As was discussed in the previous article, Robo-Advisors are a relatively safe investment for the individual investor. On top of that, they offer numerous advantages over conventional financial advisors. These include low fees, inherent diversification, and more autonomy over your investments. However, I did not take a look at some of the shortcomings of Robo-Advisors, nor did I mention how to begin finding the perfect app that suits all your needs.
Today, I will be taking you through some of the advantages of going with a financial advisor rather than a robo-advisor. At the end of the first section, you should have enough information to decide which advisor is perfect for you. After that, I will take you through what to watch out for when selecting a robo-advisor for yourself.
The Case For Financial Advisors
Financial advisors have been around ever since the inception of the financial markets, and for good reason. The concept of a financial advisor is very easy to grasp. Since most people are not able to take the time to study and understand the complex world of financial markets and institutions, they can delegate the responsibility to a financial advisor. This advisor can then take a small fee for his/her services.
Here are some of the reasons for investors to opt for financial advisor over robo-advisors:
Financial Advisors Offer a Tailored Service (Especially for High Net Worth Individuals)
Like I said previously, financial advisors cannot afford to sit down with every client regularly. However, those with a lot of money to invest are naturally going to be a top priority for any advisor. As such, they will have a lot more face-time and will be able to tailor their portfolio to their specific needs.
Financial Advisors Can Make up for Your Lack of Knowledge
If you are someone who does not even have a basic understanding of the investment world, robo-advisors are probably not for you. In order to efficiently use a robo-advisor, you need to understand various different investment vehicles such as REITs, ETFs, and Indices. On top of that, you should have a basic understanding of macro-economic cycles to know which markets to invest in and at what time.
A financial advisor can do all of this for you. He/she can help you set investment goals and explain their investment strategy to put your mind at ease.
It is also important to remember that if a large chunk of your savings is in a retirement plan (e.g. 401(k)), then a robo-advisor is not much use to you. Retirement plans are managed by investment trustees and you will need a financial advisor if you want to get the most out of it. Remember that robo-advisors can help you set up retirement plans. However, that has its own pros and cons, and one of the cons is that it is simply impossible for a robo-advisor to tap into a previously set up plan such as the 410(k).
Financial Advisors Can Help You With Personal Finance
Robots, despite being quite robust, are still not intelligent enough to help you with your personal finance needs. For example, suppose you need to lease a new car. A robo-advisor is useless in this case and will require you to determine the best strategy by yourself.
A financial advisor, on the other hand, is perfect for this sort of thing. They will be able to assist you by setting up a budget as well as a financing method that allows you to achieve your long-term investment goals while factoring in your short-term needs.
On top of that, a financial advisor can also be useful for estate planning. Simply put, a financial advisor can sort out all of your finances while keeping the ‘big picture’ in mind. A robo-advisor, despite its many advantages, can only be used for investing your savings.
Of course, it is possible that a financial advisor is out of your reach due to monetary restraints. If you are just looking for someone to help you with personal finance, then an online financial planning service such as the ones offered by Kerr Wealth Management might be worth looking into.
What Should You Look For in a Robo-Advisor
By now, you should be able to decide which advisor is right for you. Both of them have advantages as well as drawbacks, and their utility will vary from person to person.
If you decide to go ahead with a robo-advisor, then your predicament has just begun. With so many robo-advisors to choose from, it can be extremely difficult to weigh their pros and cons against one another and come to a firm conclusion on which one is the best for you.
I will not be claiming any single robo-advisor to be the ‘best one’ since that can only be decided once you have clearly defined your investment goals. However, I will take you through some of the most important things that you need to be aware of before you begin evaluating individual applications.
Human Component
Wanting to have some sort of a human component when your life savings are on the line is perfectly reasonable. If you want to have this hybrid arrangement, then you will have to pay management fees that lie somewhere between those of a robo-advisor and a financial advisor.
Using this approach will allow you to have a financial advisor who can set your investment goals and help you with personal finance. However, your investment needs will be met through a computer algorithm which will help keep the management fees in check.
SigFig is a great service if you want to have access to a human financial-advisor for a fraction of the cost. With SigFig, you can keep all of your investments wherever you kept them (like Fidelity or Schwab).
Tax Loss Harvesting
It is important to pick a robo-advisor that offers a decent tax-loss harvesting algorithm. As we touched on this previously, I will not go into the details of tax-loss harvesting here. Simply put, tax-loss harvesting involves selling off securities at a loss to offset the capital gains tax.
Betterment is considered to be one of the best robo-advisors out there. One of the reasons for this is their top-notch tax-loss harvesting algorithm. If avoiding taxes is a priority for you, then take a look at Betterment.
Fees and Minimum Balances
Perhaps the single most important reason people are attracted to robo-advisors is their extremely low fees and minimum balance requirements. If you are someone without a lot of capital, then avoiding huge fees should be very important to you.
Although all robo-advisors charge very low fees, some take this concept to the extreme. A brilliant example of this is the Schwab Intelligent Portfolios, which charges no management fee at all (You do need a $5000 minimum balance though). However, Schwab also offers a premium version of the service for $30/month regardless of Assets Under Management (i.e. the size of your portfolio). This is their version of the financial/robo-advisor hybrid (you also need to pay a one-time $300 planning fee). The premium version also provides you online planning tools as well as a customized roadmap on how to achieve your investment goals.
An important point to note here is that while robo-advisors charge low or no fees, that doesn’t include investment fees. Since robo-advisors mostly invest in ETFs, you have to pay the fees charged by the organizations managing the ETFs. Schwab Intelligent Portfolios can also lay claim to some of the lowest fees in this department, with their average investment expenses hovering around 0.15%.
Support Staff
The support staff are very important, especially for those planning a financial/robo-advisor hybrid. Apart from acting as your financial advisor, the support staff are also responsible for assisting you with any issues (technical or otherwise) that you may be having with your robo advisor.
The first thing to check is the availability of the support staff. For example, when are the support staff available to assist you? If you can only talk to a human during business hours and you are busy during that time, then you might consider a different robo-advisor.
It is also important for you to check up on the quality of the support that is available. There is no objective way to do this. Instead, you need to rely on robo-advisor reviews, forum posts on the internet, and upon the word of people you know who use the specific service.
All of the robo-advisors that have been mentioned previously in this blog post have a qualified and professional support staff as far as we can tell. So, if you already like one of the aforementioned robo-advisors in this post, then you do not need to worry about this aspect.
Robo-Advisors For The Long Run
There is no doubt that both robo-advisors and financial advisors have their pros and cons. Here is a brief summary of everything discussed so far:
- The choice between a robo-advisor and a financial advisor depends on your investing needs and goals.
- Robo-advisors have low fees, low minimum balances, and direct user involvement.
- Financial advisors provide a tailored service, human component, and personal finance assistance.
- You can also opt for a hybrid between the two. An algorithm can do your investing and a human can handle your financial planning.
- The most important things to look for in a robo-advisor are its support network, its tax-loss harvesting potential, and its fee structure.
If you do decide to go with a robo-advisor, chances are that your focus is on the long-term. Index funds are another example of a long-term investment and they have shown relatively amazing returns for their investors. As such, I will be comparing robo-advisors with Index funds next and weighing their pros and cons. If you want my help with understanding a bit more about how robo-advisors work, then feel free to contact me here. I look forward to speaking with you!
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