Investors have multiple options for portfolio management, including robo advisors, financial advisors, and the do-it-yourself (DIY) route. Learn how the various types of advisors work and the features and benefits of each.
What Is a Financial Advisor?
A financial advisor is an individual or organization that provides financial planning, wealth management, or investment advisory services to individuals. Financial advisors typically charge a fee for planning and advice, or they may get paid commission on investment trades.
Financial advisors may provide a range of services, including but not limited to:
- Trade execution
- Investment advice
- Wealth management
- Retirement planning
- Estate planning
- Tax planning
- Budgeting
What Is a Robo Advisor?
A robo advisor is an automated service that provides investment management to investors with little or no human interaction. Robo advisors use a combination of inputs provided by the investor, which are then used by computer algorithms to build and maintain a portfolio of investments.
Not all robo advisor services work the same but all generally offer basic services such as risk assessment, investment recommendations, and portfolio rebalancing, all of which are based upon data collected from the advisor-client through an online survey.
Self Investing With a Brokerage
Self-investing is typically done through a discount brokerage firm, which is a stockbroker that executes buy and sell orders at an affordable rate. Most discount brokers offer online tools, and mobile apps to track account activity and market information.
Note: DIY investors should keep in mind that discount brokers can help to keep trading costs low but these brokers don't offer investment advice or wealth management services like a full-service broker. Therefore, self-investing with a brokerage requires additional research and analysis.
Robo Advisor vs. Financial Advisors
Robo advisors and human financial advisors share some similarities, such as fees that are typically a percentage of assets under management. They also both offer investment services. However, there are differences between robo advisors and human advisors, such as personal guidance and customization.
Robo Advisor Human Advisor Cost & Fees Generally 0.50% of AUM or less Around 1.0% of AUM; hourly fee; commissions. Primary Services Investing, Portfolio Rebalancing Advice, active management, range of financial planning services Guidance From Real Pros Sometimes for an additional fee Yes Ease of Set-up and Maintenance Quick online set-up, adjustable, very low maintenance Requires consultation, data gathering, and periodic maintenance
Costs & Fees
Robo advisor fees typically range from 0.25% to 0.50% of assets under management per year, compared to the typical 1.0% for a fee-based human advisor, such as a registered investment advisor, or RIA.
Primary Services
Robo advisors offer investments, which are typically exchange-traded funds, or ETFs. Investment management is mostly a buy-and-hold (passive) approach with periodic portfolio rebalancing. Human advisors may offer active investment management and a range of financial planning services, such as retirement planning, estate planning, and tax planning.
Guidance From Real Pros
The main factor that's missing from the services provided by a robo advisor is human interaction. While some robo advisors offer access to human advisors, many are entirely automated. Thus, many of the investment strategies provided by robo advisors are passive in nature.
Tip: Active investing involves actively choosing stocks or other assets to invest in, while passive investing limits selections to an index or other preset selection of investments with very little trading, other than period rebalancing. See our article, Active vs Passive Investing, for a complete breakdown of these investing strategies.
Ease of Use & Set-up
Robo advisor account set-up is relatively easy and typically requires the investor to complete a questionnaire that gathers personal and financial information. After the initial set-up, accounts require little management on the part of the investor. Human advisors generally require an initial consultation, followed by account opening, and periodic planning sessions.
Tradeoff Between Robo Advisors and Financial Advisors
The cost to use a robo advisor is generally lower than that of a financial advisor. However, there are tradeoffs, including personal attention, investment selection, and a range of services offered, that investors need to consider before choosing the best type of advisor to suit their needs.
- Personal attention: The key element missing with using a robo advisor is personalized investment advice, portfolio customization, and ongoing management that human advisors can provide.
- Investment selection: Robo advisors primarily use a pre-set selection of ETFs or index funds for investments. However, human advisors may offer a range of investment securities, including stocks, bonds, ETFs, mutual funds, or options.
- Range of services offered: Robo advisors generally offer portfolio construction and rebalancing, whereas human advisors may provide these services, as well as a range of financial planning services, such as retirement, estate, and tax planning.
