Should you use a robo adviser or a human financial adviser?
Well, as with most things in the world of personal finance and investing, it depends on your personal facts and circumstances. But a good place to start is by reviewing some of the pros and cons of robo advisers and financial advisers.
The pros of robo advisers
Generally, robo advisers, which use an algorithm to manage your investments, charge a much lower fee to manage your assets than a human adviser. What’s more, robo advisers tend to have no or low account minimums.
Plus, many robo advisers, including those offered by Charles Schwab, Vanguard, and Betterment, now offer access to a living, breathing financial adviser, according to Scott Smith, director of adviser relationships at Cerulli Associates. “I think we long underrated the usefulness of human advisers,” said Smith.
Another advantage is that more financial advisers are adding robo adviser services to their offerings. “Digital advice is here to stay,” said Tony Davidow, author of a soon-to-be published book, “Goals-based Investing: A Visionary Framework for Wealth Management.” “These automated solutions can provide scale and efficiency to wealth management firms and advisers who embrace them. They provide a more efficient way of handling smaller accounts.”
The cons of robo advisers
One downside to using a robo adviser is this: Your investments are managed by a computer. And it’s a black box. Yes, a human created the inputs for the computer to use. But, generally, you won’t have a sense of those inputs – capital market expectations, rebalancing triggers, assumed inflation rate and the like – and how your portfolio is ultimately managed.
Robo advisers have other limitations as well. “Portfolios and plans are much more complicated and important than what you buy on Amazon or Apple,” said Smith. “As purely investment tools – digital only platforms are a slight upgrade over target-date funds.”
Another downside is that robo advisers don’t work well in isolation, said Davidow. “I think investors still benefit from human intervention, especially during turbulent times, COVID-19, for example.”
Who should use a robo adviser?
If you don’t have much in the way of assets and your finances aren’t complicated, using a robo adviser might make sense for your investments. “Digital advice can be an excellent way to engage younger investors who are fluent with technical and leering of financial services,” said Davidow. “The discipline provided in these robo offerings keeps investors focused on the long-run, and prevents them from the emotional pitfalls of so many investors,” he said.
Smith also said pure digital advice platforms make sense for those who feel comfortable and confident without human help.
If you do choose to use a robo adviser, consider using one that provides access to a financial adviser. “A hybrid solution combining automated advice and some level of human engagement is the best approach,” said Davidow.
Unfortunately, the hybrid approach works on paper not so much in reality, said Smith.
“By tying powerful aggregation and analysis technology to human advice delivery, providers have the opportunity to create a truly differentiated client experience,” he said. “However, striking a balance between sophistication of analysis and simplicity of user experience remains an elusive goal at the enterprise level. A wide swath of clients want comprehensive personalized advice, but the data collection and discovery processes of financial planning remain largely resistant to scaling.”
The pros of a financial adviser
Financial advisers, at least the good ones, have plenty to offer investors. Most if not all financial advisers will review all your finances and accounts before creating an investment plan, which they’ll implement, monitor and adjust over time.
Plus, they’ll review the tax consequences associated with all investment accounts and investments, and during turbulent times, they’ll likely stop you from sabotaging your plan. “Wealth advisers can also serve as a behavioral coach in turbulent times,” said Davidow. “Robots lack the ability to identify nonverbal cues and help investors overcome their behavioral biases.”
The best financial advisers ultimately provide objective advice and personalized service. “A robo-solution is not suitable for high-net-worth investors with complex financial needs,” Davidow. “High quality customized advice cannot be commoditized.”
The cons of a financial adviser
One downside to using a financial adviser can be the fees. On average, a financial adviser will charge you 1% of the assets they manage for you — per year. Plus, there’s often an account minimum, which, in some cases, could be $1 million or more. And then there’s the issue of competency, quality and trust. Not all advisers are created equally. Some are better than others. Some will act as a fiduciary and others won’t. Most will seem trustworthy but some aren’t. And, ultimately, trying to identify the good from the less good can be challenging.
Who should use a financial adviser?
If your assets are sizable and your finances are complicated, using a traditional financial adviser makes sense. “Wealth advisers add the most value in serving the needs of high-net-worth investors with complex circumstances,” said Davidow. “Wealth advisers often have advanced training to handle complex wealth management issues such as executive compensation, trusts and estates, tax management, and handling concentrated holdings among others.”
Smith shares this opinion. “Digital platforms have enabled the creation of millions of client relationships, but for an investor with complicated finances, the burden of having to collect a year’s worth of paper statements has simply transformed into the equally trying task of remembering all the usernames and passwords required for comprehensive aggregation,” he said.
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Original source: MarketWatch