Financial Planner vs. Robo Advisor: What's The Difference?
It’s no secret that autonomy is the direction the world is heading.
Tesla has rapidly become one of the most popular car companies in the world largely in part due to their advancements in technology. There are several lookalikes in different industries all looking to take advantage of autonomy.
With tech becoming a driving force behind businesses, it was only a matter of time before that technology started to creep into the financial world.
Let’s start with the basics - what is a robo advisor?
Robo advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Some of the most common robo advisors are Betterment, M1 Finance, and Wealthfront.
One of the main benefits of a robo advisor is the low-cost investment management compared to many traditional financial advisors. While many advisors in the financial industry are charging 1% AUM (Assets Under Management) fees, these robo advisors are able to provide a more attractive option to investors with fees as low as .25%.
A benefit that robo advisors offer is that they generally don’t have, or have very small minimum requirements to get started investing. This helps encourage younger investors and investors without a lot of money to get started, especially when a lot of financial planners won’t help you invest until you have a certain amount of money.
Because robo advisors are simply what they are, robots - the human interaction piece is almost non-existent.
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Don’t get me wrong, robo advisors do have their place in personal finance but if you are looking for actual advice and help to get you where you want to be, let’s take a look at what a financial planner provides that a robo advisor doesn’t.
A financial planner plays many roles, but one of the most important pieces that tends to get overlooked is the role of an accountability partner. If you know you should be investing or saving and haven’t yet, an advisor would be there to help determine why and get you going in the right direction. An advisor will also help explain why one investment is better than another for your situation and give you an opportunity to learn how your money works, rather than just trusting an automated algorithm with your life savings.
A good financial planner will also build a relationship with you that no automated service can replicate. A robot won’t help communicate and determine underlying behaviors or opportunities that an actual person may be able to see - or won’t understand that you don’t want to invest in a certain company because they caused you stress or turmoil in the past.
If you have a good understanding of everything about personal finance such as cash flow management, debt management and consolidation, insurance suitability, education planning, mortgage analysis, salary negotiations, and more - but just aren’t sure how to invest, a robo advisor may be the right move for you.
If you don’t feel confident in those areas or don’t want to spend the countless hours trying to get a full understanding of how those situations play a vital role in your life, a financial planner may be right for you.
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Overall, robo advisors are great but if you really only wanted the slightly cheaper investment management - you could just Google “best ETFs to buy for retirement” and similar questions until you felt comfortable and knowledgeable on the situation, right?
All of the information is out there, so why are financial planners effective?
I believe one of the main reasons is human connection and empathy.
You want to know that someone understands YOUR situation and will help make the right decisions that are best for YOU.
That’s the only difference between Google and a person. It’s hard to know if what you’re reading on the internet is true, or if it applies to you. But if you were speaking to someone that has been in your situation or understands what you’re going through, that advice becomes more valid and trustworthy because now you know that this person knows what they’re talking about and they can help you.
Robo advisors definitely have their place in the financial space, but until they are able to establish personal relationships and provide the human interaction and personal considerations - there will always be a need for trustworthy financial planners.
Think it may be time to meet with an advisor? Download our free copy of 24 Questions to Ask a Financial Advisor to get the questions you need for the transparency you deserve.