What’s the difference? – Forbes Advisor

Financial Planners


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Learning to invest can be intimidating. In addition to complicated jargon, you may worry about doing the wrong thing and losing money.

On the other hand, if you slow down the process by falling into analytical paralysis, you could miss out on potential investment growth and incur huge losses for the rest of your life.

If so, getting professional help may be exactly what you need. Consider talking to a traditional financial advisor or robo-advisor. Let’s see the difference between these two options.

What is a Financial Advisor?

Financial Advisors provide clients with personalized guidance on all financial questions. It is a broad term used by a variety of professionals, including providing investment management services, handling real estate plans, selling insurance, creating retirement plans, managing taxes, and more.

There are many types of financial advisors, but advisors who provide investment advice must be registered with the U.S. Securities and Exchange Commission (SEC) or state securities regulators.

A financial advisor works with you to understand your current situation, set financial goals, and develop an investment plan to reach those goals. They design a customized portfolio of securities in which they invest and actively manage the portfolio to optimize its performance.

What is a robo-advisor?

Robo-advisors cover similar areas using automated digital processes, saving customers money in the process.

The popularity of robo has grown significantly over the past decade, with leading financial services firms, including large investment firms such as Vanguard, Fidelity Investments and Charles Schwab, offering their own platforms. As of 2015, $47.3 billion in assets are managed by robo-advisors. By 2022, that amount will exceed $500 billion.

Unlike live financial advisors, robo-advisors use computer algorithms to manage investment portfolios and make investment decisions. They typically have lower minimum investment requirements and tend to be cheaper than financial advisors.

When signing up for a robo-advisor, you usually have to answer a few questions about your finances, investment goals, and risk tolerance. Based on the responses, the platform will design a portfolio of exchange-traded funds or mutual funds and manage them. We constantly monitor the market and adjust our portfolio balance as needed.

Many of the best robo-advisor platforms also allow customers to check-in with a certified financial planner or other type of financial advisor and ask specific questions.

Robo-advisors and financial advisors: key differences

Both robo-advisors and financial advisors are useful resources for investors, but there are some distinct differences to keep in mind.

Minimum deposit amount

Traditional financial advisors typically require large amounts of assets to invest in their clients. Depending on the advisor, he may need $50,000 or more to qualify for advice her services.

For novice investors or those who do not yet have enough cash to invest, these high minimums can be a significant barrier, which is why robo-advisors are attractive.

Robo-advisors generally have much lower requirements. Platforms like Acorns, Betterment, and WealthSimple start as little as $10 or less, so you can start investing even if you only have a small amount of cash available.

investment products

Financial advisors work with clients to design portfolios of various securities, including individual stocks, bonds, mutual funds, ETFs, as well as more complex products such as real estate mutual funds, options and futures .

Robo-advisors work differently. They tend to invest in index funds and his ETFs rather than individual securities due to their lower costs and better historical performance.

Annual fee

In terms of cost, robo-advisors are much cheaper than financial advisors, but still more expensive than doing it yourself. A monthly fee, such as $5 per month, or an annual management fee of 0.25% to 0.50% of his assets under management may be charged.

Compensation for financial advisors differs from robo-advisors. The exact fee structure varies by company and advisor, but you may incur the following fees and other costs.

  • Hourly rate for advisor services
  • Flat fee for annual portfolio review or financial planning
  • Fees for certain securities traded
  • Fees or charges according to the amount invested in mutual funds or variable annuities

management style

Another big difference between traditional financial advisors and robo-advisors is their management style. Many financial advisors actively manage their portfolios. In other words, we monitor the market and make calculated investment decisions with the goal of beating the market.

In contrast, robo-advisor portfolios are passively managed. They invest in ETFs and index funds with the goal of replicating market performance.

financial plan

Many robo-advisors attempt to provide education and advice through their platforms, but are unable to assess the larger financial picture or make personalized recommendations.

A financial advisor will work with you to create a comprehensive plan to achieve all your financial goals. In addition to investing for retirement, it also helps determine wealth planning, tax optimization, and life insurance needs.

A financial advisor will look at your situation and provide individualized advice. For example, we may advise you to refinance your car loan, downsize your home, or sign up for your company’s 401(k) match.

Robo-advisors have even more limitations. You can use robots to invest in a variety of goals, such as retirement and college, but you should consult an expert for personal insurance and tax guidance.

A robo-advisor may be able to provide basic financial advice such as “Don’t spend more than you earn,” but like a financial advisor, they can pinpoint areas where your financial life can be improved. You can not.

How to choose the option that suits you

When it comes to robo-advisors and financial advisors, there is no right choice for everyone. The best fit depends on several factors.

  • Your level of investment experience. If you are a novice investor or prefer less hassle, a robo-advisor may be for you. A robo-advisor allows you to get a customized investment portfolio, which the robo-advisor processes and rebalances. For experienced investors who want more personal attention and more complex investments, a financial advisor is probably the better choice.
  • Amount of cash available. You need a lot of cash to start working as a financial advisor. Depending on the advisor, it can be as high as $50,000 or more. But with a robo-advisor, you can get started for under $10.
  • your financial goals and needs. For simple goals like retirement or planning for college, a robo-advisor may be a good option. However, if you have more complex financial needs or need help with more complex real estate planning or tax optimization, you may need a traditional financial advisor.

If you need help managing your investments and finances, learn how to choose a financial advisor.

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