When To Choose A Robo-Advisor Over A Human Financial Advisor
Betterment and Wealthfront are robo-advisor platforms that aim to give low-cost financial advice to people who are interested in making wise financial decisions. This has led to concerns as to whether the time to get human financial advisor services is over. According to a research that was recently done, it seems not. Most millennials would still rather get financial advisory services from a real human being, despite the fact that it’s way cheaper to use the services of a robo-advisor. Click Here To Go Straight To Our Online Tutorial
Recently, a survey among millennials, who were actively saving for their retirement, was done. Millennials were asked whether they would rather use the services of a robo-advisor or a human advisor. Based on the results that were obtained, twice as many millennials would rather use the services of a human financial advisor rather than the services of a robo-advisor. This is regardless of the fact that human financial advisors charge a lot more than the robo-advisors.
One of the major reasons for this preference is the fact that human advisors can help millennials plan for their finances. They can help them prioritize, as well as track their financial performance over time. They also help millennials adapt to the financial changes that are taking place in their life. This goes well beyond just the mechanical process and extends to the social aspects of investing as well.
What is a Robo-Advisor?
A robo-advisor is an online tool that’s automated. When you need advice, you feed some information into the system based on your current financial position and what you would like to achieve financially in the future. This tool will analyze your information and then give you financial advice based on your information. For example, someone who doesn’t immediately need to use their funds will get much more different advice than someone who needs their resources within a short time. If you are highly dependent on your money for your future well-being, then you definitely want a less risky investment than someone who wants a short-term, high-return investment. The robo-advisor uses the same type of tool that human advisors use to help you come up with an investment plan. However, the robo advisor performance doesn’t include some of the extra services that human advisors would typically give you, such as retirement advice, tax planning, and estate planning.
When Should You Use a Robo-Advisor?
There are some situations where it might be more advisable to use the services of a robo-advisor.
If you want to save on investment fees
This is because robo-advisors don’t charge as much fees as human advisors do. For example, human financial advisors can charge you as much as 1-3% of the sum of your total investments every year. In the long term, this can add up to quite a large sum over the years. Compare this to robo-advisors that usually charge less than 1% of investment fees. Some can charge as low as 0.15% to manage your investments. Being able to save on the fees charged can make a huge difference in your investment in the long term.
If you have little desire for human contact when it comes to your investments
With a human advisor, there will be a need to keep in constant touch with them, but this is not the case with robo-advisors. Most people usually want to talk in case of a stock market crash or in case things go wrong with their investments. This is where having a human advisor would come in handy. But if you are sure that you can ride the wave of such negative losses on your own without having to consult with a financial expert during such times, then a robo-advisor is the way to go.
If you don’t meet the minimum requirements for a traditional advisor
In most cases, the minimum is usually $200,000. If you don’t meet this minimum limit but you still need financial advice, then the best thing to do would be to use the services of a robo-advisor. Other financial advisors might have higher minimum amounts required before they can work with you. This can be as much as $500,000 or $ 1,000,000. With a robo-advisor, you can get advice with as low as $5,000 in portfolio value. Other services will even allow you to open an account with them even if you have a zero balance. This is one of the main reasons why young investors like robo-advisors so much.
If you have no problem letting someone else manage all your investment
All you will need to do is to fund your account and then let the advisor manage it. The advisor can give you a wide range of advice and invest all your funds for you.
Should I Use A Robo Advisor?
Robo-advisors can protect you from unscrupulous human investors, who might be out to scam you. As much as the financial industry is under tight regulation, there’s always that small percentage of people that might be out to exploit you and misuse your funds. Lower your risk for something like this to happen to you by using the services of a robo-advisor.
If you want a more hands-on approach when it comes to managing your money, then robo-advisors are the best option. The advisor will take care of all the manual aspects of investing, while you can take care of the rest. You can get any advice at any time of the day or night. For instance, you can log into your account even at 3 o’clock in the morning for some investment advice. These advisors will keep your costs low but still provide you with direct access to the market.
When Should You Use a Traditional Investment Advisor?
