Using a robo advisor — or automated investing platform, as they’re also called — may suit those with a basic portfolio and straightforward goals, whereas a live financial advisor might be better for investors with more complex situations.
Investors will want to think through their current financial plan when deciding between a robo advisor vs a financial advisor.
To that end, it’s important for investors to understand how each type of advisor works (a robo advisor relies heavily on technology), what they charge — and what types of services you’re likely to get.
What Does a Financial Advisor Do?
The chief advantage of using a live financial advisor is that you can talk to them about your specific questions, needs, and goals.
How a Financial Advisor Works
A financial advisor typically sits down with clients to learn about their personal situation, including their goals, the amount of money they have to invest, future income expectations, and more. The advisor then can help create a financial plan that is uniquely tailored to their situation.
Depending upon the advisor, they may continue to monitor the success of a client’s portfolio, and make recommendations to adjust its makeup when that seems wise.
Financial advisors and wealth management advisors have been the traditional path for investors to take when needing guidance over the years, and many people still choose that route.
What Is a Robo Advisor?
A robo advisor, or automated portfolio, is a software application that uses algorithms to provide investment recommendations.
How a Robo Advisor Works
Typically, a robo advisor platform is a digital interface that provides you with a questionnaire so you can set some parameters, like your financial goals, risk preferences, and time horizon. The technology is designed to then recommend one of several automated, pre-set portfolios that aligns with your responses.
In most cases the composition, or asset allocation of each portfolio, is fixed and the investor can’t change the basic investments. Most automated portfolios typically rely on low-cost exchange-traded funds.
You can use a robo investing as you would any account — for retirement, as a taxable investment account, or even for your emergency fund — and you typically invest using automatic deposits or contributions.
How Long Have Robo Advisors Existed?
Automated portfolio technology began to emerge in 2006, with more sophisticated versions becoming available just a couple of years later. As this type of automated advising technology became more advanced, increasing numbers of people began to use it.
In most cases, robo advisor technology can:
• Evaluate an investor’s goals and personal risk tolerance based on a questionnaire.
• Factor in an investor’s timeline — for example, when they plan to retire.
• Recommend a pre-set portfolio of low-cost ETFs or other index-based products that reflects the client’s preferences.
◦ Some automated platforms may offer quarterly or annual rebalancing, and/or tax-loss harvesting.
Automating with Robo Advising
The technology behind today’s automated investing is pretty powerful. The algorithms employ advanced mathematical formulas — informed by investment planning best practices (like asset allocation and portfolio diversification based on modern portfolio theory) — to generate investment options that, ideally, suit an investor’s specified goals and risk tolerance.
Automated portfolios generally come with lower investment fees and lower account minimums, which lowers the bar to entry for new investors, and makes it more affordable in general.
This type of investing can benefit newer, sometimes younger, investors in another way: They don’t need advanced knowledge of current market conditions before investing, and they don’t need to do the heavy lifting when it comes to managing their portfolio.
However, investors who choose a robo portfolio need to be comfortable with the underlying technology, its benefits, and its limitations. For example, while some robo advisors may offer the possibility of 1:1 advice via a live advisor or planner, most do not, and investors must address more complex life situations and financial planning on their own.
The lower cost of most robo advisors reflects the fact that what you’re getting, in most cases, is an automated portfolio of pre-determined assets, but not a plan or roadmap for your financial future.
What Is Financial Planning?
At a high level, financial planning involves setting personal monetary goals, which can include goals such as saving enough money for a down payment on a house, funding children’s college education, and saving for retirement.
With those aims in mind, the next step might be to determine what resources exist to help reach those goals — meaning income, the amount of money currently in savings accounts, employer-based retirement accounts, and so forth — along with current debts and monthly payment commitments.
Financial planning involves looking at your current financial situation as well as the resources that might be needed in the future.
Financial planning involves looking at your current financial situation as well as predicting the resources that might be needed to meet future financial commitments and to live a desired lifestyle — and then creating a plan to reach these unique goals.
Financial planning can also address long-term issues such as estate planning, tax management strategies, and more. In addition, when a life event forces financial changes, a qualified professional can often help adjust your financial plans accordingly.
Why Is Investing an Important Part of a Financial Plan?
When investing, one of the foundational goals is to create financial stability through the growth and preservation of assets, which is at the heart of every financial plan. Investing is different from saving, though, and here’s how:
• When saving, you’re adding money in increments to a savings account. This may be an emergency savings account or one created to save up for a down payment on a house or to fund a dream vacation.
◦ When people save, it’s often to reach shorter-term financial goals. Because savings rates are generally quite low, the aim is not long-term growth.
◦ Investing involves taking a percentage of available funds and buying assets with it. This may include stocks and bonds, mutual funds, and so forth. When investing, it’s typically to reach long-term goals and sometimes as a strategy to build wealth.
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Managing Investments with Financial Advisors
As with most things in life, people perceive the investing process differently. Some of them are perfectly fine with having their portfolio managed through technology, while others want to call a live human being if they’re excited about a potential new opportunity or worried about fluctuations in market conditions.
With a financial advisor, investors might benefit from the wisdom and experience of a professional. This may be especially important for investors who become emotional when investing because they may benefit from a knowledgeable professional who can put investment issues into context in an objective way.
Additionally, a financial advisor may help people become better investors themselves, guiding them through the process in a way that teaches them about investments and how to make good choices.
