It is evident that the robo-advisor revolution has altered the available options as well as the cost of investment management and advising. However, it falls behind when it comes to understanding human emotions as well as some of the important decision making aspects that a financial advisor can provide. Hence, there arises the debate “Robo advisors vs Financial advisors”. In this article we will analyze both advisors and help you get a clear picture on this topic.
What do you mean by Financial advisors?
A financial advisor provides financial advice or assistance to clients in exchange for remuneration. Financial advisors offer a wide range of services, including estate planning, tax preparation, and investment management. Financial advisors are increasingly serving as a "one-stop shop" by offering everything from insurance products to portfolio management. Hence, choosing a good financial advisor is crucial for an investor. Generally, a Financial advisor is a person with good knowledge about portfolio management and investment.
What is a Robo Advisor?
A Robo advisor is a financial advisor that creates and manages investment portfolios using computer algorithms with very little assistance from human beings. Robo advisors create portfolios using information that is available on investors. It uses proven economic models in its algorithm to provide advice based on investors preferences, at affordable cost.
Robo Advisors vs Financial Advisors :
As artificial intelligence is extending its territory in the financial world, investors desire to know whether Robo advisors are better than Financial advisors. Or Are they falling behind traditional Financial advisors? Therefore, to find an answer for this question we need to take into account the positives and negatives of both the advisors.
Cost of Robo Advisors and Financial Advisors :
Cost of services is one of the most important factors for an investor. Robo advisors are known for their low-cost services. Generally, Robo Advisors charge annual fees ranging from 0.02 percent to 1 percent of investment portfolios. It is also known for its low minimums. Many robo advisors will open accounts for new customers with no initial payment.
On the other hand, Financial advisors normally charge between 1 and 2 percent of assets managed. Therefore, the charge for a Rs.100,000 portfolio would be Rs.1000 to Rs.2000. In addition to this, they may also impose annual fixed fees ranging from Rs.1,000 to Rs.3,000.Traditional financial advisors charge hourly rates for specific services, such as creating an estate plan or providing general financial advice.
By considering the cost of services of both the advisors it is evident that Robo Advisors are affordable compared to the traditional financial advisors. Hence, Robo advisors are a good choice for you if you want financial advice at low-cost.
Flexibility and Personalization of Robo advisors & Financial advisors :
Robo-advisors are intended for a broad audience. They don't consider you individually while making decisions; rather, they consider investing profiles for people just like you. They recommend a plan based on your profile, which you can accept or reject by selecting alternatives. However, you often cannot modify the strategy. You will not have many options to choose from. For example, if you want a particular individual stock to be in your portfolio; Robo advisors may not have that stock as an option.
Financial advisors are known for their flexibility and personalisation for their clients. Simply put, they can personalize the portfolio of each client according to their desire. They also provide a wide range of options for their clients, which allows their clients to make changes in their portfolio as and when they want to. Hence, you can be satisfied that you have a portfolio which is exactly made for you.
Considering the flexibility and personalization of both Financial advisors and Robo advisors, It is quite evident that financial advisors are more flexible than robo advisors. Therefore, if you want a more flexible and personalized portfolio, you should go for financial advisors.
Accessibility to the services :
Since anyone with internet connection can receive Robo Advisor services, it is safe to say that Robo Advisors are easily accessible. You can also track your portfolio on the go. But, accessibility doesn't only mean by connection to advisors. But it also means the minimum value of portfolios allowed. Robo advisors are known for their low minimums. Hence, they are known for democratizing the investment to everyone. Simply put, most people can access robo advisors and receive the services hassle-free.
Financial advisors will only work with clients who have higher net worths. This net worth changes, but it's never low because the amount of money these advisors make depends on the size of your portfolio. It is a known fact that most of the financial advisors are unaffordable for most of the population. To contact a financial advisor you either have to meet them or call them; which can be tricky sometimes. Because, the schedule of a financial advisor may not align with his clients schedule and may end up being a problem.
So, by considering the accessibility of both advisors; It is safe to say that Robo Advisors are more accessible in every aspect compared to the Financial advisors.
Human interaction :
Robo Advisors require little to none human interference. This can be seen as an advantage as well as a disadvantage. Because, Robo advisors will only analyze the information that you have provided to them. They ignore emotions which is a key factor. However, some Robo Advisors provide hybrid services where you can interact with humans. Nevertheless, those human-hybrid advisors charge for their services separately.
Financial advisors understand his clients emotions and advise them. With addition, they will interact with their clients frequently and console their clients in times of panic (incidents such as covid). Financial advisors can even talk you out of a bad decision that you would take in future.
Restricted human interaction is an advantage as well as a disadvantage for Robo Advisors. It is clear that Financial advisors can utilize their emotional judgements to produce better performance. Nonetheless, Robo advisors do not take any hasty decisions, which a human can do.
Other Important key features of Robo Advisors to consider :
Based on your risk tolerance, the majority of robo-advisors offer asset allocation for your portfolio. Other key features include tax-loss harvesting and automated rebalancing.
Tax-loss harvesting by Robo advisors:
Robo-advisor tax-loss harvesting is the automated sale of stocks in a portfolio to intentionally sustain losses to balance any capital gains or taxable income.
Automated Rebalancing by Robo advisors:
The process of automatically assessing, then buying or selling assets within a portfolio to make sure that the portfolio as a whole is still in line with the investor's financial objectives and goals is known as automatic portfolio rebalancing. Many robo advisers perform this automatically using advanced algorithms.
Hybrid Robo Advisors :
A hybrid robo adviser integrates a human financial counselor with a computer algorithm. However, this service is a little more expensive than a typical Robo Advisor.
Robo advisors or Financial advisors?
When it comes to managing your money, a robo-advisor can be a great option, especially if you're just starting out in the world of investing and have uncomplicated demands. In order to get the finest advice as your needs become more complex, it makes a lot of sense to speak with a financial counselor who is motivated by your own success. It is wise to consider every aspect and choose the one which makes most sense according to your needs.