Do robo-advisors compare to traditional wealth advisors?

Man or machine? This question seems to be popping up more frequently in all areas and industries. I have spent days where the majority of my questions are answered by Alexa, but when it comes to wealth management should we be as trusting? I did some research on the topic to see how it stacks up.

What is a Robo Advisor?

A robo-advisor is an automated digital platform that offers algorithmic wealth management services with very little human supervision. They usually have participants take an online survey about their finances and objectives, and then use that data to advise and invest client assets. Robo advisors select investments and even build diversified portfolios for you. The platform automatically updates your portfolio to stay aligned with a target allocation.

The Good

Are robo-advisors as awesome as Robo-Cop? This question may be a little subjective because nobody is ever as cool as Robo-Cop. There are, however, some benefits of investing with this technology. Let’s take a look:

1. Cost is one of the benefits to take into consideration when working with robo-advisors. No human labor equates to lower cost. Where financial advisors usually charge between 1% to 2% (and sometimes more for commission-based accounts), robo-advisors are able to cut that down to approximately 0.2% to 0.5%.
2. They have no emotions. Often times during market highs or lows investors make emotion-based decisions. With robo-advisors, these types of mistakes cannot be made.
3. Accessibility. Try getting a hold of your financial advisor at 3:00 am and you may run into some issues. With this software, as long as you have an internet connection, you have access. Additionally, with robo-advisor,s you are able to invest with much less capital than their human counterpart. Traditional advisors usually require a minimum of $100,000 in investable assets, robo advisors start as low as $5,000.

The Bad

So whats the catch? There are both limitations and downfalls to opting for a robo advisor. Here are a few I could come up with:

1. They have no emotions. I know I already mentioned this as a benefit, but no emotions comes at a cost. When you are uneasy and want someone to make you feel warm and fuzzy, robo advisors aren’t doing it. What do I mean by this? There is no human touch. You may want to discuss your future goals or ask a question and more often than not, this service is not available.
2. They are usually a one trick pony. Most robo advisors do not offer other services besides helping with investments. Working in wealth management for many years, I know investments come hand-in-hand with financial, tax and estate planning. For many individuals, robo advisors lose their appeal if they can’t offer additional services.
3. There is a lack of personalization. You are unable to alter the amount invested within a fund or change a fund altogether. Instead, you must opt for changing your goals or financial profile in order to reallocate your portfolio.

The Reality

The reality of the situation is, “We want it all.” The accessibility and hands off approach of a robo advisor with the personal touch and comfort that comes with traditional wealth management. Fintech companies like Personal Capital have built a hybrid model that encompasses the best of robo and traditional advising. Don’t think of them as an emotionless Terminator, but instead like Batman, a real person with really cool gadgets. They have a suite of financial tools at your disposal, as well as human advisors you can speak with for a holistic approach to wealth management. Sounds like the perfect balance.

When it comes to your money, you should ask the hard questions and do the research. What’s your view? Man or machine? Drop me a line below.