ideal portfolio.
But the art aspect comes from the input—that is, getting the information from the client that ultimately educates the portfolio.
A robo-advisory service will ask a limited number of questions, then generate a portfolio for you based on the answer to those questions. And anyone with a similar profile as you might end up with the exact same portfolio.
A human advisor will have set questions too, but they’ll typically have many more questions to start with … and they have the ability and agency to pore even deeper as your conversations progress. The ability to go beyond a standardized list of queries allows advisors to personalize your portfolio in a way that an AI investing system simply can’t.
Related: Budgeting in Retirement: Our Step-by-Step Guide
They’re Less Capable of Adjusting to Your Financial Situation
Robo-advisors tend to be limited from the get-go. They frequently invest only in a fixed number of ETFs, limiting both what you can invest in through the wider world of ETFs, not to mention your ability to own individual stocks and bonds, mutual funds, alternative investments, and more.
Additionally, robo-advisors may have a limited ability to pivot for you when your financial situation changes. You might be able to go back through the system and adjust original answers to questions about your risk tolerance and desired aggression. But a robo-advisor typically won’t know how to handle the complexities that come with major life events, such as a marriage, divorce, new addition to the family, buying a home, or developing a disability.
Related: How to Invest Money: 5 Steps to Start Investing w/Little Money
They Can’t Take Care of Related Financial Needs
As a general rule, human financial advisors tend to offer many more services than what you can get out of a robo-advisor, which usually only run a simple portfolio.
On the investment side, you might lose out on better account, portfolio, and tax optimization (such as tax-loss harvesting and charitable giving). And if the market is in the midst of a steep downturn, a human advisor can help you get control of your emotions and not make panicked decisions—a robo-advisor might not sell for you, but that’s about all they can do.
But the differences become so much more apparent when you look outside of the investment space.
If you adopt a child, you might need help adjusting your financial goals, changing insurance coverage, and beginning an estate plan. If you get married, that can alter your retirement goals and will greatly impact your tax situation. If a financial advisor knows you run a business, they might suggest you switch to a more beneficial business structure. And human advisors can help you set up a personalized retirement withdrawal strategy that ensures you have the money you need for day-to-day expenses while also accounting for potential wealth-crushers like inflation and bear markets.
In short, robo-advisors are extremely limited in their scope. Human advisors tend to have both better breadth and depth of capabilities.
Related: Don’t Make These 7 Mistakes When Choosing a Financial Advisor
Are All Robo-Advisors the Same?
Oh no, not even close.
From one robo-advisor to the next, you’ll find a pretty wide differentiation in number and types of investment options and customization. Some robo-advisors might offer just a few core portfolios, while others can offer hundreds of semi-personalized portfolios based on varying combinations of funds. Some might offer income-specific funds, or environmental, social, and governance (ESG) investing options, while others might not.
Features can vary somewhat, too—a handful offer tax-loss harvesting, whereas that’s too complex a task for others.
A relative rarity, but a helpful one for many investors, is the offering of a “hybrid” model where robo-advisor clients can still get access to a human advisor. The robo-advisor might handle your investments, but you can ask the advisor about why your assets have performed the way they have, whether there’s any way to have the robo-advisor invest differently for you, and other financial advice.
Guided Wealth Portfolios, for instance, are a low-cost, diversified portfolio that provides access to a financial advisor.
Related: 17 Best Investment Apps and Platforms [Free + Paid]
Who Should Consider a Robo-Advisor?
Robo-advisors are very beginner-friendly tools. Thus, they work best for people with simple finances who don’t have the time to manage their own investments.
They’re also an excellent option for people whose finances don’t yet necessitate a human advisor.
Related: How to Choose a Financial Advisor
Who Isn’t a Good Fit For a Robo-Advisor?
Very high-net-worth individuals should stick to using a human advisor. Traditional advisors can offer up a much more personalized portfolio utilizing a far wider range of investments than a robo-advisor could ever hope to handle. Plus, they’re far better equipped to handle complex financial situations, such as needing to set up an estate or starting a business.
If you want a professional to handle other aspects of your financial world—not just investing—talking to a human financial advisor is probably for the best, too.
Traditional advisors also make more sense if you want to regularly discuss your portfolio, or if in general you want to have a more active hand in your finances.
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