Robo-Investors vs. Human Financial Advisors

The rapid rise of the robo-investing industry has many investors wondering whether or not it’s right for them. It’s not necessarily an easy question to answer. For some people, robo-investing provides a fantastic opportunity, while for others it leaves a lot to be desired. In these cases, sticking with a traditional human financial advisor may be preferred. In order to make an informed decision on which is right for you, it’s necessary to have all the facts. In this post, we’ll compare the value that robo-investors and human financial advisors can provide.

What are Robo-Advisors?

Most people understand the concept of the typical financial advisor—someone who assists and advises on building a client’s portfolio and preparing for specific events such as retirement. The concept of robo-advisors may not be as clear. Robo-advisors use an computerized system to help clients build their investment portfolio. Contrary to what the name implies, robo-investing does not involve robots, but instead uses computer algorithms to decide how to invest a portfolio.

Both robo-advisors and financial advisors have advantages and disadvantages. Let’s take a look:

Advantages of Robo-Advisors

One of the most lauded benefits of robo-investing is its low cost and little to no minimum asset requirement. Many financial advisors only work with clients with a certain amount of investable assets, which could exclude some hopeful investors. Robo-investing, however, creates more opportunities for people that may have less investable assets. This also helps explains the popularity of robo-investing among millennials. Many millennials may not have saved enough in order to work with a financial advisor, but still want to start investing.

Robo–advisors also offer value to clients by basing their investment decisions off of a computer algorithm. Though computer algorithms may also have their flaws, in general, they may help to eliminate some of the human error that has always existed in investing. For example, financial advisors may choose to ignore certain red flags because they have a “good feeling” about a certain investment. This approach may fail to pay off, but human nature is hard to ignore. By removing the human nature element, robo-investors can make informed decisions without being swayed by “good feelings.”

Though the computer algorithms of robo-advisors may eliminate some of the human error, it cannot eliminate it completely. It is important to remember that a computer may run the algorithms, but a human being still creates the algorithms. So even though robo-investing has removed one layer of human error, it does not eliminate it completely.

Disadvantages of Robo-Advisors

Another important factor to consider when evaluating the algorithms of robo-investing is that they’ve largely only been tested in bull markets. Robo-investing only became popular after 2008 and the decade-long bull market has yet to test how it handles volatility. But the fourth quarter of 2018 finally tested the robo-advisors, with varying results.

Robo-investing may also have negative consequences if the client lacks sufficient financial understanding to ensure they’ve picked a suitable platform. Though these platforms typically have clients fill out a questionnaire in order to gauge how to invest their money, the degree of specificity may differ across platforms and may not take all of the clients needs into account. For example, a platform may help an investor save for retirement, but it may not take into account that they would also like to purchase a house in the next five years. Further, not all platforms ensure the appropriate diversification of a portfolio, which is a key tenant of responsible investing.

Advantages of Human Financial Advisors

While eliminating the human, and therefore emotional element, robo-investing minimizes the chance for human error. But it may also increase the chance of clients making their own, emotionally based decisions. For example, many investors feel the desire to remove themselves from the market when a market correction occurs. This is a perfectly natural response, but it may hurt the investor in the long run. Unlike a robo-advisor, a good financial advisor can act as the voice of reason during tumultuous times, and keep an investor from making emotion-based decisions.

Financial advisors also have the ability to handle a more complex financial situation and assist in more areas than simply investing a portfolio. Financial advisors can help clients figure out their goals—both short and long term, and create a plan in order to assist them in reaching those goals.  

Disadvantages of Financial Advisors

The main disadvantage of hiring a financial advisor is that advisors are human and therefore more prone to mistakes. Though, as discussed, this does not mean robo-advisors are infallible.

Another matter to consider is that the client must put in the time to build a quality relationship their advisor. If the investor knows what they’re looking for, they can judge the quality of a robo-advisor with a little online research, while finding a financial advisor requires building a trusting relationship.

The Best of Both

Options also exist that don’t force investors to choose between a human financial advisor and a robo-advisor. Work with Good Life Financial for an opportunity to benefit from the best of both worlds. Good Life Financial offers clients access to Guided Wealth Portfolios, a leading robo investment platform, combined with advice from real financial advisors.

Learn more about our offering here, and contact us today with any questions you may have.