For most of modern history, only the wealthy had access to investment advisors to help them manage their money. Everyone else had to muddle through on our own, often with little or no knowledge of how to invest.
Today, anyone can access a robo-advisor to manage their investments for them. Most are either free or dramatically cheaper than their human counterparts, and they don’t require the same high minimums for investing.
In other words, robo-advisors have disrupted and democratized the world of investment management.
But does that make human advisors obsolete? Far from it. Human investment advisors bring their own advantages to the table and make sense for some investors.
How do you know whether you should hire a human advisor or use a robo-advisor? It proves an easier decision than you might think.
What Investment Advisors and Robo-Advisors Do
Investment advisors, whether human or algorithm, choose investments for you and manage your portfolio over time.
For example, if you’ve ever wondered which investments to choose in your 401(k), you understand the value of expert advice. An advisor helps you set an asset allocation and adjusts it for you over time. After all, the ideal investments for a 25-year-old are very different from the ideal investments for a 65-year-old.
Investment advisors further help you decide not just which investments to buy, but also how much of each asset. On the simplest level, that means deciding how much of your money to keep in stocks versus bonds versus alternative investments like real estate.
Within each of those umbrella categories, they drill down further. Of your stock investments, what portion should be U.S. stocks versus international stocks? Should you just buy large-cap stocks, or also small- and mid-cap stocks? In which industries or market sectors?
The average person doesn’t know how to best divide up their portfolio. So they turn to an investment advisor to help them do so and to manage those investments over time.
Beyond basic help with investments, human advisors can also discuss other aspects of a client’s financial life. This is where human advisors shine.
Human Financial Advisors: Pros and Cons
You probably have a brokerage account and an IRA or 401(k). And you probably wonder what to invest in with them for maximum returns and minimum risk.
If you’re wealthy, you can hire an expert to tell you. They can also take care of it for you on an ongoing basis so you don’t have to worry about it.
As you explore human versus robo-advisors, consider the following pros and cons carefully and which apply most to you and your financial situation.
Pros of Human Financial Advisors
1. Complete Personalization and Flexibility
When you hire a human financial advisor, they typically advise you, but ultimately they do whatever you tell them to do with your money. If you want 63.7% of your money invested in Zimbabwean diamond mines, your advisor can make that happen.
They can also oversee assets in all your various accounts, not just money in their advisory account. You can grant them access to your employer’s 401(k) account or at least send them a breakdown of your current investments and the other available choices.
They can look over your real estate assets, business assets, cryptocurrency assets, and whatever else you have. They can then make recommendations tailored specifically for you — which, in turn, you can choose to adopt or ignore.
If you get skittish about stocks and sense a recession looming on the horizon, you can direct them to reduce risk in your stock portfolio — or start shorting stocks or selling off all your stocks entirely.
You sit in the driver’s seat, and the advisor helps you navigate with their expert advice. Alternatively, you can hand them the keys and leave it entirely to them to get your money from Point A to Point B.
2. Holistic Financial Advice
Algorithms do a great job with choosing and managing investments for you, just like humans do. With a simple questionnaire, they can typically analyze your needs and propose an appropriate investment portfolio. Most people don’t have unique or complicated investing needs.
But beyond picking and managing investments, you quickly run into algorithms’ limitations. They can’t discuss your estate planning with you or point out your budgeting mistakes. They can’t have a nuanced conversation with you about prioritizing your long-term financial goals.
Granted, many investment advisors won’t do that with you either. Yet when you have direct access to a financial expert, you can engage them in complex conversations about money.
When you reach the limits of their knowledge, they can direct you to other types of financial planners and advisors. For example, they can help with harvesting losses for tax purposes, but they can’t prepare your tax return for you. So they’ll recommend a good accountant.
If you have a debt or spending problem, they can not only help you diagnose it, but also refer you to a debt counselor. Robo-advisors can pick diversified investments, but they can’t have these sorts of challenging conversations with you.
3. Human Interaction and Emotion Management
There’s a comfort in knowing you can pick up the phone any time and reach a financial expert you know and trust. When questions come up, as they inevitably do, personalized help is just a phone call away.
We humans sometimes need that reassurance, a soothing voice at the other end of the line. Or better yet, the ability to sit down face to face with a financial advisor.
