When starting out on your investing journey, one of the decisions you will need to make is whether you want to use a robo-advisor or a human financial advisor.
Since 2010 when the first robo-advisor became available in the UK, the number of platforms for individuals looking to invest their personal capital has increased dramatically.
While robo-advisors may have been a lesser-used option before, these platforms now present a genuine competitor to traditional financial planners and financial advisors.
In this article, I will outline the various pros and cons of using a robo-advisor vs financial advisors and planners. Read on to find out whether using an automated service might be a good choice for you, or whether you might benefit from the human touch.
- The main difference between a a robo-advisor and a human advisor is the automation of investments and portfolios.
- With a robo-advisor your investments are automated via ready-made portfolios which usually have themes based around topics like Green Energy, Gaming and Electric Batteries.
- Wombat has a number of investment themes and calls itself a thematic micro-investing app, which means it’s an automatic robo-investor app.
- A human advisor will offer more flexibility and will usually offer a face-to-face meeting to better understand your investing needs, before recommending a customised investment strategy tailored specifically for you.
What is a robo-advisor?
Robo-advisor is short for “robotic” advisor, and refers to investment platforms where a computer makes your investment decisions for you.
The choices that the platforms make are driven by computer-generated algorithms, designed to find the best investment performance while requiring less human input.
The platforms provide automated financial services, creating an investment portfolio based on user data that you input when you sign up for a robo-advisor account.
This includes information such as your tolerance for risk, how much you have to invest, and your investing time frames. You’ll answer a series of questions when you sign up for an account and it’s your answers that will determine the strategy the “robot” adopts for you.
The technology itself actually isn’t new; human financial advisors have been using it for decades to determine investing strategies for individual investors. These financial advisors typically charged a fee to provide this service.
Now, the difference is that independent companies have automated this process, giving general investors access to the same technology for a fraction of the cost.
How do they differ from a human advisor?
While a robo-advisor might essentially be technology making decisions for you, a human advisor is just that – human.
Traditional financial advisors are people who have a wide range of knowledge about the financial services market. They will have passed a series of exams to become qualified, meaning they are knowledgeable about areas such as pensions, tax, protection, and investments.
When you work with a financial advisor, they’ll get to know you personally. They’ll find out about your family, your current lifestyle, and what your long-term goals are.
They’ll then offer personalized advice based on your individual circumstances. Investing can be a part of this, but it can also include any financial product or service that they think is relevant to you.
This might include services such as finding you a mortgage deal, taking out protection and insurance options, or death and estate planning.
The pros of robo-advisors vs financial advisors
There are plenty of compelling reasons to consider a robo-advisor vs a financial advisor.
A low-cost option
To work with a human financial advisor, they might charge you percentage-based, fixed, or hourly fee for their time. Investment fees and charges can range significantly from advisor to advisor depending on the level of service you can expect to receive.
These fees could be even more considerable if you work with a dedicated investment advisor who works exclusively in investment advisory services and designing investment portfolios.
By contrast, most robo-advisors offer a fixed platform fee based on how much you have invested.
The fees you’ll pay will vary depending on the platform you choose, but typically costs are divided into two categories: portfolio management fees, and fund fees.
Management fees are often between 0.25% and 0.5%, while fund fees can be anything from 0.05% to 0.65%.
These low costs help to reduce what you have to pay for your investment service, meaning you get to keep more of your returns.
Less room for human error
A huge advantage of using a robo-advisor is the removal of the possibility of human error affecting your investment portfolio.
By removing the human element and providing fully automated services, these platforms remove the chance of a human making a mistake.
Human advisors can make mistakes in investment management. They could buy or sell assets at the wrong time, or potentially offer you financial advice and an investment strategy that doesn’t suit you or your risk tolerance.
A robo-advisor can’t make mistakes in the same way. Robo-advisors choose investments and your investment strategy when you sign up for the service and fill in the survey.
Provided that the strategy suits you, the algorithm will then do exactly what it’s designed to do.
Using a “round-up” robo-advisor
As well as robo-advisors where you put fixed sums into an investment account, you can also use “round-up” robo-advisors.
Round-up advisors function by linking your bank account to the platform. Then, whenever you make a purchase using your bank card, the your advisor app will round up each payment to the nearest whole pound.
