Quick reads...

Robo-Advisors vs. Financial Advisors: How to Know Which One is Right For You

By: David Bach  |  Last Updated: January 14, 2021
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLEThe difference between robo-advisors and financial advisors
The pros and cons of robo-advisors
The pros and cons of financial advisors
Robo-advisor vs. financial advisor costs
Robo-advisor vs. financial advisor: Which one is right for me?
Next steps: Choosing the right robo-advisor or financial advisor

Traditionally, if you wanted to work with a financial advisor, you needed a lot of money — usually hundreds of thousands of dollars in investable assets. Until recently, financial services companies have been designed to work with the wealthy.

Thanks to technology, though, professional financial advice is starting to become accessible and affordable to more people. In fact, nearly anyone can use what’s known as a “robo-advisor” if they need help managing their portfolio, thanks to the low account minimums.

Is a robo-advisor a good fit for you? We’ll dive into that and more below.

The difference between robo-advisors and financial advisors

Robo-advisors use technology to build and manage an investment portfolio that’s right for you, depending on your goals and risk tolerance. It’s like having a (non-human) financial advisor manage your investments — for a much cheaper price.

Financial advisors, on the other hand, are professionals who you can hire and work with face-to-face. 

Robo-advisors primarily help with your investments. The way it works is, you go online and answer a series of questions about things like your time horizon, financial goals and risk tolerance. Using an algorithm, the robo-advisor will build a diversified portfolio of low-cost funds fit for your situation based on the information you provided and unpredictable forces like market volatility and asset class performance. It will also automatically rebalance your portfolio as you get closer to your money goals.

This is a good option for someone who needs help choosing and managing their investments. It’s a simple, hands-off and affordable option.

A traditional financial advisor is going to cost more than a robo-advisor but will provide more than just automated portfolio management — you’ll work face-to-face with a human advisor who will create an individually tailored financial plan for you. Plus, they can advise you on anything personal finance-related, from how to create a budget and plan for retirement to what type of insurance to buy.

There’s also somewhat of an “in-between” option: a virtual financial advisor.  

A virtual advisor is just as it sounds: You’ll get access to a human financial advisor, but will work with them online (through video chats, email or phone). Because everything happens online, it tends to be less expensive than hiring a traditional, in-person advisor.

The pros and cons of robo-advisors

The pros
  • Working with a robo-advisor is an easy, convenient and hands-off way to invest your money. You don’t have to worry about choosing your own funds or rebalancing your portfolio. Once you make your initial contribution, you can set up automatic contributions and then sit back and relax.
  • They’re affordable and accessible. Most require very small account minimums and in some cases, no minimums at all, meaning you don’t need a lot of money to start investing. Because everything is done by a computer, you’ll pay low fees for a robo-advisor (especially compared to what you would pay a traditional advisor).
  • Some robo-advisors provide access to helpful financial planning tools, like retirement calculators or budgeting tools that can help you plan for big purchases. 
The cons
  • You don’t get a complete financial plan or face-to-face meetings with a human advisor.
  • If you’re subject to panicking and pulling out of the market during a crisis, a robo-advisor won’t talk you through a market downturn like a professional can.
  • Without the help of a professional, you may complete the online questionnaire about your goals and risk tolerance inaccurately and, not knowingly, create a portfolio that is riskier or more conservative than is appropriate for you. In short, you have less guidance.

The pros and cons of financial advisors

The pros
  • You’ll have access to a professional who you can meet with in-person (or virtually), who will advise you on everything personal finance-related and help you make smart money decisions.
  • They can help you navigate complex financial situations (or tough money conversations with family), which will save you time and stress
  • You’ll get a personalized financial plan that can help you reach your money goals efficiently. Over time, you’ll build a relationship with your advisor. They’ll better understand your dreams and ambitions and will help you reach them.
  • A good advisor can help you avoid major money mistakes, like panicking and selling your investments when the market goes down suddenly. They can also prevent you from making risky and potentially detrimental investments.
The cons
  • Advisors typically require a high minimum balance. In many cases, you have to have at least $100,000 in investable assets just to work with one.
  • They may be expensive to work with. Plus, some advisors earn commissions, which can make it tricky to know if they’re truly working in your best interest.
  • Not all financial advisors are created equal. Finding the right one who is going to have your best interest in mind takes time, effort and a lot of research. 

Robo-advisor vs. financial advisor costs

As mentioned above, human financial advisors are going to cost more than robo-advisors. Here’s the breakdown:

How much robo-advisors costs

Robo-advisors typically charge based on the amount of assets they’re managing. Most charge between 0.25% and 0.50%, though some don’t charge a fee at all.

Here’s how much some of the most popular robo-advisors charge:

  • Betterment: 0.25% per year on your invested balance (no account minimum) 
  • Wealthfront: 0.25% per year on your invested balance ($500 account minimum)
  • Sofi: 0% per year on your invested balance (no account minimum)
  • TD Ameritrade: 0.30% per year on your invested balance ($500 account minimum)

Assuming a 0.25% – 0.50% fee, here’s how much you’d pay per year for a robo-advisor managing a:

  • $10,000 account: $25 – $50
  • $50,000 account: $125 – $250
  • $100,000 account: $250 – $500
  • $1 million account: $2,500 – $5,000

Keep in mind that you still have to pay the expense ratio of the funds you’re invested in (all mutual funds and ETFs charge investors an expense ratio to cover operating expenses). Most robo-advisors will invest your money in low-cost funds with expense ratios under 0.10%, but that’s something you’ll want to look into.

How much financial advisors costs

Like robo-advisors, some financial advisors charge a percentage of your assets under management. It’s typically around 1%, but can be as much as 3%. Generally, the more money they manage, the lower the percentage they charge. 