You should use a human advisor when the following circumstances apply to you:
You would rather not transact online – A lot of young investors have no problem conducting their business online. However, the older generation is not comfortable with this option. If this applies to you, then you are better off having a human advisor.
You would rather be in contact with a real person – If you would rather interact with another person, then go for this option. Human advisors can advise you in regards to your portfolio. You can also be able to ask them any questions that you want. Typically, you can have phone access whenever you need to talk to them. With robo-advisors, no one is directly in charge of managing your portfolio. When you call them, typically you will only be able to get answers for questions related to how the system works.
You want some control over how your portfolio is managed – With robo-advisors, once the portfolio is decided based on your risk tolerance levels, you will not be able to customize it. For instance, even if you wanted to buy individual stocks, it will not be possible to do this.
You are not comfortable with the portfolio plan assigned to you – Robo-advisors are not flexible. Once they have developed a portfolio investment plan for you, you have to invest as required. Therefore, if you are not comfortable with the automated advice dispensed to you by the advisor, you are better off investing with a human advisor.
If a large percentage of your money is in an employer-sponsored retirement plan – This fund is often managed by a human advisor and it will not be possible to move it under a robo-advisor. Therefore, if a large percentage of your portfolio involves these retirement funds, then you are better off using a human advisor rather than a robo-advisor. You can get some allocation recommendations on how to manage your funds from the robo-advisor. You might or you might not be able to extend this advice to your 401(k) plan.
Robo-Advisor vs. Financial Advisor
Emotions usually have a huge impact on the day to day decisions that people make in their lives. Emotions define most parts of human existence. It can be hard to imagine life without emotions. Life might be empty and with no substance attached to it if there are no emotions involved. A lot of people are emotional about their money. If you have ever been broke or gotten a huge unexpected amount of cash, then you might have experienced intense emotional reactions. You might even have made some emotional decisions during that time in regards to how you spent your money. The decisions you made might have been rational or irrational.
This is where having a real human advisor can come in handy. During financially difficult times or when investments are doing really well, most people might end up making emotional financial decisions, which might not always be good. Your human advisor can help you to think more rationally. This is unlike a robo-advisor, which cannot help you when it comes to the emotional aspect of building wealth and managing your investment.
Being held accountable helps to ensure that you stay committed to achieving your goals. Without accountability, you can easily fall off the bandwagon of your goals, no matter how well-intentioned you are. A robo-advisor can help you set goals but they cannot be there for you like a human advisor can be to help you ensure that you have met your goals.
Human life is dynamic and change takes place all the time. For instance, you might have children, get an inheritance, lose a job or a house. All these changes will affect your quality of life and what you would want to do with your finances. A human advisor can help you adapt your finances to these changes that are taking place in your life so that you can stay on the financially savvy path. However, a robo-advisor cannot do this for you. They are much more rigid, as they fully operate on algorithms.
The thing about robo-advisors is that they have a one size fits all approach. This is because they have been specifically designed to meet the needs of the masses. This is part of the reason why they are so cheap, and this can cause a lot of limitations on investors. If you want a more customized approach, then a human financial investor can do this for you. They can come up with a financial situation that’s specifically designed for someone in your financial situation. This will give you a more realistic plan for your money and meet your needs better.
The best time to use a robo-advisor is when you:
- You want your investments to be automatically taken care ofYou are more comfortable
- conducting business online rather than having to interact with a
- human being when it comes to your investments
- You are only investing a small amount of money
Use a human advisor if:
- You want a more hands-on approach when it comes to managing your portfolio
- You want to take calculated risks
- You have a big financial portfolio
However, this doesn’t mean that when you use one you cannot use the other. In most cases, these two types of financial advisors have different kinds of clientele and are not usually competing for the same clients. This is mostly due to the minimum investment amount required. In any case, your life might change and this might cause your investment strategy to change to adapt to your needs. This might cause you to also change the kind of financial help that you need to go for.
In addition, you might even choose to handle your investment on your own. Wealthfront is open to letting their clients copy their investment strategy if they would rather invest their own money on their own.