None of us are entirely rational creatures. When a stock market correction hits, sending your portfolio plunging, it becomes all too easy to panic. If you call up your advisor and tell them to sell all your stocks, they’ll tell you to take a deep breath and count to 10.
Then they’ll explain that corrections happen frequently, that you shouldn’t panic sell, and that in most cases, stocks recover within a few months. They’ll walk you through all the reasons why you shouldn’t try to time the market.
Robo-advisors can’t talk you off the ledge like this. If you panic and pull all your money out of your robo-advisor account, you don’t get the benefit of that voice of reason from another human being you know and trust.
Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up, you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals.
Cons of Human Financial Advisors
1. High Costs
Human investment advisors cost more money than robo-advisors — usually, a lot more money.
Most fully automated robo-advisors like Betterment charge between 0% and 0.5% of your portfolio annually, at a maximum. Others, like Ellevest, charge a small monthly membership fee. Others are completely free.
Most human investment advisors charge between 1% and 2% of your portfolio. If they manage a $500,000 portfolio for you, a 2% management fee comes to a steep $10,000 per year.
Beyond their own fee, you also have to account for the fees of the funds they choose. Human advisors may recommend you buy expensive, actively managed mutual funds or exchange-traded funds (ETFs) that could cost an additional 1% to 3% each year. And in many cases, you won’t even know it if they don’t show you that level of detail when proposing investments.
2. Availability for the Average Person
It takes work for human investment advisors to manage your money. And because they charge based on a percentage of your portfolio, human advisors require a minimum portfolio under management for it to be worth their time to take you on as a client.
Minimum portfolios tend to start at around $50,000 on the low end. Many investment advisors require $1 million or more as a minimum portfolio to even consider taking you as a client.
Yet only 55% of Americans own any stocks at all, according to a 2019 Gallup poll. So even a $50,000 minimum puts human advisors out of reach for many Americans.
3. Human Fallibility
Like you, human investment advisors are subject to their own emotional swings. Instead of you panicking and selling, they might get twitchy and push the red button themselves.
A more likely risk is that they try to get fancy with picking and choosing stocks to try to “beat the market.” According to a study reported by MarketWatch, only 23% of actively managed stock funds beat their passively managed peers.
In other words, trying to pick winning stocks is extremely hard, and most people fail to outperform the market. And smart people have a nasty habit of trying to beat the market because they think they can outsmart everyone else.
Then there’s the risk of bribery, theft, skimming off the top, or running off to Colombia with your money. Not everyone claiming to be a professional advisor is ethical, and despite rigorous oversight, the financial industry has its fair share of shady characters.
Ultimately, human advisors come with human foibles, not just human strengths. You take the bad with the good, as with everything else in life.
Robo-Advisors: Pros and Cons
Most people don’t have unique investing needs. A 30-year-old single person with moderate risk tolerance who earns $60,000 per year and wants to retire at 62 has similar needs as other people fitting that profile. They don’t need a bespoke investment plan with those Zimbabwean diamond mine shares.
Robo-advisors are algorithms that take into account your personal profile and needs and propose an investing plan appropriate for people like you. You get to review the proposal before greenlighting it.
For many people, if not most, completely automated robo-advisors prove plenty robust. They choose sound investments for you, and then they rebalance and tweak your portfolio over time.
But most robo-advisors don’t stop there. Most of today’s robo-advisors combine the best of both worlds with hybrid advising options, allowing you to also call in human help when you want it. The algorithm handles your money, but if you have questions or want to change your asset allocation, you contact on-call human advisors. You get the flexibility and human touch of an investment advisor, without the stiff fees or minimum wealth requirements.
Pros of Robo-Advisors
1. Available to Everyone
While some robo-advisors require minimum investments, they remain far lower than human advisors’ minimums. Some don’t require a minimum at all, such as SoFi Invest (more on them below).
You probably have a spare $10 to invest. You may not have $100,000, as many human advisors require.
Low minimum investments help you get started even if you have less than $1,000 to invest. You can start earning returns right now, rather than sitting on cash and losing money to inflation.
In this sense, robo-advisors have truly democratized investment advising and made it available to everyone.