A financial advisor may help people become better investors themselves.
If an investor wants or needs someone to do a deep dive into their financial situation and walk them through the pros and cons of certain kinds of investments, then a financial advisor may be a smart choice.
That’s because investors who want granular levels of input into the individual components of their portfolio may prefer a human advisor.
In addition, some people may not be comfortable selecting investments online — for example, if they aren’t comfortable using technology to make decisions when the market is volatile — and, in those scenarios, it might help to have an advisor who can do it for them.
As another consideration, some people find that they really enjoy being in the driver’s seat when it comes to investing. If that resonates, then robo advising may not be the most satisfying choice.
Millennials and Investing
Many millennials are currently playing financial catchup, at least in part because of their student loan debt. The ideal scenario for them might be to pay down their debt while also saving and investing (although that’s easier said than done) to close their wealth gap.
An early step in closing this wealth gap could be to start investing, even if it’s only with a small amount of money per month.
And because many people in this situation only can invest a small amount monthly, at least at first, the lower points of entry — meaning the low fees and initial investment amounts associated with robo investing may make this type of investing attractive to plenty of millennials.
Plus, this generation grew up surrounded by technology, so many of its members feel quite comfortable using it throughout their daily lives. And, because millennials are often on the go, having the ability to invest and monitor their investments using mobile technology can be a real plus.
This does not mean, of course, that robo advising is the most appropriate choice for all millennials. It may be that a financial advisor who takes new clients with smaller amounts of money to invest would be a better option for people in that generation who need to have that flexibility.
Baby Boomers and Robo Advising
So, does this mean the opposite is true for Boomers? Do they rely more on human financial advisors?
In reality, many people from this generation also appreciate the low investment fees associated with robo investment technology. The less that’s paid in fees, the more money can stay in their retirement accounts.
And there are plenty of older Americans who also feel comfortable with the ease of automated services.
Making the choice between a robo advisor and a human advisor is a highly personal decision. The convenience and lower-cost of an automated platform may appeal to those who have a limited budget and more straightforward goals.
For those who can afford to pay a little more for personal advice, and who may have more complex financial goals, a live financial advisor could be the way to go.
When opening an invest account with SoFi, investors gain access to automated and human advisors alike.
So if someone appreciates the benefits of automated investing and chooses that option, they can still receive personalized advice from SoFi’s financial planning team.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.
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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [emailprotected]. Please read the prospectus carefully prior to investing.
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As an expert in financial planning and investment strategies, I've analyzed the content provided by Kelly Boyer Sagert on April 13, 2023, covering the comparison between robo advisors and live financial advisors. The depth of my knowledge allows me to break down and provide insights into the concepts discussed in the article:
1. Robo Advisors vs. Financial Advisors:
- Robo Advisor: An automated investment platform that utilizes algorithms to provide investment recommendations.
- Financial Advisor: A live professional who works with clients to understand their financial situation and goals, providing personalized advice.
How They Work:
- Robo Advisor: Utilizes a digital interface and a questionnaire to recommend pre-set portfolios based on financial goals, risk preferences, and time horizons.
- Financial Advisor: Engages in personal consultations to understand clients' goals, income, and investment preferences, creating a customized financial plan.
- Robo Advisor: Lower fees, automated portfolio management, suitable for straightforward goals.
- Financial Advisor: Personalized advice, tailored financial plans, guidance through complex situations.
2. Financial Planning:
- Involves setting monetary goals, assessing current financial situations, and creating plans to meet future financial commitments.
- Addresses issues such as estate planning, tax management, and adjustments for life events.
Importance of Investing:
- Investing is a key aspect of financial planning, aiming for asset growth and preservation to achieve long-term goals.
3. Millennials and Investing:
- Facing financial challenges, including student loan debt.
- Prefer low-cost, tech-savvy solutions.
- Robo advising may appeal due to low fees, ease of use, and mobile accessibility.
4. Baby Boomers and Robo Advising:
- Attitude Towards Technology:
- Many appreciate low fees associated with robo investing.
- Comfortable with automated services.
- Open to considering both automated and human-advised options.
5. Choosing Between Robo and Human Advisors:
- Personal decision based on budget, financial goals, and preferences.
- Robo advising suits those with straightforward goals and limited budgets.
- Human advisors offer personalized advice for more complex situations.
6. SoFi's Approach:
- SoFi's Services:
- Offers both robo and human advisors to cater to different preferences.
- Provides automated investing with no advisory fees, making it accessible for various investors.
7. Financial Tips & Strategies:
- General Advice:
- Tips provided are of a general nature and may not consider individual circumstances.
- Encourages investors to assess appropriateness based on their own financial situations.
8. Fund Fees:
- Fee Structure:
- Robo advisors may have lower fees and account minimums.
- Exchange Traded Funds (ETFs) associated with robo advising have their own management fees.
9. Legal Disclosures:
- Platform Details:
- SoFi provides automated investing and brokerage services through various entities, including SoFi Wealth LLC and SoFi Securities LLC.
- Disclosures related to state licensure and additional details can be found on SoFi.com/legal.
My expertise allows me to provide a comprehensive understanding of the concepts discussed in the article, offering valuable insights into the benefits and considerations of both robo and human-advised investment strategies. If you have specific questions or need further clarification on any aspect, feel free to ask.