Robo Advisors vs. Financial Advisors: Which Is Right for You?

Futuristic robot writing on paper in a modern office, representing the concept of robo-advisors in comparison to human financial advisors. This visual explores the contrast between algorithm-driven financial management and personalized advisory services, highlighting key factors like flexibility, cost, and communication for wealth management decisions.

In today’s blog, we’ll explore the differences between choosing a robo-advisor or a human financial advisor to assist in managing your wealth. There are many factors to consider, and we’ll explore several of them in more detail.

One way of thinking about differences is to consider it a decision between algorithms and personalization. Each option has unique strengths and some limitations that suit different needs and preferences. Understanding how they compare in terms of models, flexibility, cost, and communication can help you make an informed decision.

The SGL Financial team has a long history of providing financial advisory services to affluent individuals and families. Our Buffalo Grove financial professionals create highly customized wealth management plans that include financial, tax, investment, and legacy strategies.

What Are Robo-Advisors?

Robo-advisors are digital platforms that provide automated, algorithm-driven investment services. Most require you to complete an online questionnaire about your current circumstances, financial goals, risk tolerance, and time horizons for planning and investing. 

Based on your responses, the robo-advisor creates a portfolio of low-cost exchange-traded funds (ETFs) and adjusts it periodically through automated rebalancing programs.

ETFs are mutual funds that trade like securities.

Model Comparison: Automation vs. Financial Advisor Expertise

Robo-Advisors: Simplicity and Low Cost

Robo-advisors use algorithms to streamline investment management. This makes them an excellent choice for people who:

  • Have smaller amounts of investable assets
  • Have simple financial circumstances, needs, and goals
  • Are younger and more comfortable with software-driven investment services 
  • Want a hands-off approach to investing
  • Make investment expense a top criterion

For example, if you are younger and your main goal is to save for retirement using a simple portfolio management strategy, a robo-advisor can allocate your funds into a mix of ETFs aligned with your risk tolerance. However, robo-advisors may struggle with more nuanced scenarios, such as navigating complex tax situations or sudden life transitions like divorce or inheritance.

An even simpler example: You must know what to input in robo’s questionnaire to get the right results.

Financial Advisors: Holistic and Personalized

Human advisors bring emotional intelligence and flexibility to the table. They’re particularly valuable for clients with:

  • Complicated financial lives
  • Planning and investing requirements
  • Business ownership or large estates
  • Generational goals that require strategic planning, such as the management of wealth transfers

Buffalo Grove financial advisors adapt to changing economic and market circumstances while providing nuanced recommendations that algorithms simply can’t replicate. For example, an SGL Financial CFP® or financial advisor can work with you to adjust your financial plan in real time if you experience unexpected changes in your financial situation.

Flexibility: Customized Solutions vs. Standardized Portfolios

Robo-Advisors: Limited Customization

Robo-advisors often rely on pre-designed models that are efficient but lack personalization. While some platforms allow you to tweak investment preferences slightly, they cannot handle significant deviations from their algorithms.

For instance, if you have ethical concerns about investing in certain industries, not all robo-advisors can accommodate these preferences. Some premium platforms offer socially responsible investment (SRI) portfolios, but the options are still limited compared to what a human advisor can provide.

Financial Advisors: Tailored Strategies

Human advisors can build custom portfolios based on your goals, preferences, and values. If you want to incorporate alternative investments, such as real estate or private equity, a human advisor is more equipped to create a plan that aligns with these investment needs.

Additionally, human advisors excel at addressing unexpected events. For instance, if market volatility affects your investments, they can discuss strategies like tax-loss harvesting to offset losses, a level of personalization that robo-advisors have trouble duplicating.

 

Watch our co-founder, Gabriel Lewit, discuss preparing for tax season.

 

Communication: Algorithms vs. Personal Connections

Robo-Advisors: Online and Call Centers

Most robo-advisors communicate through online dashboards, email, or call centers. While efficient for the robo, this setup can feel impersonal, especially during financial stress. Some platforms offer premium tiers, including access to human advisors, but the interaction is often limited to call centers and virtual conversations.

For example, suppose you have questions about your portfolio or market conditions. In that case, you might have to navigate a help desk or wait for a callback rather than speaking directly with a dedicated advisor familiar with your situation.

Financial Advisors in Buffalo Grove: Direct Relationships

With a human advisor, you build a solid, personal relationship over time. You can call or meet with the advisor to discuss concerns or changes in your financial situation. This direct connection fosters trust and ensures your advisor understands the evolution of your circumstances, goals, and timelines.

Financial advisors may be a better fit if you prefer a proactive level of communication, such as receiving regular updates or having a sounding board for big financial decisions.

 

Listen to one of our recent podcast episodes, “Jingle all the way to financial growth.”

 

Which Option Is Right for You?

Choose a Robo-Advisor if:

  • You’re comfortable with technology and prefer a hands-off approach
  • Your financial situation is simple
  • You’re just getting started and need a low-cost solution

Robo-advisors work best for individuals in the early stages of wealth building. They provide efficient, low-cost portfolio management and are ideal for goals like building an emergency fund, saving for a first home, or having a smaller amount of money in a savings account.

Choose a financial advisor if:

  • You have complex financial needs, such as tax or estate planning
  • You value personalized service and direct communication
  • You may experience significant life changes
  • You are managing a large portfolio of securities

Human advisors excel at tailoring strategies for high-net-worth individuals, including those nearing retirement. They also bring peace of mind during uncertain times by offering guidance that algorithms can’t replicate.

The Hybrid Approach

Some firms now offer hybrid models that combine robo-advisors with access to human financial professionals. This setup gives you the best of both worlds: low-cost automated portfolio management for smaller portfolios alongside personalized advice for bigger portfolios.

This pairs robo-advisory technology with a team of financial advisors, offering a combined approach for clients who want more than algorithms but don’t need full-time personal guidance for all of their accounts.

Final Thoughts

The decision between a robo-advisor and a human financial advisor ultimately comes down to your needs, preferences, and asset amounts. Robo-advisors are a cost-effective solution for simple financial situations and small amounts of money, while human advisors offer comprehensive support for more complex situations and larger asset amounts.

Think of it this way. You have a $500,000 rollover IRA that requires personalized professional management. And, you have a $50,000 college fund for your only child that also needs investment management. A human advisor professionally manages the $500,000 account. A robo or a mutual fund manages the $50,000 account. 

If you’re still unsure, consider starting with a robo-advisor to build a foundation and then transitioning to a human advisor as your financial life becomes more complex. Whatever path you choose, the most important consideration is being confident your assets are in the right hands.

Ready to discuss your financial planning needs with a team of experienced Buffalo Grove financial advisors? Connect with the SGL Financial team today.

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