Robo-advisors, or fully automated online investment platforms, are springing up quickly, appealing mainly to new and younger investors. But does that mean they’re right for every investor, in all circumstances? Are there times when you might be better off with a traditional investment advisor, rather than a robo-advisor? Yes!
Here’s how to tell when a robo-advisor or traditional investment advisor is the better choice. Let’s take a look at both sides.
When You Should Use a Robo-Advisor
Robo-advisors can be a real advantage when at least some of the following apply to your investment situation:
You fully understand the impact investment fees have on your investment performance. How much you pay in investment fees can have a material effect on your investment performance, especially over the long term. Traditional investment advisors typically charge anywhere from 1% to 3% of the value of your portfolio, while robo-advisors charge less than 1%. In fact you can get robo-advisors with investment fees as low as 0.15% per year to manage your investments. All things being equal, this can improve your investment performance dramatically.
You don’t need much in the way of direct contact. Some people like personal contact in connection with their investments, while others have no need for it. If you’re perfectly content turning the job of managing your investments over to someone else, someone with whom you have little if any contact, robo-advisors are a good choice. Just make sure you’re okay with not having a human advisor to talk to in the event the stock market crashes. That’s often the time people most want to speak with an advisor or broker directly. If you’re prepared to ride out the downturn and you don’t have a need to analyze it with a person who is intimately familiar with your investments, then the robo-advisor route will work for you.
You don‘t meet the minimum requirements for a traditional advisor. One of the major limitations of traditional investment advisors is the account minimum balance requirement. Most require you to have at least $200,000 in your portfolio before they will even consider working with you. Others will look for even higher minimums, such as $500,000 or even $1 million. Robo-advisors will provide professional investment management of a portfolio with as little as $5,000. Some will even allow you to open an account with no minimum balance. This is a big part of the reason why robo-advisors are more popular among new or young investors.
You’re willing to let someone else do ALL your investing. When you invest in a robo-advisor platform, the site will handle all of your investment activities for you. All you need to do is fund your account. If you prefer this kind of investment arrangement, a robo-advisor will work well for you.
When You Should Use a Traditional Investment Advisor
Despite the rising popularity of robo-advisors, many people still prefer having a traditional investment advisor. This may be you if any of the following apply:
You’re not comfortable transacting business online. Some people, typically younger generations, are perfectly okay conducting all of their business on the web. But not everyone is this way. If this describes you, then you’re probably better off with a traditional investment advisor.
Direct human contact is very important to you. If you prefer having direct human interaction regarding your investments, you’re best to stay with traditional investment advisors. They will not only manage your portfolio for you, but they’ll also be available to discuss your questions and concerns. Robo-advisors typically allow you some form of phone access, but there’s no one at the platform who actually has primary responsibility for, and knowledge of, managing your portfolio. They’re mainly there to answer questions about the system.
You want at least some measure of control over your investments. One of the limitations of robo-advisors is that they’re pretty much hands-off activities. The platform will have you complete a brief questionnaire that will determine your risk tolerance, then a portfolio will be designed based on that tolerance. You will not have an opportunity to customize your portfolio in any way. You won’t be able to load up your portfolio with Apple stock as part of the allocation. In fact, most robo-advisors don’t hold any individual stocks at all.
You don’t agree with the investment allocation robo-advisors use. Beyond the lack of control over your investments discussed above, a robo-advisor arrangement may not work for you if you’re not comfortable with the actual allocation that’s assigned to your portfolio. Because they are fully automated, robo-advisors simply don’t have the kind of investment flexibility you can get with a traditional investment advisor.
Most of your money is in an employer-sponsored retirement plan. Because employer-sponsored retirement plans like 401(k)s are directly managed by an investment trustee, you cannot put the assets under the control of the robo-advisor. The most you can get will be investment allocation recommendations from the platform that you may or may not be able to extend to your 401(k). If most or all of your investment funds are in your retirement plan, a robo-advisor will be little use to you.
Summary
Robo advisers can work very well in a lot of situations. But since everyone’s situation and temperaments are different, you still need to weigh the options of whether a traditional investment advisor will work better for you and your investing style.
Readers: Which do you prefer? Do you use a robo-advisor or traditional advisor for your investments?
Comments
As an adviser to the middle class, I believe that consumers should use robo advisers whenever they can for investment management. They are significantly less expensive and introduce strong discipline into the process. IMHO, the adviser can provide guidance on planning issues – big picture – and helping control behavioral issues for investors. I believe that adviser compensation should not be tied to assets under management at all but should be based upon the amount of time the client requires. Many advisers currently sell their value as managing assets and charge as such and I do not believe that serves the investor well, even if the adviser is a fiduciary.
Asset allocation is headed towards commodity status, but people will still planning guidance in the future.
Or use both. And why risk all your money with one robo-advisor. None of them have a very long track record.
Nice summary, good advice. But nobody–not you, not the WSJ or any other business pub or site– is doing a quant comparison. Easily done in order to compare returns across advisers. Yes, there is grunt work, but someone needs to do it. Most people invest to make money in line with their risk tolerance. Show them the money