The recent popularity of so-called "robo advisors" has left people wondering: how are they different from your average financial planner – you know, a human?
Robo advisors and financial planners have some things in common. Both exist to help customers handle their money in smart ways. Both are put to best use when you have some wiggle room in your budget for achieving your goals, and both are not free.
The two differ greatly, however, when it comes to achieving your dreams. One does what you tell it to do, and the other can take your dreams and offer you a plan for achieving them. Guess which is which?
Robo Advisors Can't Interpret Your Dreams for You
A robo advisor is really an investment formula, engineered to meet the demands of a wide range of people. You give it some parameters and it calculates an investment strategy that amounts to something very much like a mutual fund and bond portfolio.
A financial planner, on the other hand, has the ability to listen you. You tell him or her what you'd like out of life, and using his or her expertise, translates that into a dollar amount. Then, he or she will devise a strategy, which involves all the various aspects of your financial world, for reaching that goal.
Robo advisors can't do that for you because they weren't designed for that purpose. There are simply too many factors and extenuating circumstances that go into creating a financial plan and robo advisor software isn't robust enough to handle such, which actually borders on the realm of artificial intelligence.
Robo Advisors Won't Motivate You Like a (Human) Financial Planner Will
Plans are nice, but they're useless unless you follow them. Financial planners know this, so they're usually pretty adept at convincing their clients to stick to the plan they created.
Whether it's by educating clients on basic financial principles to demonstrate their goals can indeed be achieved if they stick to the plan, or by scaring the bejeezus out of them to keep them on track, financial planners are just good at motivating clients to do the right thing.
Robo Advisors are Cheaper
Robo advisors cost, on average, less than financial planners. We may be in danger of comparing apples to oranges here, however, since financial planners do far more for their clients than apply a mathematical formula to some numbers.
But for investors who simply want to "set it and forget it", or who have a steady job and who are very young with no dependents and few goals other than earning and saving money, maybe a robo advisor is all they need for the time being.
Starting a family, purchasing a home, handling an inheritance, saving for college, or any form of retirement or estate planning, on the other hand, are all out of the purview of a robo advisor. For assistance with planning for those events, a financial planner will be money well spent.
Besides, the money you're charged when you hire a financial advisor won't break the bank, for most people. Sometimes they charge a percentage of how much they manage, typically around 1% to 2%. Others, who are fee-based, can cost $700 and up for a simple, one-time financial plan drawn up.
Conclusion
If you're still wondering which is better for you – robo advisors or financial planners – keep in mind that you can go with both choices, if you want. Put some money into a robo-advised account, then consult a financial planner for advice on what to do with the rest. Either way, you're bound to learn a thing or two and come out ahead!
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Will Kaplan, CFP® is the principal at Halcyon Financial Planning, a fee-only wealth management firm located in Portland, Oregon. Halcyon specializes in a goals-based approach that combines your aspirations and resources with a forward focused, proactive style of planning. Will and I became friends after meeting through NAPFA, and I asked him to write some thoughts on working with Robo Advisors as a guest topic for this site. |
Will Kaplan | Halcyon Financial Planning