If you’ve outgrown DIYing your investment management strategy, you have two options — use a robo-advisor or work with a wealth manager.
Robo-advisors are a high-tech, hands-off alternative to a traditional financial advisor. With algorithms that automate investment portfolios, they offer a middle ground between doing it yourself and working with a human financial advisor.
Robo-advisors may be a good choice for some people, but they have limitations that become more apparent as your assets grow and financial situation becomes more complex.
Here’s what you need to know about both options to help you make the decision that’s right for you.
Robo-Advisor vs. Traditional Wealth Manager: An Overview
Financial advisors have been helping people make investment decisions for generations. But they offer more than just basic investment advice.
They provide comprehensive wealth management solutions, such as tax strategy, insurance planning, estate planning, retirement planning and more.
Robo-advisors are the new(ish) kid on the block in the investment management world. Because they have low or no minimum balance requirements to get started, they are accessible to beginners who want to invest in the stock market but aren’t ready for or don’t have enough assets to work with a traditional advisor.
However, they only provide investment management services. They can’t provide guidance for your other financial needs.
What is a Robo-Advisor?
Robo-advisor is a bit of a misnomer. First, here’s what it’s not: There are no robots working behind the scenes, advising you about how to invest your money.
Robo-advisors are low-cost digital investment platforms that automate portfolio management by using computer algorithms to develop an investment plan based on a user’s risk tolerance, financial goals and investment timeline. Robo-advisor services often include tax loss harvesting and automatic portfolio rebalancing.
Advantages and Disadvantages of a Robo-Advisor
A robo-advisor may be a good option for people with relatively simple financial situations who only want help managing their investment accounts. Here are some pros and cons of using one.
Pros of Using a Robo-Advisor
- Simple to use. After you complete an online questionnaire, a robo-advisor will create your portfolio. You can set up automatic deposits into your account to start investing.
- Lower cost. Robo-advisors typically have lower fees than traditional wealth managers. The cost to use a robo-advisor generally ranges from 0.25% to 0.50% of your portfolio compared to 0.5% to 1.5% for traditional advisors.
- Low minimums. Robo-advisors often have no or low minimum investment requirements, making them accessible to newer investors with fewer assets.
- Automatic rebalancing. Many robo-advisors automatically rebalance your portfolio to ensure your asset allocation remains aligned with your investment strategy. This is an appealing upgrade if you’ve been doing it yourself.
- Tax loss harvesting. Some robo-advisors harvest investment losses to offset investment gains and reduce your tax bill.
Cons of Using a Robo-Advisor:
- Limited functionality. Robo-advisors only offer investment management services. They can’t help with more complex financial scenarios like estate or tax planning.
- Limited asset classes. Investment options are typically limited to exchange-traded funds (ETFs) and mutual funds. You can’t usually purchase individual stocks, bonds and other types of investments through a robo-advisor.
- Lacks nuance. The questionnaire may not adequately capture the information needed to make the best investment decisions.
- No personal guidance. Robo-advisors can’t provide personalized advice based on how different areas of your life are connected and may influence decisions in other areas. Robo-advisors don’t have insight into what’s happening in other areas of your life, such as whether you want to buy a house, fund your kid’s education or pay for your child’s wedding. Additionally, they can’t help you make the most of employee benefits, such as equity compensation, insurance and retirement plans. Long story short, even when they can point you toward resources based on an algorithm, they can’t replace having a professional on your side synthesizing the full picture to maximize your opportunity.
Advantages and Disadvantages of a Traditional Wealth Manager
Traditional advisory services are usually a better bet for high-net-worth individuals significant investable assets and/or a more complicated financial scenarios.
While we say a traditional advisor, the reality is there is nothing traditional about comprehensive wealth management. Beyond investments, wealth management covers all aspects of your financial life to ensure alignment between your money, goals, and values.
Here are some of the benefits and drawbacks of working with an advisor.
Pros of Using a Traditional Wealth Manager
- Personal touch. A robo-advisor won’t check in with you to see if your goals, financial situation or other life circumstances have changed. They can’t advise you against making rash financial decisions that may not be in your best interest. Your relationship with your advisor allows them to give you financial advice and develop customized solutions based on your unique and complete financial picture.
