Robo-Advisors vs. Human Financial Planners: The Pros and Cons in Modern Investing
This is an article ‘Robo-Advisors vs. Human Financial Planners: The Pros and Cons in Modern Investing’ by Marc Primo.
Over the past decade, robo-advisors have experienced a remarkable surge in popularity. These automated investment advisors have rapidly accumulated substantial assets under management, often reaching tens of billions. In 2021 alone, 27.7% of US investors have instituted systems powered by such tech tools. However, how do they stack up against conventional financial advisors?
Curiously, following an initial phase of skepticism and reluctance towards these emerging players, the financial industry has gradually welcomed them. This transformation involves integrating conventional financial guidance with the automation offered by robo-advisors. But at any rate, it's essential to recognize that both approaches come with their distinct advantages and disadvantages.
The Benefits of Robo-advisors
The rise of financial technology has given birth to a new player in the game – robo-advisors. No, it’s not another comic book superhero like Robocop, but one that protects your wallet as times and market trends change. However, in a way, it can be. These automated investment platforms promise convenience and cost-effectiveness. Of course, it somehow lacks certain values traditional human financial planners bring to the table, such as experience and personalized guidance. Nonetheless, they are useful to help you make more sound financial decisions in the long run, primarily thanks to artificial intelligence (AI) and machine learning (ML).
While many view AI and Ml as a double-edged sword that can either work for or against human work systems, the so-called ‘factory of the future’ as coined by Boston Consulting Group, aims to put humans at the helm to make such tech tools work for the benefit of workers rather than replace them in terms of delivering results.
Robo-advisors are online platforms that do just that in today’s financial systems. They use algorithms to provide sound investment advice that helps you manage your portfolio. These tools have gained immense popularity in recent years for several reasons. They are accessible 24/7, making them an ideal choice for individuals who prefer managing their finances on their own schedule. So, if you're a busy student juggling classes and part-time work, you can still review and adjust your investments at any time.
Most robo-advisors also charge lower fees than traditional financial planners. This can save you money in the long run, especially for long-term investments. Consider platforms like Wealthfront or Betterment, which offer competitive pricing if you’re interested in taking this route.
Another plus that robo-advisors offer is how they utilize the modern portfolio theory to diversify your investments, spreading risk and potentially improving returns. For instance, they may suggest a mix of stocks, bonds, and alternative assets to optimize your portfolio, reducing your risk exposure.
Most of all, these platforms often provide transparent and easy-to-understand reports, enabling investors to track their portfolio performance. This level of clarity when it comes to your investment status can empower you to make smarter decisions and investments to grow your money.
Robo-advisors are Good, But…
Perhaps the main thing that robo-advisors lack is personalization. These tools often use a one-size-fits-all approach and might not consider specific financial goals, like saving for a home, unlike when you consult human financial planners who can provide customized guidance in specific markets.
Adding to the lack of personalization, Robo-advisors can also fall short in providing that essential human interaction we need to foster trust, especially in financial decisions. This aspect can certainly be important for those who value face-to-face communication. A business undergoing financial transformation, for instance, might prefer discussing investment decisions in person with a professional rather than relying on what the algorithms say.
In a nutshell, robo-advisors primarily focus on investment management and may not offer comprehensive financial planning services like a human consultant can provide. They often lack tax planning and estate planning, unlike human financial planners, who provide a broader range of services.
With that, let’s review the pros of investing with the help of human financial experts.
Understanding Human Financial Planners
Human financial planners are certified pros when it comes to offering personalized financial guidance and services. Their approach is centered on understanding your unique financial situation, needs, and goals, and because of this, it has turned out to be one of the most lucrative careers today. In fact, the employment of personal financial advisors is projected to grow 13% from this year to 2032, much faster than the average for all occupations.
Tailoring their advice on how you deal with your finances, these degree holders greatly weigh in on and consider your goals vis-a-vis your risk tolerance. For instance, if you're nearing retirement, they have the capacity to create a customized plan to ensure your savings align with your retirement income needs.
Aside from that, most financial planners can provide a human touch by offering emotional support and reassurance during market fluctuations and life changes. Such support can be invaluable during times of economic uncertainty or personal hardship. More importantly, they can offer a wide range of financial services, including retirement, estate, and tax planning, that can create a comprehensive financial plan for you that distributes your assets efficiently.
By helping you adjust your money matters as your life circumstances change, human financial planners ensure that you stay on track to meet your goals through investment strategies, especially after a significant life event, such as the birth of a child or an unexpected inheritance.
Making the right choice
The drawbacks of human financial planners primarily revolve around three key factors. Firstly, they often come with a higher price tag compared to robo-advisors, potentially impacting your overall investment returns. A few may have conflicts of interest, as they receive commissions or incentives for recommending specific financial products. Lastly, depending on your location and the planner's availability, it may not be as convenient as resorting to a robo-advisor for financial advice.
When deciding between robo-advisors and human financial planners, it largely hinges on your financial situation, preferences, and goals. Robo-advisors are a solid choice if you're working with a limited budget for investment management, as they typically come with lower fees. They give you more freedom and the convenience of automation to prioritize cost-efficient diversification. This can be achieved through exchange-traded funds (ETFs) to reduce risk exposure while keeping fees low may also find robo-advisors appealing.
On the other hand, human financial planners are a better fit if you have complex financial needs, specific goals, or major life changes that require personalized guidance. These pros constantly study trends in comprehensive financial planning that encompasses retirement, estate, and tax planning in addition to investment management.
Just always remember that the decision isn't necessarily binary. You can leverage the strengths of both robo-advisors and human financial planners to create a well-rounded, effective financial plan. Whether you're a student, a businessman, or a consumer, this guide should help you navigate the complexities of modern investing and make informed decisions that align with your financial aspirations.