So for example, if you spent £0.80 on two pints of milk, your robo-advisor round-up app would take the remaining £0.20 and invest it for you.
These platforms are proving to be particularly popular with younger investors who don’t have the money to pay for a financial advisor or a financial planner but still have an interest in using financial products.
Rounding up your transactions can be a simple and easy way to build up a savings pot. It can also serve to “gamify” the investment process, which can make the idea of putting money aside more exciting and engaging.
The cons of robo-advisors vs financial advisors
As with any decision, there are also downsides to choosing a robo-advisor over traditional advisors.
No access to expert financial advice
Robo-advisors keep their costs down by removing the need for human interaction.
As a result, while people obviously work in these companies to design the platforms, you lose that direct human contact, meaning you don’t benefit from their advice when it comes to your investments.
That means you won’t benefit from face-to-face investment advice or financial planning services.
Traditional advisors can make changes to your financial plan if they can see it isn’t working for you.
They might be able to find you a more suitable financial product, switching to low-cost funds that will provide better returns for lower costs. Or they might change the asset class you’re invested in to suit your risk preference.
A robo-advisor cannot do this without you directly making changes to your preferences on the platform.
Lack of access to other services
Another downside to using a robo-advisor is that it will exclusively be an investment advisor, not offering any other form of advice.
Meanwhile, a dedicated financial advisor will likely offer a comprehensive range of financial planning services.
This could include everything from offering investment advice and asset allocation, to the most appropriate retirement accounts, all the way through to estate planning.
Whatever you want to achieve in your financial life, a traditional advisor will be able to help you with expert advice. You’ll miss out on this service with a robo-advisor.
Limited tax advice
When you invest money, it’s possible that you may have to pay tax on any profits that you make.
If you choose an Individual Savings Account (ISA) then you won’t pay any Income or Capital Gains Tax on any gains you make on your investments. However, investing directly in shares, or in other types of investment, through taxable accounts could mean you end up paying tax.
Robo platforms are designed to make investment decisions for you, not to provide tax advice. On the other hand, a financial planner or financial advisor can consider the tax-efficiency of your portfolio (and your wider financial plan) to ensure that you’re taking advantage of all the tax breaks available, and not paying more tax than you need to.
Key takeaways: robo-advisor vs financial advisors
- Many robo-advisors present a cheaper alternative to traditional financial advisors.
- You can remove the risk of human error in your investing.
- You can use a “round-up” robo-advisor to make the most of your spending.
- You’ll miss out on comprehensive financial advice services with a robo-advisor.
- Robo-advisors typically offer fewer services than financial advisors.
- You may end up paying more tax when using a robo-advisor.
Should you choose a human financial advisor or a robo-advisor?
Overall, the decision between robo-advisors and financial advisors comes down to your personal preferences and financial needs.
If you’re satisfied with an investment platform that simply invests your money on your behalf with little to no input needed from you, an automated platform could be a good, low-cost option for you.
Many of these apps can be managed through your phone, making them an easy and convenient way to generate wealth without the need for input from a qualified professional.
However, if you’d rather know that your money has the human supervision of a real person who’s actively managing it for you, then you may be better off working with a financial advisor.
Financial advisors offer more than just an investment tool: they can provide a wide range of financial planning services and independent financial advice.
Financial advisors are highly qualified individuals who have sat many exams to demonstrate their skill and expertise in their chosen field. The value financial advisors can add can be significant, especially over the long term.
The financial plan a financial advisor can design for you could help you to achieve your financial goals throughout your lifetime. They can offer advice on a range of issues, from retirement planning all the way to tax loss harvesting and corporate finance.
Traditional financial advisors may be more expensive than using an automated or robo service, but the service that a good financial advisor offers may ultimately be worth the fee they you pay – depending on your circumstances and requirements.
Robo advisors or financial advisors FAQs
Do robo-advisors beat human financial advisors?
Robo-advisors can potentially beat human financial advisors and standard market returns. However, this isn’t guaranteed. Even if a robo-advisor has beaten the investment markets in the past doesn’t necessarily mean it will continue to do so.
Which robo-advisor has the best returns?
The robo-advisor with the best two-year annualised returns was SigFig, according to Nerdwallet analysis looking at performance between December 2017 and June 2020. Some of the best robo-advisors in the UK also perform very well compared to financial advisors.