Like everything in life, having a robo-advisor or a traditional financial advisor to invest has its advantages and disadvantages, so you must be very clear about its essential characteristics to decide what is best for you.
The world has advanced by leaps and bounds in the last 30 years, not to mention the speed that the covid-19 pandemic forced in the last two years for many things to adapt. Of all that we could mention in what technology has favored, especially that of our mobile devices such as cell phones and tablets, it has also been reflected in the way in which people now invest their money. There are more and more options to make your money work, however, it is pertinent that you know the pros and cons of investing your money with the help of a robo-advisor or a traditional financial advisor.
Characteristics of a robo-advisor
In recent years, robotic advisors, better known as robo-advisors, have gained ground among investors, especially those who download investment apps on their mobile devices. One of the biggest attractions of robo-advisors is the low cost of investing in this way.
Automated advisors are essentially software platforms that invest on your behalf. A robo-advisor’s job is to create an investment portfolio for you and then manage it over time so you don’t have to. Due to its characteristics, this technological system can guide your investments based on algorithms, so the platform will usually ask you about your age, investment objectives, investment time horizon and risk tolerance, among other questions.
With the information provided, the robo-advisor helps you decide how your assets should be allocated, for example, whether you have riskier assets or mostly conservative assets. As market conditions change, or as you invest more money, the Auto Advisor will automatically adjust your portfolio to align with achieving your goals. This process is called rebalancing.
The automated advisors service typically costs between 0.25% and 0.5% of your assets under management per year. For example, if you have $10,000 invested in your account, regardless of whether you have obtained returns, you could expect to pay between $25 and $50 dollars that year of management.
Although a robo-advisor can adjust your investments based on your age and investment goals, which can be an important quality, it does not take into account other issues that may change in your life, such as reduced income, your debts , other assets or investments. In a nutshell, everything is automated, so you can’t trust the setting to actually suit your current needs either.
Characteristics of a traditional financial advisor
For many other investors, there is nothing better than a traditional financial advisor, who is a money professional who, among other activities, guides them when it comes to investing. Although this generates expenses that a robo-advisor may not, without a doubt, having an expert on the subject provides greater security for many people when it comes to putting their money into a certain investment. In addition to that the advisors can also give you advice on budgeting and spending.
The dynamics of working with a human financial advisor is defined by you. It is possible that it will help you with specific matters that do not require follow-up. However, if your objective is investment, the estate planning that is carried out and executed must be followed up over time. Although you do not need to see it every month, it is advisable to maintain constant communication with your advisor, for matters of maintenance of your investments. If your goals are long-term, you could date every six months.
Obviously, because a financial advisor is a person who has operating and personal expenses to cover, he could charge you more than a robo-advisor. The cost for such a professional would be around 1% of your assets under management that year. For example, if you have $10,000 dollars invested in your account, regardless of whether you have obtained returns, you could expect to pay him around $100 dollars that year of management, plus commissions for other services received, if he does not only attend to your investments. There are many financial advisors who charge a flat annual fee or even an hourly rate.
Both automated advisors and financial advisors may require clients to have a specific minimum amount of total assets before they can work together. The minimum will vary, but for some financial advisors, that minimum amount could be anywhere from $1, $100, or as high as $250,000.
Unlike a robo-advisor, a financial advisor will be more connected to your current circumstances, since they could give a personalized follow-up to your debts, income reduction, spending habits, financial needs and changes in your life circumstances (marriage, children, divorce, among others) that could affect the way you invest and your short, medium and long-term goals.