2. Lower Costs
As outlined above, most robo-advisor fees range in the 0% to 0.5% range — a fraction of the 1% to 2% human advisors typically charge. Some robo-advisors are completely free. Again, that keeps them accessible to everyday people.
Beyond low (or no) management fees, robo-advisors operate on a passive investing strategy. They opt for passively managed funds, which both cost less in expense ratios and tend to outperform actively managed funds in the long term. Remember, only 23% of actively managed funds outperformed passive exchange-traded funds over the past 10 years.
Lower fees, both on the advisor and fund sides, add up to significant savings when compounded over time. Saving 2% annually on investment fees could mean the difference between retiring at 60 rather than 62.
3. Complete Automation
My robo-advisor automatically transfers money into my investment account every week. It invests it for me based on my profile, and rebalances my portfolio for me automatically.
I spent five minutes filling out the initial questionnaire and approving its investment choices for me. I spent another two minutes selecting the automated transfer settings. I haven’t spent another minute on it since.
My paper assets run completely on autopilot. With automated savings, I don’t have to rely on self-discipline to maintain a high savings rate. It just happens in the background without me having to lift a finger. The money leaves my checking account before I can spend it, helping me trick myself into saving money.
Some human advisors can set up complete automation and rebalance your portfolio periodically for you, of course. But my robo-advisor automates everything so seamlessly, I don’t feel the need to pay a human to do this work for me.
4. No Emotional Investing Decisions
Robo-advisors don’t panic or try to get fancy by shorting stocks. They stay the course with your investing strategy, which is exactly what long-term investors should do during turbulent times.
Through regular, automated rebalancing, they inherently help you sell high and buy low. When one investment jumps up while another drops, rebalancing capitalizes on the gain and buys more of the underpriced asset.
It all happens in the background automatically.
Cons of Robo-Advisors
1. Limited Flexibility and Personalization
Wealthier investors and those with truly unique needs sometimes find that robo-advisors don’t offer the flexibility they want. If you want complete control and personalization over your investments, you need either a robo-human hybrid advisor or a traditional human advisor. Fully automated robo-advisors offer only limited options for investments.
2. Limited Human Interaction
The availability of human interaction varies depending both on the robo-advisor and whether you opt for full automation or hybrid advising.
With full automation, you have only limited options to speak with humans. You can usually reach a customer service department quickly, but they can only answer technical or general questions. Customer service reps aren’t certified financial planners or investment advisors, after all.
Hybrid advisors give you far more access to human help from qualified financial professionals. With many services, you can schedule unlimited calls with human advisors. Some higher-end services even give you a dedicated advisor or two, so you can build a relationship with a couple of advisors assigned specifically to your account and familiar with your goals and needs.
Of course, hybrid advisors cost more than automated robo-advisors, usually in the 0.4% to 1% range.
3. No Broader Financial Perspective or Support
Algorithms can do an outstanding job of picking appropriate investments for you, automatically transferring money for you, and rebalancing your portfolio regularly for you. Some can even alert you if you’re overspending on dinners out or your credit card balances rose sharply this month.
But even these ever-smarter algorithms can’t slap sense into you. At best, they send you an email notification that you spent 32% more this month at restaurants than normal or that your credit card balance jumped by 26%. That’s a far cry from another person sitting down with you and saying, “Let’s talk about how to budget your money better.”
A good financial planner can take a holistic, bird’s-eye view of your finances. They can help you diagnose problems and brainstorm creative solutions. Robo-advisors can manage your investments, but their ability to support you largely ends there.
4. No Emotion Management
When you use a 100% automated robo-advisor, they can’t talk you off the ledge when you panic. You simply have an account on an online platform. You can pull the plug on it without ever speaking with a human.
The simple fact is that people do sometimes get emotional about their money. And in those moments, it helps to hear the calming voice of an expert. We all occasionally need someone to tell us, “Everything is going to be OK.”
How to Decide Between Human, Hybrid, and Robo-Advisors
The first question is the simplest one: How much money do you have to invest?
With $500 to invest, it’s not much of a decision. You don’t yet have enough money for human or even hybrid advisors to take you on as a client. Start with a robo-advisor to get your money working for you, and grow your portfolio as you can.
