Robo-Advisor vs. Personal Financial Advisor vs. Certified Financial Planner: Who reigns supreme?
Robo-advisors
Robo-advisors, platforms attempting to revolutionize investing for individuals, use computer algorithms to build and manage a client’s investment portfolio. Robo-advisors allow you to establish an investment horizon and risk tolerance and are offered at low cost for those investors who may have little experience or not much capital to begin their investing journey.
As an individual investor, the robo-advisor prompts you to provide basic information through a series of questions tailored to discovering your investing heartbeat and capacity. The robo-advisor will digest that data and spit out a uniquely-tailored approach for allocating assets and building a portfolio of diversified investments based on its calculation of your investment percentages. Then, after funds are positioned, your robo-advisor can continually monitor and realign your investment portfolio in accordance with your target percentages. The robo-advisor phenomenon was built on passive investing, using low-cost funds linked to an already established mix of investments.
Advantages of Robo-advisors
There are a few key advantages to using a robo-advisor. The robo software takes the emotions out of investing and positions the investor based on percentages, thus avoiding mercurial decisions inevitable when following the market closely and constantly. The robo software also puts the management of your investment on auto-pilot, where you do not have to worry about changing course or jumping into another sector…it’s all taken care of for you. Furthermore, robo-advisors require less of an initial investment than other advisory firms and charge less fees than the traditional method. So, if you want to invest with no experience and are unsure where to start, robo-advisers are a nice option.
You will generally pay one of these digital advisors a service fee that may be structured as a fixed monthly fee or as a percentage of assets. Most robo-advisors use mutual funds or exchange-traded funds rather than individual stocks to build your portfolio. As mentioned above, they typically follow an index fund or another passive investment approach.
Popular choices include Fidelity Go, Vanguard, and Betterment. Robo-advisors can be beneficial for the individual investor who does not want to feel compelled to throw a bunch of capital into the market or swallow the often-enormous fees associated with traditional financial advisors (“FA”). Robo advisors also provide flexibility with time and effort.
Disadvantages of Robo-advisors
After laying out the robo-advisor services and their advantages, it is important to delineate the potential pitfalls of using a robo-advisor for your personal investing approach.
First, a robot is not a sounding board or strategy consultant if you are facing complex financial issues or interested in nuanced investing strategies. If a particular investment (e.g., stock, bond, mutual fund, etc.) declines drastically, or even if just the market underperforms for a stretch, robots cannot provide context or discuss options. As an individual investor, that option may be crucial. Furthermore, as life goes on and financial goals get bigger and more diverse, a robo-advisor cannot provide guidance to help determine short- and long-term financial strategies based on evolving life circumstances. These digital platforms cannot empathize or understand your goals and values. Financial professionals are particularly useful to help you stay on the right investing path according to your interest and needs, as you age and move through life. Indeed, financial advisors are professionals for hire, usually on a continuous long-term basis, to help manage your finances based on your life goals, which may include investing, estate planning, and more. The FA should help guide you and create a tailored financial plan based on your unique circumstances and financial goals.
Cost Structures
In terms of cost structures, robo-advisors charge fees from .25% to .50% of the amount managed per year. And many will take on new clients with $0 to open an account. On the other hand, traditional financial advisors charge a median percentage of 1–2% per year, but fees can fluctuate based on the size of the account. Additionally, some advisors have a mandatory minimum balance of $250,000 to manage. The fee structure can vary depending on the advisor’s experience and qualifications.
Financial Advisors vs. Financial Planners
Financial professionals exist on a wide spectrum, and each one is throwing his or her respective hat in the ring for “your business” — the opportunity to help manage your money. Two of the most popular (often used interchangeably) include Financial Advisor and Financial Planner. They often may actually do the same thing, however…. It is important to note that every financial planner is also a type of financial advisor, but every financial advisor is not necessarily a financial planner. In fact, 100 certifications exist for a financial advisor to potentially attain.
Financial Advisors
A financial advisor is a wide-ranging term for a financial professional who helps manage your money. In return for a fee, the advisor helps you with a variety of tasks related to the management and direction of your money. Specifically, a financial advisor may assist with the management of investments, purchase and sale of stocks and other securities on your behalf, or design your estate and tax plan. A financial advisor may hold a variety of licenses and credentials, depending upon the services he or she provides.
Financial Planners
A financial planner is a type of financial advisor, who helps companies and individuals create a program to meet long-term financial goals. Often, a financial planner possesses specializations in investments, taxes, retirement, and/or estate planning. Additionally, the financial planner may hold various licenses or designations, such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC), or Certified Investment Management Analyst (CIMA), among others.
Brokers vs. Financial Advisors
Long gone are the days when boiler rooms run rampant, and stockbrokers are the kings of Wall Street. However, some of the blueprints have largely remained. Brokers are paid commissions to execute trades or buy and sell assets for clients. Financial advisors, on the other hand, are paid a flat fee or percentage of assets under management (“AUM”) to advise clients on securities and/or manage investments.
Brokers
In the age of online investing, individual investors who want to trade on the stock market no longer require a broker to execute their buy and sell orders. Although brokers still execute orders, many have expanded their services to personalized investment management in return for charging potentially high commissions. Furthermore, brokers may be dual-registered as investment advisers, and may potentially be involved in private placements, initial public offerings (IPOs), or secondary issuances. Brokers may work to sell their clients on a hot new issuance or private deal to help a company raise capital.
Financial Advisors
Conversely, financial advisors operate on a fee-based system of providing investment advice for individual investors and managing investment accounts. Financial advisors also may help their clients create a broad wealth management framework, including assisting with tax, estate, and mortgage planning.
The Bottom Line
When it comes to managing your money, is pivotal to do your research into the different types of financial professionals and platforms that may assist you with the best wealth management strategies according to your needs and interests.
Special attention should be directed towards the cost structure that a financial advisor or money manager is charging- those 1–2% fees are not so small after they accumulate over several years. It’s your money — manage it how you see fit! If you don’t know what you’re currently paying in fees or confused about the next steps, head over to Compundly.com for a free investment audit.
