Let’s take a look at what robo-advisors are, what they do, how they differ from human financial advisors and how each of them approach holistic financial planning.
How do robo-advisors work?
Robo-advisors are financial companies that use software systems to offer investment options, which are based on the investor’s personal information/investment goals, and the company’s mathematical algorithms.
Once the investor has answered a set of questions, they are presented with a selection of ready-made investment portfolios that are basically a collection of Exchange Traded Funds (ETFs). These portfolios are designed to fit a certain generic “type” of investor, rather than any one individual. The onus is therefore on the investor to choose which portfolios are best for them. Investors then provide a lump sum of money to start up their account with their chosen portfolio and can then add money to it either sporadically or with regular payments.
Robo-advisors’ chief selling point is that they have low fees. Their management fees are typically below one percentage point of your portfolio’s value.
For this, you get a portfolio of ETFs that can be a mix of equity (usually shares) and fixed income securities (typically bonds). Some also offer to rebalance your portfolio if the market changes and have agents available to answer your questions.
Robo-advisors lack an in-depth look at your personal finances or a robust financial plan. Neither do they offer help to improve your overall financial situation (for example, to maximize your cash flow or reduce debt). They only cover one aspect of financial planning: investments.
What does a human financial advisor do?
Financial advisors are far more than just investment advisors. They’re typically well trained and experienced, with many being Certified Financial Planners (CFPs).
They bring a holistic approach to your personal finances. This means that they look at every aspect of your financial wellbeing and also provide a wide range of financial help:
- Choosing and managing the right investments for you
- Managing cash flow
- Planning for major expenses
- Saving for retirement
- Sharing your wealth, with donations and a legacy
- Ensuring you are prepared for the unexpected
- Helping small business owners succeed
- Minimizing your taxes
Financial advisors get to know you and your family, so they can help you to achieve your financial and life goals. They act like an overall financial planner or project manager, helping to you take control of your finances and become empowered to adapt to changing circumstances.
They’re also proactive. They’re constantly monitoring the markets and your portfolio, to determine if and when it needs to be rebalanced. Other services a good financial advisor will provide include:
- Advising you on the most tax-efficient ways to hold and draw from investments.
- Suggesting sustainable investing options that align with your priorities and values.
- Helping you to keep your budget and savings plan on track.
- Suggesting the kinds of insurance that will help protect you and your family, and help ensure your financial plan doesn’t become derailed.
- Alter your portfolio and plan when major events arise or are imminent.
- Provide guidance and assurance, particularly during volatile markets.
- Protect your wealth and minimize risk.
- Help you to retire when you want to, on your terms.
Financial advisors help to reduce your financial stress and keep your financial goals on track. They’re with you for the long haul: they’ll get to know your financial situation inside-out and understand your financial hopes and dreams.
They’ll use that knowledge and their expertise to create a financial plan specifically designed for your unique circumstances. Advisors also have access to a wide range of complementary products and solutions from multiple companies (such as insurance and mortgages), so they can suggest the best options that fit in with your financial plan.
And they’ll help you get through your major life events, often over decades.
|
Full-service/ IG advisor |
Robo-advisor |
Multi-disciplined/holistic approach/ robust financial plan |
✓ |
X |
Tailored to individual needs |
✓ |
X |
Combines multiple time frames/goals (short-, medium- and long-term) |
✓ |
X |
Access to other experts/specialists |
✓ |
X |
Wide range of complementary solutions |
✓ |
X |
Flexibility to make changes/adapt |
✓ |
X |
Human advisors can help you retire wealthier and be financially happier
According to research by CIRANO,1 investors with a financial advisor get better long-term returns. After four years of working with an advisor, investors have on average 1.8 times more money than someone who doesn’t have an advisor. After 15 years, that figure rises to 2.3 times more money than someone without an advisor.