For example, take a look at the chart below, which shows annual advisor fees for one of the largest RIA’s in America. You’ll notice that, the more assets being managed, the lower the rate:

Assets Annual Fee
$0 – $400,000 1.75% on the first $400,000
$400,001 – $750,000 1.25% on the next $350,000
$750,001 – $1,000,000 1.00% on the next $250,000
$1,000,001 – $3,000,000 0.75% on the next $2,000,000
$3,000,001 – $10,000,000 0.60% on the next $7,000,000
$10,000,001 – $25,000,000 0.50% on the next $15,000,000
$25,000,000 + Negotiable

Using this fee structure, here’s how much you’d pay per year for a traditional financial advisor for various account sizes:

  • $50,000 account: Assuming an annual fee of 1.75%, you’ll pay $875 a year
  • $100,000 account: Assuming an annual fee of 1.75%, you’ll pay $1,750 a year
  • $500,000 account: Assuming an annual fee of 1.25%, you’ll pay $6,250 a year
  • $1 million account: Assuming an annual fee of 1.00%, you’ll pay $10,000 a year

Note that if you’re working with a virtual financial advisor and they operate under this fee structure, it may be cheaper.

Vanguard, for example, charges an annual fee between 0.05% and 0.30%  for its online financial planning services. The fee depends on your assets under management. Here’s its annual fee schedule:

Fee Managed Assets
0.30% On assets up to $5 million
0.20% On assets above $5 million and up to $10 million
0.10% On assets above $10 million and up to $25 million
0.05% On assets above $25 million

That means, if you have $50,000 worth of assets under management (its account minimum), you’ll owe $150 a year. For a $100,000 account, you’ll owe $300, and for a $1 million account, $3,000. 

Keep in mind that there are other ways advisors can get paid besides assets under management:

  • Flat fee. This is a set monthly or annual fee, which can be anywhere between $1,000 and $8,000, depending on what type of advisor you’re working with and how complicated your financial situation is. Also, some advisors will charge a flat fee per plan. In this case, you won’t receive any ongoing advice — just the plan.
  • Hourly fee. This fee structure is just as it sounds: You’ll be charged by the hour, which could be anywhere from $100 to $400.
  • Commissions. In addition to charging fees, some advisors also make money whenever they sell you securities, insurance and/or other financial products — and their earnings, which can be anywhere from 1-6% of your investment, come straight out of your wallet. You want to understand exactly how your advisor is getting paid before hiring them.

The bottom line: If you’re working with a robo-advisor, you’re going to pay the least amount. If you’re working with a virtual financial advisor, expect to pay more than you would for a robo-advisor but less than you would for a traditional, human advisor, the most expensive tier of advisors.

Robo-advisor vs. financial advisor: Which one is right for me?

The answer to this question boils down to what you need and want. If you’re a new investor and need help getting started, a robo-advisor might be enough for now. 

If you want advice beyond investing — say you’re planning to have a family and don’t know how to prioritize short-term expenses with long-term goals, or maybe you have questions about picking employee benefits or tax planning or estate planning — you’ll probably want to work with a human advisor (virtually or in-person).

The type of advisor you settle on also depends on your budget and net worth. If you don’t have a ton of assets, you may not qualify to work with a traditional financial advisor, but could afford to work with a virtual advisor or robo-advisor.

If you go the traditional advisor route, you’ll want to find a great professional who you can trust. This will take time and research, which we’ll touch on next. 

Next steps: Choosing the right robo-advisor or financial advisor

How to choose the right robo-advisor

Today, there are tons of robo-advisors to choose from. When comparing different companies, it’s important to understand a few things:

  • Is there a minimum balance required to invest? Most robo-advisors let you start investing with $500 or less, but others require much more. 
  • What is the management fee? Expect this to be between 0.25% and 0.50%, though some don’t charge a fee at all. 
  • What are the investment options? Most robo-advisors offer between five and 10 portfolio choices based on risk tolerance (they’ll range from conservative to aggressive). The more options, the better.
  • What types of accounts will the robo-advisor manage? Typically, a robo-advisor will manage individual retirement accounts (Roth, traditional and SEP IRAs) and taxable accounts. Some will also manage your 401(k) and trusts.

To help you narrow your search, check out our top-recommended robo-advisors

After you’ve selected a robo-advisor and are ready to get started, when you go through the initial questionnaire, take your time. Don’t just fly through the questions and click away. Most of these firms determine the mix of investments based on what you tell them about your time horizon and your risk tolerance. If you click on one wrong button, your entire portfolio can be built incorrectly, with either too much risk or not enough. 

If you have any questions or hesitations at all, call the company and talk to one of their advisors. When it comes to investing your money, you want to be fully aware and have a complete understanding of what you’re doing.

How to choose the right financial advisor

Finding a great professional to work with will take time and research. Start by trying to get a referral from a friend, colleague, acquaintance or an accountant or attorney if you have one. You’ll want to ask questions like why they like their advisor, how long they’ve worked together, how often they meet and how they pay their advisor. 

If you can’t get a referral, do your own research. Start by looking up advisors in your area using the resources below:

  • The Financial Planning Association. The FPA’s website allows you to search by zip code for an advisor who has qualified as a certified financial planner. (Certified financial planners, or CFPs, are advisors who have completed specific education, training and exams to earn a CFP certification, which is considered the gold standard of financial planning.)
  • The National Association of Personal Financial Advisors. This site allows you to search by zip code for financial planners who operate on a fee-only basis (meaning, they don’t earn commissions).
  • The Certified Financial Planner Board of Standards. The site lets you search for CFPs in your area

Next, read Finishrich.com’s full guide to choosing a financial advisor.