- Comprehensive solutions. Wealth managers offer a holistic approach to your personal finances that goes beyond basic investment management and includes tax planning, retirement planning and more. They can help you handle more complex financial challenges that robo-advisors cannot.
- Estate planning. No one wants to think about what will happen to their family if they’re no longer around to take care of them. But if something happens to you, an advisor can help your loved ones decide what financial moves to make next.
- Tax planning. Paying your fair share is fine, but no one wants to leave an unnecessary tip for Uncle Sam by failing to optimize your portfolio for tax purposes. A wealth manager can help evaluate options to become and remain tax efficient.
- Expanded investment options. Traditional wealth managers can access investment types that aren’t available through a robo-advisor. Plus, they have access to professional research to help you decide what types of investment are right for you and how to make the most of each.
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Investing Philosophies. One major benefit of choosing wealth management is the ability to evaluate possible matches based on their investing philosophy. You may hear this as the traditional debate between passive and active, but here at Plancorp we strongly believe that an evidence-based and academic approach is best. We apply proven academic principles to construct more efficient portfolios with lower costs based on an investor’s risk tolerance and financial goals.
Cons of Using a Traditional Wealth Manager
- Higher minimums. You may need a larger investment portfolio to work with a wealth manager.
- Higher fees. Working with a wealth manager typically costs more than a robo-advisor.
Cost Comparisons of Robo-Advisors vs. Traditional Wealth Managers
In general, robo-advisors are less expensive than traditional wealth managers. But an advisor provides a holistic approach to your finances and individualized solutions based on your unique circumstances and goals.
Wealth managers also stay up to date on the latest available financial products and investment strategies and use them to your advantage when appropriate.
It’s common for both robo-advisors and traditional financial planners to get paid a fee based on assets under management (AUM).
A typical fee structure for robo-advisors is 0.25% to 0.50% of AUM. Financial advisors often charge around 1% of AUM, but rates vary, so it’s important to ask.
Regardless of what they charge, a good advisor is transparent about their pricing. Here are a few things to look for when selecting a wealth manager.
- Fee-only: An advisor shouldn’t receive commissions for the products they sell.
- Fiduciary: Your advisor is obligated to do what’s in your best interest, not theirs and not the companies of the products they sell
- Transparency. You should be able to easily find a schedule of fees that clearly outlines the charges you may incur.
Robo-Advising vs. Traditional Wealth Manager for Complex Situations
Every equity compensation, employee stock purchase plan and deferred compensation package is different. If you want a basic overview of how each type works so you can decide what to do next, a robo-advisor may be sufficient.
But if you want someone who will take a deep dive into your options and make recommendations based on your finances, tax liability and goals, a financial advisor is a better bet.
What Type of Advisor is Right for You?
Robo-advisors have their place. If you’re new to investing and your financial situation isn’t overly complicated, a robo-advisor may be a good fit.
But if you’re further along in your career and have a substantial portfolio or complex compensation considerations, a robo-advisor may not be your best option.
Here are seven signs working with a financial advisor could be worth your while.
- You want a plan tailored to your situation. A wealth manager is better if you want someone to look at all aspects of your finances, not just your investments.
- You want someone to keep you on track. If you like having someone regularly review your finances and goals and make adjustments to your plan as necessary, an advisor may be a good choice.
- You have access to equity compensation. Navigating the financial and tax implications of stock options, employee stock purchase plans, deferred compensation and other equity compensation packages can take time and effort. A wealth manager can guide you through the process.
- You want to minimize your tax obligation. While some robo-advisors may implement tax loss harvesting, that’s only one way to reduce your tax burden. An advisor can employ multiple strategies to minimize your tax bill.
- You’re maxing out your 401(k) and have money left over. An advisor can help you decide how best to use extra funds.
- You’re unsure about your approaching retirement. If you’re a decade or less away from retiring and aren’t confident that you can live comfortably and pass something on to the next generation, a wealth manager can help you get on track.
- You want to make the most of your wealth. Doing okay is “okay.” But delegating more to a professional will help you maximize what’s available. A financial advisor can make recommendations based on your complete financial picture and the most up-to-date products and strategies to make the most of what you have.
Still not sure? Take our money match quiz to understand where you land on the scale of DIY planning to comprehensive wealth management.
