Do you need a human financial advisor or will one of the up and coming robo-advisors work for you? This is a question that many people are asking themselves in today’s financial world. The only one who can really answer this new question is you the investor and one who is planning for their retirement. While robo-advisors are gaining in popularity they now have about $16 billion in assets under management but that pales in comparison to the trillions that are with traditional advisors. But the robo-advisor tout cheaper fees and the fact that they are more objective because they are based on an algorithms and therefor take the emotion out of the equation. But they may not be able to offer many of the added values that a registered investment advisor can add.
The fact that robo-advisors use algorithms as compared to emotion is one of their main advantages, or so they claim. A second advantage they claim over human advisors is that they are cheaper when it comes to fees with some as low as .25% as compared to the 1% a human advisor normally charges. Also robo-advisors rely heavily on the use of exchange traded funds to invest and diversify your investments. And depending on the funds used these fees may be extremely low as compared to actively managed funds, provide more diversification, and actually reduce costs as the low fee in most instances includes the price to rebalance the portfolio when the time comes.
In recent months there has been a sharing of ideas between robo-advisors and actual planners. Many planners are now using the exchange traded funds to invest their client’s funds in provide cheap investment options and provide added diversification to the portfolios. Also planners can use the same algorithms the robo-planners use to provide this service as well as providing the additional services that robo-planners simply cannot add. These can be tax advice, estate planning, and charitable gifting. In order to properly plan for and execute those areas a real planner is needed and not a basic robo-planner.
Robo-advisors have been looking at adding a human component to their services in order to better compete with real planners. An example of this can be seen in Vanguard. They have begun to offer a service called Personal Advisor Services with fees of .3% for those who accounts are over $100,000. This service is in the testing phase and may be a new way for traditional advisors and robo-advisors to join and provide a lower cost to investors with less funds than what a traditional advisor might take on. And Vanguard is not alone in looking into this untapped market as Charles Schwab is also investigating the possibility of entering this market as well.
If you wish to manage your own portfolio there is nothing to prevent you from going to a site such as www.wealthfront.com and answering their questions to get your portfolio mix and in the case of this site they will even tell you what exchange traded funds they would use to invest for you. Then all you need to do is open a brokerage account with a discount brokerage firm to buy your funds. Here it is up to you to keep track of your positions and rebalance when needed and you will also be responsible for any commissions associated with the account. In the case of this robo-advisor a small fee of .25% would cover your brokerage fees associated with buying and selling of assets.
What is right for you? Well for someone who does not have much in the way of assets or a complicated financial situation a robo-advisor may be the perfect fit for you. If estate planning, taxes, or gifting are part of your financial plans a real advisor is better suited for your needs. If you have any questions or need clarification please do not hesitate to contact me.