But with $10,000 or more to invest, you can qualify for some hybrid advisors. At that point, start asking yourself how important it is to you to be able to speak with a human advisor. Some investors sleep easier at night knowing they have the option to call up a human advisor and talk about their finances. Others couldn’t care less.
Also ask yourself whether you just need help choosing investments, or if you want help with long-term planning too. A robo-advisor can choose and manage investments for you, but it can’t work with you to create a retirement plan, for example.
Don’t be afraid to pay a separate financial planner by the hour. Ultimately, investment advising and financial planning are two separate, if related, disciplines. You can use a robo-advisor to manage your investments and pay an hourly fee to sit down with a financial planner every few years to discuss your long-term financial planning and goals.
As your investable wealth grows into six figures and beyond, your finances gradually get more complicated. At a certain point, you may decide your needs have become more unique and you want the more personalized approach of a hybrid or human investment advisor.
Robo-Advisors and Hybrid Advisors to Consider
Ready to get help with choosing and managing your investments?
The services below offer a great first look at the options for investors across the financial spectrum. For more options, check out our guide to the best robo-advisor services available.
SoFi offers a completely free robo-advisor service. With a minimum investment of $1, you truly have no excuses not to start investing.
SoFi doesn’t offer the bells and whistles many wealthier investors want, such as tax-loss harvesting or 401(k) advising. But it does offer access to human investment advisors as part of its free service, making it even more remarkable.
If you’re new to investing or don’t have much to invest, SoFi makes a perfect entry-level option.
Betterment offers both an automated robo-advisor option and a hybrid advisor option. Both cost more than SoFi’s options, but they offer some more bells and whistles.
The automated option, Betterment Digital, charges 0.25% of assets under management. There’s no minimum investment, however.
Betterment Premium, the hybrid option, costs more at 0.40% and requires a $100,000 minimum investment. It allows investors to manually choose investments and directly edit their asset allocation.
Both accounts include tax-loss harvesting and 401(k) advising, but not 529 plans. They also offer a socially conscious investing option, which many investors appreciate.
At the high end of the robo-advisor spectrum lies Personal Capital. It includes every bell and whistle, along with a dedicated financial advisor assigned to your account if you invest at least $200,000. Other advanced features include 401(k) advising, 529 plan management, trust management, tax-loss harvesting, socially conscious investing options, and direct stock ownership.
The service prices accordingly. Investors with less than $1 million under management pay 0.89%, a fee that gradually declines to 0.49% if you invest at least $10 million. The minimum investment to open an account is a steep $100,000.
Ultimately, Personal Capital makes a great hybrid option for wealthier investors. Read comprehensive reviews of Personal Capital before committing your portfolio, though.
Schwab Intelligent Portfolios
I use Schwab’s robo-advisor service myself and like it. It’s 100% free, although it does require a minimum investment of $5,000. It comes with some higher-end features, such as tax-loss harvesting and trusts, but it doesn’t include others like 401(k) account advising or 529 plan management.
Schwab also offers a hybrid advising option with a unique twist. In a departure from the industry norm, it doesn’t charge based on a percentage of your portfolio. It instead charges a flat fee, making its hybrid advising affordable and scalable.
You pay a one-time initial fee of $300 and a monthly fee of $30 after that. For those fees, you get unlimited access to speak with human financial planners. A certified financial planner works with you to holistically review your finances, plan your retirement and other long-term goals, and otherwise provide the human support you need.
This hybrid advising option does require a minimum investment of $25,000. But both account types make for affordable investment advisory for middle-class investors.
Everyone has different financial needs, and those needs change over time.
As a beginner investor, start with a free, completely automated robo-advisor like SoFi or Schwab. As you build wealth, consider adding hybrid advising to get a more personalized touch. And when you reach substantial wealth, you may decide to switch to completely human-managed advisory service.
If you opt for the last, screen potential advisors carefully. Start with a tool like SmartAsset that matches you with prescreened investment advisors in your area based on your personal traits and needs.
Regardless of the path you take, advisors help you choose appropriate, diversified investments and help manage your shifting portfolio over time. I highly recommend you use an advisor, whether automated, hybrid, or human, even if you also enjoy picking and choosing other investments through a separate brokerage account.