DIY with a Brokerage vs. Robo or Financial Advisors
Some investors prefer a DIY (do-it-yourself) approach to investing, as opposed to using a robo advisor or human financial advisor. While DIY investing provides some benefits, such as cost savings, convenience, and control, investors should also consider the cons of self-investing with a brokerage.
Pros of DIY vs. Alternatives
- Lowest cost: Fees for robo advisors are generally lower than fees for human advisors, but fees for a completely self-managed investment accounts using low-cost mutual funds or ETFs can be lower than both.
- Convenience: While robo advisors are generally easier to use, and more convenient compared to human advisors, a DIY approach can be the most convenient middle ground for investors willing to do their own research and place their own trades.
- More Control: Self-investing with a brokerage allows an investor to choose their own investments, strategy, and timing of trades, whereas robo advisors typically limit choices to ETFs or index funds, and human advisors generally adhere to their preferred investment selection and strategies.
Cons of Self Investing with a Brokerage
- Time-consuming: Portfolio management, including investment research, planning, analysis, trade execution, and monitoring, takes time and energy that some investors may not be able to commit.
- Lack of expertise: Discount brokers may offer some investing tools, but they don't provide investment advice or financial planning. Therefore, DIY investors are left to their own expertise, which may be limited compared to a professional advisor.
- Potential for lower returns: While human advisors are susceptible to making mistakes, DIY investors lacking investment knowledge and experience are generally at greater risk of producing lower returns than a pro, and possible lower than a passively-managed robo advisor account.
Considerations When Choosing Which Is Best For You
Key considerations for choosing between a DIY approach or the hiring of a robo or financial advisor can be narrowed down to personal preference and the complexity of the portfolio.
- DIY: Investors who prefer to have control over their investments and portfolio management.
- Robo advisor: Generally suited for beginning investors or those with little or no need for financial planning beyond a simple investment portfolio.
- Human advisor: For investors who want personalized investment management and may need other financial planning services, such as estate planning or retirement planning
Bottom Line
Robo advisors, human advisors, and the DIY approach all have their respective advantages and disadvantages. Your personal circ*mstances and needs should dictate which is best.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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Portfolio Management Options
Portfolio management offers investors various options, including robo advisors, financial advisors, and the do-it-yourself (DIY) route. Each option has its unique features and benefits, catering to different investor preferences and needs.
Financial Advisor
A financial advisor is an individual or organization that provides financial planning, wealth management, or investment advisory services to individuals. They typically charge a fee for planning and advice or may receive commission on investment trades. Financial advisors offer a range of services, including trade execution, investment advice, wealth management, retirement planning, estate planning, tax planning, and budgeting [[1]].
Robo Advisor
A robo advisor is an automated service that provides investment management to investors with little or no human interaction. It uses computer algorithms to build and maintain a portfolio of investments based on inputs provided by the investor. Robo advisors generally offer basic services such as risk assessment, investment recommendations, and portfolio rebalancing, all based on data collected from the advisor-client through an online survey [[2]].
Self-Investing with a Brokerage
Self-investing is typically done through a discount brokerage firm, which executes buy and sell orders at an affordable rate. While it offers online tools and mobile apps for tracking account activity and market information, it does not provide investment advice or wealth management services like a full-service broker. Therefore, self-investing with a brokerage requires additional research and analysis [[3]].
Robo Advisor vs. Financial Advisors
Both robo advisors and human financial advisors offer investment services, but there are differences in cost, primary services, guidance, and ease of set-up and maintenance. Robo advisors generally have lower fees and offer investment management primarily through exchange-traded funds (ETFs) with a passive approach, while human advisors may offer active investment management and a range of financial planning services [[4]].
DIY with a Brokerage vs. Robo or Financial Advisors
Investors who prefer a DIY approach value cost savings, convenience, and control. However, self-investing with a brokerage can be time-consuming, may lack expertise, and has the potential for lower returns compared to professional advisors. Choosing between a DIY approach, robo advisor, or financial advisor depends on personal preference and the complexity of the portfolio [[5]].
Conclusion
Robo advisors, human advisors, and the DIY approach all have their respective advantages and disadvantages. The choice between them should be based on personal circ*mstances and needs, considering factors such as cost, personal attention, investment selection, and range of services offered [[6]].
